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The Theories Of Trade
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The Theories Of Trade

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  • 1. The Theories of Trade
  • 2. Learning Objectives
    • To understand the traditional arguments of how and why international trade improves the welfare of all countries
    • To explore the similarities and distinctions between international trade and international investment
  • 3. Evolution of Trade Theory
    • The Age of Mercantilism
    • Classical Trade Theory
    • Factor Proportions Trade Theory
    • International Investment and Product Cycle Theory
    • The New Trade Theory: Strategic Trade
  • 4. Mercantilism
    • Mixed exchange through trade with accumulation of wealth
    • Conducted under authority of government
    • Demise of mercantilism inevitable
  • 5. Classical Trade Theory
    • The Theory of Absolute Advantage
      • The ability of a country to produce a product with fewer inputs than another country
    • The Theory of Comparative Advantage
      • The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other
  • 6. Classical Trade Theory Contributions
    • Adam Smith—Division of Labor
      • Industrial societies increase output using same labor-hours as pre-industrial society
    • David Ricardo—Comparative Advantage
      • Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce
    • Gains From Trade
      • A nation can achieve consumption levels beyond what it could produce by itself
  • 7. Factor Proportions Trade Theory
    • Developed by Eli Heckscher
    • Expanded by Bertil Ohlin
  • 8. Factor Proportions Trade Theory Considers Two Factors of Production
    • Labor
    • Capital
  • 9. Factor Proportions Trade Theory
    • A country that is relatively labor abundant (capital abundant) should specialize in the production and export of that product which is relatively labor intensive (capital intensive).
  • 10. Product Cycle Theory
    • Raymond Vernon
    • Focus on the product, not its factor proportions
    • Two technology-based premises
  • 11. Product Cycle Theory: Vernon’s Premises
    • Technical innovations leading to new and profitable products require large quantities of capital and skilled labor
    • The product and the methods for manufacture go through three stages of maturation
  • 12. Stages of the Product Cycle
    • The New Product
    • The Maturing Product
    • The Standardized Product
  • 13. The Product Cycle and Trade Implications
    • Increased emphasis on technology’s impact on product cost
    • Explained international investment
    • Limitations
      • Most appropriate for technology-based products
      • Some products not easily characterized by stages of maturity
      • Most relevant to products produced through mass production
  • 14. The New Trade Theory: Strategic Trade
    • Two New Contributions
    • Paul Krugman-How trade is altered when markets are not perfectly competitive
    • Michael Porter-Examined competitiveness of industries on a global basis
  • 15. Strategic Trade
    • Krugman’s Economics of Scale:
    • Internal Economies of Scale
    • External Economies of Scale
  • 16. Strategic Trade
    • Government can play a beneficial role when markets are not purely competitive
    • Theory expands to government’s role in international trade
    • Four circumstances exist that involve imperfect competition in which strategic trade may apply
  • 17. Strategic Trade
    • The Four Circumstances Involving Imperfect Competition:
    • 1.Price
    • 2.Cost
    • 3. Repetition
    • 4.Externalities

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