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Ppt ch03

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    • 1. 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
    • 2. TOPIC PLAN:
      • Mercantilism
      • Absolute advantage
      • Comparative advantage
      • Comparative advantage versus competitive advantage
      • Factor endowments
      • The New Trade Theory
      • Porter’s Diamond
      3 -2
    • 3. 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
    • 4. 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
    • 5. 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
    • 6. Alternative production possibilities from 100 units of resources 3.6
    • 7. Opportunity Cost and Comparative Advantage 3.7
    • 8. Diversified production before trade Production/Consumption 3.8
    • 9. 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
    • 10. 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
    • 11. 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
    • 12. 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
    • 13. 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
    • 14. 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
    • 15. 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
    • 16. 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
    • 17. Determinants of National Competitive Advantage Firm Strategy Structure, and Rivalry Related and Supporting Industries Demand Conditions Factor Endowments Government Chance 3 -1 7
    • 18. 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
    • 19. 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