International trade theories


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International trade theories

  1. 1. International Trade Theories N.Keerthi (128936) Narahari Sai G (128937) Nishanth Singh (128938) Valliappan (128939) Presented by
  2. 2. What is international trade? • International trade is the exchange of capital, goods, and services across international borders or territories. • Trade mainly have two components EXPORTS and IMPORTS.
  3. 3. Why trade theories?  The first purpose of trade theory is to explain observed trade. That is, we would like to be able to start with information about the characteristics of trading countries, and from those characteristics deduce what they actually trade, and be right. That’s why we have a variety of models that postulate different kinds of characteristics as the reasons for trade.  Secondly, to know about the effects of trade on the domestic economy.  A third purpose is to evaluate different kinds of policy.
  4. 4. Types of trade theories  Interventionist Mercantilism Neo mercantilism  Free- trade theories Theory of Absolute advantage Comparative Advantage
  5. 5. Theory of trade patterns  Porter Diamond theory  Specialization theory  Theory of country Size  Factor proportion theory  Country similarity theory
  6. 6. What the major trade theories Do and Don’t discuss
  7. 7. Mercantilist Theory Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) Mercantilism was at its height in the 17th and 18th centuries. The term Merchantilism was coined by the Marquis de Mirabeau in 1763, and was popularised by Adam Smith in 1776. Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective
  8. 8. Mercantilism: mid-16th 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 export through subsidies.  Minimize imports through tariffs and quotas  Flaw: restrictions, impaired growth
  9. 9. Theory of Absolute Advantage  Suggests specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones  A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage
  10. 10.  Adam Smith: Wealth of Nations (1776) argued:  Capability of one country to produce more of a product with the same amount of input than another country  A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient  Trade between countries is, therefore, beneficial  Assumes there is an absolute balance among nations
  11. 11. Theory of Comparative Advantage  Also proposes specialization through free trade because it says that total global output can increase even if one country has an absolute advantage in the production of all products
  12. 12. Theories of Specialization Both absolute and comparative advantage theories are based on specialization
  13. 13. Product Life Cycle (PLC) Theory I. Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries II. Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline
  14. 14. Life Cycle of the International Product
  15. 15. The Porter Diamond theory Four conditions as important for competitive superiority: 1) demand conditions 2) factor conditions 3) related and supporting industries 4) firm strategy, structure, and rivalry
  16. 16. Limitations of the Porter Diamond Theory  Capital and labor move internationally to gain more income and flee adverse political situations  Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
  17. 17. Trade Pattern Theories  How much a country will depend on trade if it follows a free trade policy  What types of products countries will export and import  With which partners countries will primarily trade
  18. 18. Theory Of Country Size  Countries with large land areas are apt to have varied climates and natural resources.  They are generally more self-sufficient than smaller countries.  Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade
  19. 19. Factor-Proportions Theory  A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors  Factor costs will determine which goods the country can produce most efficiently
  20. 20. Composition of Worldwide trade
  21. 21. Country-similarity Theory  Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies  Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them
  22. 22. The Relationship between Trade and Factor Mobility  Capital and labor move internationally to gain more income and flee adverse political situations  Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
  23. 23. References: 1) 2) 3) TradeTheory2004.pdf 4)
  24. 24. Thank You
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