Top Banner
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. International Business R. M. Joshi Joshi 1 THEORIES OF THEORIES OF INTERNATIONAL INTERNATIONAL TRADE TRADE C2
17
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

11

THEORIES OF THEORIES OF INTERNATIONAL INTERNATIONAL

TRADETRADE

C2

Page 2: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

22

Learning ObjectivesLearning Objectives

To discuss the implications of trade theories on To discuss the implications of trade theories on international businessinternational business

To explain various theories of international trade To explain various theories of international trade To examine gains from trade under various trade To examine gains from trade under various trade

theoriestheories To explain the theoretical framework for shifting To explain the theoretical framework for shifting

patterns of production and tradepatterns of production and trade

Page 3: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

33

Implications of Trade Theories

Trade theories provides the conceptual base for international trade

and shifts in trade patterns. They also facilitate in understanding the

basic reasons behind the evolution of a country as a supply base or

market for specific products.

Page 4: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

44

Theory of MercantilismTheory of Mercantilism

The theory attributes and measures the wealth of a The theory attributes and measures the wealth of a

nation by the size of its accumulated treasures. It aims nation by the size of its accumulated treasures. It aims

at accumulating financial wealth in terms of gold by at accumulating financial wealth in terms of gold by

encouraging exports and discouraging imports.encouraging exports and discouraging imports.

Page 5: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

55

Theory of Absolute AdvantageTheory of Absolute Advantage

Absolute advantageAbsolute advantage may be defined as ability of a nation to produce the goods may be defined as ability of a nation to produce the goods

more efficiently and cost effectively than any other country. more efficiently and cost effectively than any other country.

According to the theory, each country should specialize in producing those According to the theory, each country should specialize in producing those

goods that it can produce more efficiently, instead of producing all products. goods that it can produce more efficiently, instead of producing all products.

Thus, a country should use increased production to export and acquire more Thus, a country should use increased production to export and acquire more

goods by way of imports which in turn would improve living standards of its goods by way of imports which in turn would improve living standards of its

people.people.

Page 6: C2 PPT 210509

Absolute Advantage- Resources required to produce 1 ton of Cocoa and RiceAbsolute Advantage- Resources required to produce 1 ton of Cocoa and Rice

Ghana -Ghana - 1010 2020 S.KoreaS.Korea 4040 1010With out tradeWith out trade

GhanaGhana 1010 55S.KoreaS.Korea 2.52.5 1010

12.512.5 1515With SpecializationWith SpecializationGhanaGhana 2020 00S.KoreaS.Korea 00 2020

2020 2020After trade 6 tonsAfter trade 6 tons

1414 6666 1414

Increase in consumptionIncrease in consumption44 113.53.5 4.04.0

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

66

Page 7: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

77

Theory of Comparative AdvantageTheory of Comparative Advantage

Comparative AdvantageComparative Advantage may be defined as the inability of a nation to produce a may be defined as the inability of a nation to produce a

good more efficiently than other nations, but its ability to produce that good more good more efficiently than other nations, but its ability to produce that good more

efficiently compared to the other good. efficiently compared to the other good.

Thus, the country may be at an absolute disadvantage with respect to both the Thus, the country may be at an absolute disadvantage with respect to both the

commodities but the absolute disadvantage is lower in one commodity than another. commodities but the absolute disadvantage is lower in one commodity than another.

Therefore, a country should specialize in the production and export of a commodity Therefore, a country should specialize in the production and export of a commodity

in which the absolute disadvantage is less than that of another commodity or in other in which the absolute disadvantage is less than that of another commodity or in other

words, the country has got a comparative advantage in terms of more production words, the country has got a comparative advantage in terms of more production

efficiency.efficiency.

Page 8: C2 PPT 210509

Comparative Advantage- Resources required to produce 1 ton of Cocoa and Comparative Advantage- Resources required to produce 1 ton of Cocoa and RiceRice

Ghana -Ghana - 1010 13.3313.33 S.KoreaS.Korea 4040 2020With out tradeWith out trade

GhanaGhana 1010 7.57.5S.KoreaS.Korea 2.52.5 55

12.512.5 12.512.5With SpecializationWith SpecializationGhanaGhana 1515 3.753.75S.KoreaS.Korea 00 1010

1515 13.7513.75After trade 4 tonsAfter trade 4 tons

1111 7.757.7544 66

Increase in consumptionIncrease in consumption11 .25.251.51.5 1.01.0

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

88

Page 9: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

99

Revealed Comparative AdvantageRevealed Comparative Advantage

It is measured by a country’s share of world exports of a commodity divided It is measured by a country’s share of world exports of a commodity divided

by its share in total exportsby its share in total exports..

