Theories of International Trade

PRESENTED BY:ADITYA KUMAR(06) GUNENDER BORAR(19) NEHA ANAND(35) NILAKSHA ANAND(37)

LEARNING OBJECTIVES
What is International Trade? Understanding of the Fundamental Principles

of International Trade and the shifts in trade patterns.

Mercantilism Absolute advantage (Classical) Comparative advantage Factor Proportions Trade International Product Cycle New Trade Theory National competitive advantage

Mercantilism: mid-16th century

A nations wealth depends on accumulated

treasure
Gold and silver are the currency of

trade

Theory says you should have a trade surplus.

Maximize export through subsidies. Minimize imports through tariffs

and

quotas

Flaw: restrictions, impaired growth

Defining mercantilism
trade theory holding that nations should

accumulate financial wealth, usually in the form of gold (forget things like living standards or human development) by encouraging exports and discouraging imports

Theory of absolute advantage

Adam Smith: Wealth of Nations (1776) argued: Capability of one country to produce more of a product with the same amount of input than another country A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient Trade between countries is, therefore, beneficial Assumes there is an absolute balance among

nations

Theory of absolute advantage

destroys the mercantilist idea since there

are gains to be had by both countries party to an exchange questions the objective of national governments to acquire wealth through restrictive trade policies measures a nations wealth by the living standards of its people

Theory of absolute advantage

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Theory of comparative advantage

David Ricardo: Principles of Political Economy (1817) Extends free trade argument Efficiency of resource utilization leads to more productivity Should import even if country is more efficient in the products production than country from which it is buying. Look to see how much more efficient. If only comparatively efficient, than import. Makes better use of resources Trade is a positive-sum game

Assumptions and Limitations

Countries are driven only by the impulse of

maximization of production and consumption. However the attainment of economic efficiency in a specialized field may not be the only goal of countries. For instance: Middle East Countries

Factor Endowment ( HeckscherOhlin) Theory

Developed by Heckscher and Bertil Ohlin to explain

the reasons for differences in relative commodity prices and competitive advantage between two nations. Relatively cheaper cost of Labour: Export Labour Intensive products

A country with a :

Labour is scarce and Capital is relatively abundant: Export Capital Intensive Goods
Suggests patterns of trade are determined by factor

endowments - not productivity

Factor Endowment Theory

The theory suggests three types of

relationships: LAND- LABOUR RELATIONSHIP LABOUR- CAPITAL RELATIONSHIP TECHNOLOGICAL COMPLEXITIES

The Leontief Paradox

The Test:
Could Factor Endowment Theory be used to explain the types of goods the United States imported and exported?

The Method:
Input-output analysis

The Leontief Paradox

The Findings:
The U.S. exported labor-intensive products and imported capital-intensive products.

The Controversy:
Findings were the opposite of to the result of Heckscher- Ohlin Model of factor endowment.

International Product life-cycle

Gap in technology & preference and the ability of the customer in international markets determines the stages of international PLC Introduction Growth Maturity Decline

The Product Cycle andTrade Implications

Increased emphasis on technologys

impact on product cost Explained international investment Limitations

Most appropriate for technology-based

products Some products not easily characterized by stages of maturity Most relevant to products produced through mass production

The new trade theory emphasizes on 2 type of economies of scale 1. Internal Economies of Scale 2. External Economies of Scale

New trade theory - applications

Typically, requires industries with high, fixed

costs
World demand will support few competitors

Competitors may emerge because of First-

mover advantage
Economies of scale may exclude new entrants Role of the government becomes significant

Some argue that it generates government

intervention and strategic trade policy

 Success occurs

where these attributes exist. More/greater the attribute, the higher chance of success The diamond is mutually reinforcing

 Location implications:

Disperse production activities to countries where they can be performed most efficiently

First-mover implications:
Invest substantial financial resources in building a

first-mover, or early-mover advantage

Policy implications:
Promoting free trade is in the best interests of the

home-country, not always in the best interests of the firm, even though, many firms promote open markets

MERCAN TILE THEORY

THEORY OF ABSOLU TE ADVANT AGE

THEORY OF COMPAR ATIVE ADVANT AGE

FACTOR ENDOW MENT THEORY

INTERNA NEW TIONAL TRADE PRODUC THEORY T LIFE CYCLE

PORTER S DIAMON D THEORY

Increase TRADE SURPLUS Expansio n of COLONIS TAION

ACCUMULATI ON OF WEALTH AT THE COST OF ANOTHER TRADING PARTNER DOMESTIC PRICES INCREASEINF LATION INCREASE

ADVANTAGES

Increase in SKILL OF LABOUR

MORE EFFECTIVE WORK METHODS
SYNERGESTIC EFFECT ON DEVLOPING ON OVERALL EFFECIENCY LEVELS FULL EMPLOYMENT CONDITIONS NOT AVAILABLE ALWAYS

BENEFIT FROM INTERNA TIONAL TRADE

At growth stage you can fix your price

Competiti ng ability increased Improved quality of products and services

CRITICISM

LIMITATI ONS

SYNERGESTIC EFFECT ON DEVLOPING ON OVERALL EFFECIENCY LEVELS FULL EMPLOYMENT CONDITIONS NOT AVAILABLE ALWAYS

At decline stage you have to decrease your price as per your competitors

Knowhow of internatio nal culture hampere d