The International Trade Theory, trade theory slideshow presentation on power-point.

2. Introduce Myself
Md. Imrul Khan
Id: 160050100182
Batch : 5th
Faculty of Business Administration
Cox’s Bazar International University

3. Presentation Topic On : The
International Trade Theory
Submitted To:
A.S.M Saifur Rahman
Lecturer, Assistant Professor and Exam controller
Faculty Of Business Administration
Cox’s Bazar International University

4. Abstract
• This is present an analysis of Classical
country-based and modern firm-based theories.
Subsequently, further critical analysis is
presented based on mercantilism, being the least
favorable theory and the national competitive –
porter’s diamond theory being the most
appealing theory.

5. Introduction
International trade exposes
consumers and countries to the
international market that enables of
goods and services between
countries. Product that is bought from
the global market is called an import
and product that is sold to the global
market is called an export. Simply
put, it allows countries to trade
globally as well as enable consumers
to choose and shop goods and
services that suits their own
preferences in terms of quality and
price which are not available in their
own countries.

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This notion is supported by wood where he
mentioned the greatest part of international trade
is when some goods can be produced better or
cheaper in one country rather in another. In the
1990s the influence of these international trade
theories has resulted in significant changes in the
global free trade. The theories are 1) Mercantilism
2) Absolute Advantage 3) comparative Advantage 4)
Heckscher-ohlin Theory 5) The product life Cycle theory 6)
New Trade Theory : Economies of scale & First mover
Advantage National Competitive Advantage

7. Overview Of Trade Theory
Mercantilism is the first classical country-based theory
propagated in the sixteenth and seventeenth centuries the
theory is about three hundred years old, but it has been
one of the most debated theories until today. Mercantilist
suggested countries to encourage exports and discourage
imports. The next classical theory which was proposed by
Adam smith in 1776 is known as absolute advantage
theory. The theory explains the benefits of unrestricted free
trade. Adam smith highlights that in order to raise richness
is to embrace free trade between states. In the 1817 David
Richardo refined the theory and suggested comparative
advantage theory where he indicates that countries can
gain from trade even if one of them is less productive.

8. Analysis of classical
country-based and Modern
firm-based Trade Theories

9. Mercantilism
• This theory emerged in England in the mid-sixteenth
century as the first theory of international trade. It
suggests that the quantity of metals which refers to gold
and silver owned by countries represent the country’s
richness. Gold and silver were used as a currency of
trade between countries and countries could earn more
gold and silver by exporting more and restrict imports
transactions. In other words, a country must promote
export transactions than its import transactions to
improve the country’s balance of payments or economy’s
transactions between countries. As a result, the country
accumulates more gold and silver, which subsequently
increase the country’s richness power and reputation.

10. Absolute Advantage
As Mercantilist policies give a bad impact to a
country’s economic growth , Adam smith in 1776
Challenges the zero-sum game by arguing that the
policy is only beneficial to the mercantilist country
and does not give a positive advantage to
consumers. He suggests the notion of a positive-
sum game where it is more profitable export
transactions if a country imports goods that will
also benefit others, including the consumers.

11. Comparative Advantage
Adam Smith’s absolute advantage theory,
however, does not explain situations where
countries which do not have absolute advantage in
any of the product or have absolute advantage in
any of the product or have the absolute advantage
theory. according to Hill et al, Ricardo suggests
that countries should specialize in the efficiently
from other countries, or, at the same time buying
goods from other countries that they could produce
more efficiently at home.

12. Heckscher-ohlin and Beril-ohlin
Kowalski and Hill et al, discuss the different explanation of
comparative advantage developed by Swedish economists
Eli Heckscher in 1919 and Beril ohlin 1933. According to
Heckscher and ohlin, the comparative advantage arise
from differences based on national factor endowments
which are land, labor cost and capital. These differences in
factor endowments translate to differences in factor costs, it
means more favorable a factor lead to a lower cost. as
such Heckscher-ohlin predict that countries will export
goods that make intensive use of locally abundant factors,
and import goods that make intensive use of factors which
are locally scare.

13. The product Life cycle Theory
The product life cycle theory is the first modern
firm-based theories. This theory was developed by
Raymond Vernon in the mid-1960s. According to
Barot the theory emphasizes on creativity, markets
extension, comparative advantages and strategic
answer of the global rivals in decisions related to
the production trade and international investments.
The product life cycle theory consists of three
phases, 1) a new product 2) mature product and 3)
Standardized product.

