Trade theory
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Trade theory Presentation Transcript

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