International trade theory

TopicInternational Trade Theory

presented by: Mahrukh pervaiz sheikh

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International Trade

Purchase, sale, or exchange of goods and services across national borders

People have larger selection of products Important engine for job creation

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An Overview of Trade Theory

Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.

The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.

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An Overview of Trade Theory

The history of Trade Theory and Government Involvement presents a mixed case for the role of government in promoting exports and limiting imports. Later theories appear to make a case for limited involvement.

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Trade Theory Timeline

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Mercantilism mid 16th centuryA nation’s wealth depends on accumulated

treasure

Three pillars Maintain trade

surplus

Governmentintervention

Gold and silver are the currency of trade.

Maximize exports through subsidies.

Minimize imports through tariffs and quotas.

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Absolute Advantage

Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer

resources)

Specialization and trade allows each to produce and consume more

1 resource unit = 1 ton rice or

1/5 ton tea

Riceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

Tealand

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Theory of Comparative AdvantageDavid Ricardo: Principles of Political

Economy (1817).

Should trade even if country is more efficient in the production than its trading partner.

Inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it does any other good

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Factor Proportions Theory

Countries produce and export goods that require resources (factors) in abundance, and import goods

that require resources in short supply

Two factor types

Land and Capital

Labor

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Leontief Paradox

Research discovered evidence opposite the prediction of factor proportions theory U.S. exports are more labor-intensive than U.S.

imports

Possible explanation Theory assumes nation’s production

factors to be homogeneous Theory is better predictor when

expenditures on labor are considered

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International Product Life Cycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves

through its life cycle

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The New Trade Theory

Began to be recognized in the 1970s.Deals with the returns on specialization where substantial economies of scale are present.

Specialization increases output, ability to enhance economies of scale increase.

In addition to economies of scale, learning effects also exist.

Learning effects are cost savings that come from “learning by doing”.

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Application of the New Trade Theory

Typically, requires industries with high, fixed costs.World demand will support few competitors.Competitors may emerge because “they got there first”.

First-mover advantage.

Some argue that it generates government intervention and strategic trade policy.

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First-Mover Advantage

Economies of scale may preclude new entrants.Role of the government.

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National Competitive Advantage

Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants

Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants

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Porter’s DiamondDeterminants of National Competitive Advantage

Factor Condition

Firm Strategy,Structure and

Rivalry

Demand Conditions

Related and Supporting Industries

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Factor Conditions

Basic factors Advanced factors

Nation’s resources(large workforce, natural resources, climate, and

surface features)

Nation’s resources(large workforce, natural resources, climate, and

surface features)

Result of investing in education and innovation

(skill of workforce segments, technological infrastructure)

Basic factors can spark initial production, but advanced factors account for sustained competitive advantage

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Demand Conditions

Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products and technologies

This should improve the competitiveness of the entire

group of companies in a market

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Related and Supporting Industries

Related and Supporting Industries

Companies in an internationally competitive industry do not exist in isolation

Supporting industries form “clusters” of economic activity in the geographic area

Each industry reinforces the competitiveness of every other industry in the cluster

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Firm Strategy, Structure,and Rivalry

Highly skilled managers are essential because strategy has lasting effects on firm competitiveness

Domestic industry whose structure and rivalry create an intense struggle to survive, strengthens its competitiveness