14. New Trade Theory: Economies of
Scale & First Mover Advantage
In the 1980s, economists such as Paul Krugman
and Kevin Lancaster, develop a theory which is
called the New Trade Theory – Economies of
Scale and First Mover Advantage. The theory
stresses out that any firm that able to achieve
better economies of Scale would give a positive
impact to international trade by increasing the
variety of goods available to consumers and
decrease the average cost of those goods

15. National Competitive Advantage
In 1990, Michael porter revealed the results of his research
in his book The Competitive Advantage of Nations, why
some nations achieve international success and some
failed to survive. He emphasizes on company strategy and
competition. Competition differ significantly from country to
country and from one industry to another. For example, the
reason why Japan is doing so well in automobile industry,
and Germany and the United States are best in the
chemical industry. These questions can’t be answered by
previous theories, but porter’s theory tries to provide some
explanations to these questions.

16. Porter’s Diamond framework
firm strategy
structure,
and rivalry
Diamond
Conditions
Related and
supporting
industries
Factor
endowments

17. Factor Endowments
These factors can be either basic natural
resources, climate, location, or advanced factors
such as skilled labor, Communications
infrastructure, research facilities and technological
know –how factor endowments are based on
Heckscher-ohlin theory which porter did not
propose anything new. These factors can provide
an initial advantage that is then reinforced and
extended by investment in advanced factors
According to porter, Advanced factors are the most
significant for competitive advantage.

18. Demand Conditions
In refers to the nature of home demand for
an industry’s product or service. Demand
conditions influence the development of
capabilities for example, sophisticated,
knowledgeable and demanding customers
pressure firm to be more competitive and to
produce high quality and innovative
products.

19. Relating and supporting
industries
This attribute refers to the presence supplier
industries and related industries that are
internationally competitive According to porter,
investing in these industries can spill over and
contribute to success in other industries. The most
important findings are that successful industries
within a country tend to be grouped into clusters of
related industries which then prompt knowledge
flow between firms. As a result, it benefits all firms
within that cluster.

20. Firm strategy, structure, and rivalry
The last attribute refers to the nation governing
how companies are created, organized and
managed, and the nature of rivalry within a nation.
The two important points made by porter highlight
that different nations are characterized by different
management ideologies which influence the ability
of firms to build national competitive advantage.
Porter’s second point is that there is a strong
association between vigorous domestic rivalry and
the creation and persistence of competitive
advantage in an industry.

21. Global Strategic Rivalry Theory
Global strategic rivalry theory emerged in the 1980s and
was based on the work of economists Paul Krugman and
Kelvin Lancaster. Their theory focused on MNCs and their
efforts to gain a competitive advantage against other global
firms in their industry. Firms will encounter global
competition in their industries and in order to prosper, they
must develop competitive advantages. The critical ways
that firms can obtain a sustainable competitive advantage
are called the barriers to entry for that industry. The
barriers to entry refer to the obstacles a new firm may face
when trying to enter into an industry or new market.

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The barriers to entry that corporations may seek to
optimize include:
• research and development,
• the ownership of intellectual property rights,
• economies of scale,
unique business processes or methods as well as
extensive experience in the industry, and
the control of resources or favorable access to raw
materials.

23. Porter’s National Competitive
Advantage Theory
In the continuing evolution of international trade theories,
Michael Porter of Harvard Business School developed a
new model to explain national competitive advantage in
1990. Porter’s theory stated that a nation’s competitiveness
in an industry depends on the capacity of the industry to
innovate and upgrade. His theory focused on explaining
why some nations are more competitive in certain
industries. To explain his theory, Porter identified four
determinants that he linked together. The four determinants
are (1) local market resources and capabilities, (2) local
market demand conditions, (3) local suppliers and
complementary industries, and (4) local firm characteristics.

24. whose theory i would like to use
and which is Dominant today
As a manager I would like to use absolute advantage
Theory. What’s the reason are as follows:-The theories
covered in this assignment are simply that—theories. While
they have helped economists, governments, and
businesses better understand international trade and how
to promote, regulate, and manage it, these theories are
occasionally contradicted by real-world events. Countries
don’t have absolute advantages in many areas of
production or services and, in fact, the factors of production
aren’t neatly distributed between countries. Some countries
have a disproportionate benefit of some factors.

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The United States has ample arable land that can be used
for a wide range of agricultural products. It also has
extensive access to capital. While it’s labor pool may not be
the cheapest, it is among the best educated in the world.
These advantages in the factors of production have helped
the United States become the largest and richest economy
in the world. Nevertheless, the United States also imports a
vast amount of goods and services, as US consumers use
their wealth to purchase what they need and want—much
of which is now manufactured in other countries that have
sought to create their own comparative advantages through
cheap labor, land, or production costs.

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As a result, it’s not clear that any one theory is dominant
around the world. This section has sought to highlight the
basics of international trade theory to enable you to
understand the realities that face global businesses. In
practice, governments and companies use a combination
of these theories to both interpret trends and develop
strategy. Just as these theories have evolved over the past
five hundred years, they will continue to change and adapt
as new factors impact international trade.