ADM 3318 Chapter Notes - Chapter 5: Leontief Paradox, Absolute Advantage, Invisible Hand

• School: University of Ottawa
• Department: Administration
• Course: ADM 3318
• Professor: Pranlal Manga

Document Summary

Free trade: the absence of government-imposed barriers, such as quotas or duties, that impede the free flow of goods and services between countries. Adam smith"s theory of absolute advantage argued that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and what it exports. He took a laissez-faire stance toward trade as he believed it was in the best interests of a country. David ricardo: developer of comparative advantage (comparative advantage arises from differences in productivity) The benefits of trade: common sense notion of international trade dictates that country"s should export products they can produce at low cost, and import products they cannot produce. Countries should trade exports that are most efficiently produced in their economy, even though a country can already produce it themselves. Countries can gain if its citizens buy certain products from other nations that they could produce at home.