RCARCAij ij = (X= (Xijij/X/Xwjwj)/(X)/(Xi i / X/ Xww))

WhereWhere

XXij ij = i= ith th country’ export of commodity j country’ export of commodity j

XXw w = world exports of commodity j= world exports of commodity j

XXi i = total exports of country i= total exports of country i

XXw w = total world exports= total world exports

Page 10: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1010

Factor Endowment Factor Endowment (Hecksher-Ohlin) Theory(Hecksher-Ohlin) Theory

Why comparative advantage- Factors of endowments – land, labour, and capital. More Why comparative advantage- Factors of endowments – land, labour, and capital. More

abundant a factor , lower it costs. abundant a factor , lower it costs.

A nation will export the goods whose production requires intensive use of the nation’s A nation will export the goods whose production requires intensive use of the nation’s

relatively abundant and cheap factors and import the goods whose production requires relatively abundant and cheap factors and import the goods whose production requires

intensive use of its scarce and expensive factors.intensive use of its scarce and expensive factors.

US- Sustainable exporters of agricultural goods(Abundance of arable land)US- Sustainable exporters of agricultural goods(Abundance of arable land)

China- Exports goods from labor-intensive manufacturing units- footwear,textile China- Exports goods from labor-intensive manufacturing units- footwear,textile

Page 11: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1111

The Leontief ParadoxThe Leontief Paradox

Wassily Leontief carried out an empirical test of the Wassily Leontief carried out an empirical test of the

Heckscher-Ohlin Model in 1951 and found that the US Heckscher-Ohlin Model in 1951 and found that the US

exported more labour-intensive commodities and exported more labour-intensive commodities and

imported more capital intensive products which was imported more capital intensive products which was

contrary to the results of Heckscher-Ohlin Model of contrary to the results of Heckscher-Ohlin Model of

factor endowment. factor endowment.

Page 12: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1212

Country Similarity TheoryCountry Similarity Theory

Trade occurs between nations that have similar Trade occurs between nations that have similar

characteristics, such as economic, geographic, cultural, characteristics, such as economic, geographic, cultural,

etc. However, in case of manufactured goods, cost was etc. However, in case of manufactured goods, cost was

determined by similarity in product demands across determined by similarity in product demands across

countries rather than by relative production costs or countries rather than by relative production costs or

factor endowments factor endowments

Page 13: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1313

The New Trade TheoryThe New Trade Theory

The theory elucidates that international trade enables a firm The theory elucidates that international trade enables a firm

to increase its output due to specialization by providing to increase its output due to specialization by providing

larger markets, resulting into enhancing its efficiency. It larger markets, resulting into enhancing its efficiency. It

helps explain the trade patterns when markets are not helps explain the trade patterns when markets are not

perfectly competitive or when economies of scale are perfectly competitive or when economies of scale are

achieved by production of specific products. achieved by production of specific products.

Page 14: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1414

International Product Life Cycle TheoryInternational Product Life Cycle Theory

The theory explains the variations and The theory explains the variations and

reasons for change in production and reasons for change in production and

consumption pattern among various consumption pattern among various

markets over a time period. markets over a time period.

Page 15: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1515

Stages of International Product Life CycleStages of International Product Life Cycle

The IPLC has four distinct identifiable stages that The IPLC has four distinct identifiable stages that influences demand structure, production, marketing influences demand structure, production, marketing strategy, and international competition as follows: strategy, and international competition as follows: Stage 1: IntroductionStage 1: IntroductionStage 2: GrowthStage 2: GrowthStage 3: MaturityStage 3: MaturityStage 4: DeclineStage 4: Decline

Page 16: C2 PPT 210509

Evaluating the product life cycle theoryEvaluating the product life cycle theory

Product developed- Xerox (1960) in USProduct developed- Xerox (1960) in US Sold initially to US usersSold initially to US users Exported- Japan and Western EuropeExported- Japan and Western Europe As demand grew in these counties- Joint ventures- Japan( Fuji-As demand grew in these counties- Joint ventures- Japan( Fuji-

Xerox), Britain ( Rank-Xerox)Xerox), Britain ( Rank-Xerox) After expiration of patent of Xerox- others countries startedAfter expiration of patent of Xerox- others countries started Like- Canon in Japan, Olivetti in ItlayLike- Canon in Japan, Olivetti in Itlay US export declinedUS export declined US now purchase from lower cost foreign countries- JapanUS now purchase from lower cost foreign countries- Japan Facing high labor cost in Japan- Switched there operations to Facing high labor cost in Japan- Switched there operations to

developing countries- Singapore, Thailanddeveloping countries- Singapore, Thailand Hence- US and Japan- Exporters- ImportersHence- US and Japan- Exporters- Importers

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1616

Page 17: C2 PPT 210509

Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

1717

Theory of Competitive AdvantageTheory of Competitive Advantage

According to the theory, a firm’s home country environment is According to the theory, a firm’s home country environment is

the main source of competencies and innovations often referred the main source of competencies and innovations often referred

to as the diamond mode, it focuses upon the four determinants:to as the diamond mode, it focuses upon the four determinants:

• Factor (Input) ConditionsFactor (Input) Conditions

• Firm Strategy and RivalryFirm Strategy and Rivalry

• Demand ConditionsDemand Conditions

• Related and Supporting IndustriesRelated and Supporting Industries