Trade theories

TRADE THEORIES Presenting by :- Deepu Raj Sandeep Siwach Pushpender Singh Tomer Ahbab Ahmad Ajay Kumar Jaila

Theories of International Trade International Trade National Competitive Advantage Product Life Cycle Comparative Advantage Factor Endowments Mercantilism Absolute Advantage

Mercantilism: mid-16 th century
A nation’s wealth depends on accumulated treasure
Gold and silver are the currency of trade.
Theory says you should have a trade surplus.
Maximize exports through subsidies.
Minimize imports through tariffs and quotas.
Flaw: “zero-sum game”.
David Hume in 1752 pointed out that:
Increased exports leads to inflation and higher prices
Increased imports lead to lower prices

Comparative Advantage
Given by David Ricardo in 1817
--Principle of Political Economy.
Nation should produce those goods for which they have the greatest relative advantage.
Should import even if country is more efficient in the product’s production than country from which it is buying.
Makes better use of resources

The Theory of Comparative Advantage 3.75 7.5 2.5 G’ 0 5 10 15 20 5 10 15 20 Wheat Cloth G C A K K’ B

Theory of Absolute Advantage Adam Smith: Wealth of Nations ( 1776).
Capability of one country to produce more of a product with the same amount of input than another country.
Produce only goods where you are most efficient, trade for those where you are not efficient.
Assumes there is an absolute advantage balance among nations, e.g., Ghana/cocoa.

The Theory of Absolute Advantage Rice Cocoa G’ 0 5 10 15 20 5 10 15 20 A B K G K’

Factor Endowments Theory
Swedish Economist Eli Heckscher (1919) & Bertil Ohlin (1933).
Factor endowments: Extent to which a country is endowed with such resources as land, labor and capital.
Export goods that intensively use factor endowments which are locally abundant.
Import goods that make intensive use of factors that are locally scarce.

Product Life Cycle Theory R. Vernon,(1966)
As products mature, both location of sales and optimal production changes
Affects the direction and flow of imports and exports
Globalization and integration of the economy makes this theory less valid

Stages of the Product Cycle
The New Product
Flexible production
Innovator Monopoly
The Maturing Product
Concentration
International market & competition
More standardized production
The Standardised Product
Low-margin cost-based production
Highly competitive

National Competitive Advantage Porter’s Diamond (Harvard Business School, 1990)
The theory attempts to analyze the reasons for a nations success in a particular industry
Porter studied 100 industries in 10 nations
postulated determinants of competitive advantage of a nation were based on four major attributes
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry
Success occurs where these attributes exist

Determinants of National Competitive Advantage 4-30 Factor Endowments Firm Strategy, Structure and Rivalry Demand Conditions Related and Supporting Industries

Determinants of National Competitive Advantage
Factor endowments: Nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry.
Demand conditions: The nature of home demand for the industry’s product or service.
Related and supporting industries: The presence or absence in a nation of supplier industries or related industries that are nationally competitive.
Firm strategy, structure and rivalry: The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.

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Trade theories

by Pankaj Kumar on Feb 23, 2011

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Trade theories — Presentation Transcript