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International Trade

Theory
International Trade in IT
Hardware
Cost of IT hardware fell by 20% in United
States due to international outsourcing
Lower prices of hardware speeded up
diffusion of IT is USA
Boosted productivity adding some 230 billion
dollars into US GDP
Employment in computer software and
service sector grew at twice the national
average
Study Objectives
To review the number of theories of international
trade benefits
Allows a country to export what can be produced more
efficiently and import that can be produced more efficiently
in other countries
Explain the pattern of international trade
Climate and natural resource endowment
Labor productivity David Ricardo
Factors of production Hecksher-Ohlin
Product life cycle Raymond Vernon
World market Paul Krugman
International Trade Theories
Mercantilism( Business )
Absolute Advantage Adam Smith
Comparative Advantage David Ricardo
Hecksher-Ohlin Theory
The Leontief Paradox
The product Life Cycle
New Trade Theory-
Michael Porter - 1990
Implications of International trade theory

Mercantalism
First Theory of international trade emerged in England
Pertains to 16
th
century
Gold & Silver were main stays of national wealth and essential to
vigorous commerce
Enhancement of gold and silver reserve through exports to
enhance prestige and wealth
Export more and import less
Imports were limited by quotas and tariff
Exports were boosted through incentives and subsidies
Viewed trade as zero game.
Mercantilists viewed no virtue in large trades
The critique David Hume, a classical economist -England Vs.
France


Absolute Advantage Adam
Smith - 1776
Attacked mercantilists zero game philosophy
Countries are observed to have differences in their abilities to
produce efficiently
A country possess absolute advantage when it can produce
more efficiently than any other country England
Textile.French Wine
Countries should specialize in production of goods where they
have absolute advantage and trade these goods for goods
produced by other countries
Countries should never produce goods at home that it can buy at
a lower cost from other countries.
International trade is a positive game in which every country
gains.
Ghana and South Korea
Comparative Advantage
David Ricardo
Theory goes one step ahead of absolute advantage
A comparative study of efficiency between the
countries with same input/resource
Ghana and South Korea
Potential world production is enhanced in free trade
than restricted trade.
International trade is a positive sum game (greater
than absolute advantage) in which all countries gain
Comparative Advantage David
Ricardo-Qualifications & Assumptions
A simple world with two countries
Assumed that resources are mobile from one
produce to other
Assumed away transportation costs
Assumed away difference of cost of resources in
two countries
Law of diminishing returns has been ignored in
allocation of resources for production
Assumed fixed stock of resources and no change in
efficiency
Assumed away effects of trade on income
distribution within a country
Comparative Advantage David
Ricardo-Qualifications & Assumptions
Immobility of resources
Diminishing Returns
Not all the resources are of same quality
Different goods use different resources in different
propotion
Lesson
Stock of resources and efficiency does increase.
Foreign investment and mobility of human resources
Economies of scale and advanced technology
Local entrepreneurs are groomed up in free trade.
Gains from specialization exhaust before specialization is
complete
It is worthwhile to produce as long as gains outweigh
diminishing returns
Hecksher-Ohlin Theory

A different explanation of comparative advantage
theory
Forwarded by Swedish economists Eli Hechsher
and Bertil Ohlin in (1919-1933)
Comparative advantage arises from national factor
endowment and land, labor and capital
More abundant the factor, the lower is the cost
Export goods which are produce of abundant
national factors of production and importing goods
that make use of resources that are scare
Product Life Cycle
Stages of Product Life Cycle
New Product
Matured
Standardized

The Inventing Country
Production-Export-Import
Other advanced countries
Import-Production-Export
Less Developed countries
Import-Production-export


Implications of International
Trade Theories
Location
To disperse its productive activities to those countries where they
can be performed more efficiently.
First Mover advantage
Firms that establish a first mover advantage with regard to the
production of a particular new product may subsequently
dominate global trade in that product.
Pays to invest financial resources
Several years of financial losses before a venture becomes
profitable
Establish a long term sustainable competitive advantage
Government Policy
Business can exert strong influence on government trade policy
for free trade or trade restrictions.IBM & Apple is USA vs. Japan

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