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Ppt ch03

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Ppt ch03 Ppt ch03 Presentation Transcript

  • Chapter 3: International Trade Theory US EU Australia China TRADE THEORY Comparative advantage New Trade Theory 3 -1 Absolute advantage PORTER’S DIAMOND FACTOR ENDOWMENTS
  • TOPIC PLAN:
    • Mercantilism
    • Absolute advantage
    • Comparative advantage
    • Comparative advantage versus competitive advantage
    • Factor endowments
    • The New Trade Theory
    • Porter’s Diamond
    3 -2
  • Mercantilism: mid-16 th century
    • A nation’s wealth depends on accumulation of precious metals (e.g. holdings of g old and silver ) .
    • Theory says you should have a trade surplus.
      • Maximize exports through subsidies.
      • Minimize imports through tariffs and quotas.
    • David Hume (1752): persistent trade surplus will affect the money supply and in the long run close the trade surplus
    • Key problem: “Zero-sum game”.
    3 - 3 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea
  • Theories of International Trade: Absolute Advantage
    • The exporting country holds a superiority in the availability of certain goods. Reasons:
      • Climate,quality of land, and natural resources.
      • Differences in labour, capital, technology and entrepreneurship
    • Beef Computer Printers
    • (tonnes) (units)
    • Australia 800 200
    • Japan 400 500
    • • Australia has an absolute advantage in beef, while Japan has an absolute advantage in printers.
          • .
    3 - 4
  • Theory of Comparative Advantage
    • David Ricardo (1817)
    • One country has a comparative advantage over another in the production of a certain commodity if its opportunity cost of producing that commodity is lower
    3.5
  • Alternative production possibilities from 100 units of resources 3.6
  • Opportunity Cost and Comparative Advantage 3.7
  • Diversified production before trade Production/Consumption 3.8
  • The Theory of Comp arative Advantage and the Gains from Trade Cheese (tonnes) Cloth (bolts) Production and Consumption without Trade Australia 125 60 U.K. 40 60 Total production 165 12 0 Production with Trade Specialization Australia 200 - U.K - 120 Total production 200 120 Consumption after U.K. Trades 60Bolts of C loth for 60 tons of Australian Cheese Australia 140 60 U.K. 60 60 Increase in Consumption as a Result of Specialization and Trade Australia 15 0 U.K 20 0 3 - 9 Total consumption 35 0
  • Comparative versus Competitive Advantage
    • Comparative advantage is a concept based on relative costs of production (and opportunity cost) between nations.
    • Competitive advantage is a concept used to compare two company’s ability to compete in the same business.
    3 - 10
  • Factor Endowments (Heckscher and Ohlin)
    • Explains differences in opportunity costs
    • Factor endowment: A country’s share of factors of production (e.g. land,capital, labour,enterprise).
    • Countries will specialise in those goods which make more intensive use of the abundant/cheap factors.
      • Cheese:land-intensive
      • Cloth: labour-intensive
    • The theory can explain the Australia-Japan trade patterns
    3 - 11
  • Limitations of the Trade Theory
    • The theory disregards a number of considerations :
      • The difficulty in moving resources in the desired industries
      • Fluctuations in demand
      • Trade barriers
      • Other political restraints
    3 -1 2
  • The New Trade Theory
    • Began to be recognised in the 1970s.
    • Deals with the returns on specialisation where substantial economies of scale are present.
      • Specialisation increases output, ability to enhance economies of scale increase.
      • In some industries there are likely to be only a few profitable firms.
    3 -1 3
  • The New Trade Theory
    • Thus firms with first mover advantages will develop economies of scale and create barriers to entry for other firms.
    • The commercial aircraft industry is an excellent example (eg. Boeing, Airbus)
    • New trade theory does NOT contradict the theory of comparative advantage, but instead identifies a source of comparative advantage
    3 -1 4
  • Implications from the 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 (e.g. the need to nurture and protect “first movers”)
    3 -1 5
  • National Competitive Advantage: Porter’s Diamond ( Harvard Business School, 1990)
    • Looked at 100 industries in 10 nations.
      • Thought existing theories didn’t go far enough.
    • Results contained in The Competitive Advantage of Nations.
    • Question: “Why does a nation achieve international success in a particular industry?” (e.g. Switzerland in Watches and Pharmaceuticals; Finland in Mobile Phones)
    3 -1 6 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea
  • Determinants of National Competitive Advantage Firm Strategy Structure, and Rivalry Related and Supporting Industries Demand Conditions Factor Endowments Government Chance 3 -1 7
  • The Diamond
    • Success occurs where these attributes exist.
      • More/greater the attribute, the higher chance of success.
    • The four attributes, government policy and chance work as a reinforcing system.
    • Nokia is a good example of a firm which has built its competitive advantage as a result of factors in Porter’s diamond.
    3 -1 8 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea
  • Evaluating Porter’s Theory
    • If Porter is right, his model is expected to predict the pattern of international trade in the real world:
      • a country’s exports should reflect the presence of the four ‘diamond’ components.
      • Countries will import in those areas where the components are not favorable.
    • This theory is too new. Requires independent empirical testing.
    3 - 19 Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides prepared by John Gionea