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Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
Trade theory
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Trade theory
Trade theory
Trade theory
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Trade theory

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  • 1. Theories of International Trade AG BM 338 Agribusiness in the Global Economy
  • 2. LEARNING OBJECTIVES <ul><li>After today’s class, you should be able to : </li></ul><ul><li>Understand classical theories of international trade </li></ul><ul><li>Understand modern theories of international trade </li></ul><ul><li>Draw implications for action </li></ul>
  • 3. Trade Balance <ul><li>trade deficit - An economic condition in which a nation imports more than it exports </li></ul><ul><li>trade surplus - An economic condition </li></ul><ul><li>in which a nation exports more than it imports </li></ul><ul><li>balance of trade - The aggregation of buying (importing) and selling (exporting) by both sides leads to the country-level trade surplus or deficit. </li></ul>
  • 4. &nbsp;
  • 5. &nbsp;
  • 6. &nbsp;
  • 7. Trade Theories <ul><li>classical trade theories - major theories typically studied consist of mercantilism, absolute advantage, and comparative advantage </li></ul><ul><li>modern trade theories - major theories typically studied consist of product life cycle, strategic trade, and national competitive advantage </li></ul>
  • 8. The Age of Mercantilism <ul><li>Between 1600 and 1800 most of Western Europe pursued a policy of mercantilism </li></ul><ul><li>What was mercantilism? </li></ul><ul><ul><li>Belief that exports should exceed imports </li></ul></ul><ul><ul><li>Bullionism – the belief that the economic health of a nation was measured by the amount of precious metals (gold and silver) it possessed </li></ul></ul><ul><ul><li>Colonialism – colonies were viewed as sources of raw materials </li></ul></ul><ul><ul><li>Heavy government control of trade, with the goals of trade being the goals of governments </li></ul></ul>
  • 9. Absolute Advantage <ul><li>Producing a good with fewer inputs (capital, labor, land, raw materials, etc.) per unit of output than other countries </li></ul><ul><li>If input prices are the same in two countries, the country with an absolute advantage in a good will have a lower unit cost of production for that good </li></ul><ul><li>Adam Smith, The Wealth of Nations , 1776 </li></ul><ul><ul><li>A country should produce and export products in which it has an absolute advantage </li></ul></ul><ul><ul><li>A country should import products in which it has an absolute disadvantage </li></ul></ul>
  • 10. Absolute Advantage: Problems <ul><li>What about a country (like the U.S.) that has an absolute advantage in most products? </li></ul><ul><ul><li>How can it possibly produce enough of everything to satisfy the whole world? </li></ul></ul><ul><ul><li>As production increased, competition for scarce inputs would drive up production costs, taking away many absolute advantages </li></ul></ul><ul><li>What about a country (like Nepal) that has an absolute disadvantage in nearly all products? </li></ul><ul><ul><li>Why should its resources sit around unused? </li></ul></ul><ul><ul><li>As production fell, prices of inputs would fall, lowering production costs and creating some absolute advantages </li></ul></ul>
  • 11. Comparative Advantage <ul><li>Producing a good at a lower opportunity cost than another country </li></ul><ul><ul><li>Inputs used in the production of one good aren’t available for the production of other goods </li></ul></ul><ul><ul><li>When a country produces a good, what does it give up in foregone production of other goods? </li></ul></ul><ul><li>David Ricardo, The Principles of Political Economy and Taxation , 1817 </li></ul><ul><ul><li>A country should produce and export products in which it has a comparative advantage </li></ul></ul><ul><ul><li>A country should import products in which it has an comparative disadvantage </li></ul></ul>
  • 12. Opportunity Cost <ul><li>opportunity cost - the cost of pursuing one activity in terms of the foregone return on the next-best alternative activity </li></ul><ul><li>Examples </li></ul><ul><ul><li>The opportunity cost of going to college is what you could have earned working full-time instead </li></ul></ul><ul><ul><li>The opportunity cost of using a plant to manufacture one product is what the company could have earned manufacturing another product at the plant instead </li></ul></ul>
  • 13. Numerical Example <ul><li>One input (labor) </li></ul><ul><li>Two goods (corn, timber) </li></ul><ul><li>Two countries (A, B) </li></ul><ul><li>Which country has an absolute advantage in </li></ul><ul><ul><li>Corn production? </li></ul></ul><ul><ul><li>Timber production? </li></ul></ul><ul><li>Which country has a comparative advantage in </li></ul><ul><ul><li>Corn production? </li></ul></ul><ul><ul><li>Timber production? </li></ul></ul>
  • 14. More on Comparative Advantage <ul><li>Even a country at an absolute disadvantage in everything will have a comparative advantage in something </li></ul><ul><li>Each country specializes in the production and export of what it does relatively well </li></ul><ul><li>Prices of goods and inputs in a free-market economy will adjust in order to lead to this outcome </li></ul>
  • 15. More on Comparative Advantage <ul><li>Countries rely on imports to meet consumer demands for goods in which they don’t have a comparative advantage </li></ul><ul><li>A country can achieve consumption levels beyond what it could achieve on its own </li></ul><ul><li>Government policy can alter free-market outcomes (import tariffs, import quotas, export subsidies, etc.) </li></ul>
  • 16. &nbsp;
  • 17. Some Definitions <ul><li>factor endowments - extent to which different countries possess various factors, such as labor, land, and technology </li></ul><ul><li>resource mobility - assumption that a resource </li></ul><ul><li>removed from one industry can be moved to another </li></ul>
  • 18. Factor Proportions (Heckscher-Ohlin) Trade Theory <ul><li>A country that is relatively abundant in a factor of production should export goods that use a lot of that factor in the production process, and import other goods </li></ul><ul><li>Example: a country like China with a lot of labor should export labor-intensive goods </li></ul><ul><li>Why? If a factor is relatively abundant, it will be relatively cheap, and a country will be more globally competitive in products that use a lot of that factor </li></ul>
  • 19. Modern Trade Theories <ul><li>product life cycle theory - economic theory that accounts for changes in the patterns of trade over time </li></ul><ul><li>strategic trade theory - theory that suggests that </li></ul><ul><li>strategic intervention by governments in certain industries can enhance their odds for international success </li></ul><ul><li>first-mover advantages - Advantages that first entrants enjoy and do not share with late entrants </li></ul><ul><li>strategic trade policy - Economic policies that provide companies a strategic advantage through government </li></ul><ul><li>subsidies </li></ul>
  • 20. &nbsp;
  • 21. &nbsp;
  • 22. Modern Trade Theories <ul><li>Theory of national competitive advantage of industries (or diamond theory ) </li></ul><ul><li>The theory that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond” </li></ul><ul><li>Competitive advantage is created by technological and institutional change, not just inherited from a country’s natural endowments </li></ul>
  • 23. &nbsp;
  • 24. &nbsp;
  • 25. IN-CLASS EXERCISE <ul><li>In groups of 3-5 people… </li></ul><ul><ul><li>Come up with three examples of imported foods eaten by people in your group </li></ul></ul><ul><ul><li>Are there alternatives sources for these foods – either domestically produced or from different countries than the ones you purchase from? </li></ul></ul><ul><ul><li>If so, what factors influence your purchase decisions? </li></ul></ul><ul><li>Present your findings to the class </li></ul>

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