International trade theory

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International trade theory

  1. 1. Topic International Trade Theory presented by: Mahrukh pervaiz sheikh
  2. 2. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-2 International Trade Purchase, sale, or exchange of goods and services across national borders  People have larger selection of products  Important engine for job creation
  3. 3. 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. 4-7 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  4. 4. 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. 4-7 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  5. 5. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-5 Trade Theory Timeline
  6. 6. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-6 Mercantilism mid 16th century A nation’s wealth depends on accumulated treasure Three pillars Maintain trade surplus Government intervention Gold and silver are the currency of trade. Maximize exports through subsidies. Minimize imports through tariffs and quotas.
  7. 7. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-7 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
  8. 8. Theory of Comparative Advantage David 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 4-13 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  9. 9. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-9 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 CapitalLabor
  10. 10. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-10 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
  11. 11. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-11 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
  12. 12. 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”. 4-25 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  13. 13. 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. 4-26 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  14. 14. First-Mover Advantage Economies of scale may preclude new entrants. Role of the government. 4-27 McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
  15. 15. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-15 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
  16. 16. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-16 Porter’s Diamond Determinants of National Competitive Advantage Factor Condition Firm Strategy, Structure and Rivalry Demand Conditions Related and Supporting Industries 4-30
  17. 17. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-17 Factor Conditions Basic factors Advanced factors 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
  18. 18. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-18 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
  19. 19. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-19 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
  20. 20. McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. 4-20 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
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