2. Outline
Key Terms
Comparative Advantage
Heckscer-Ohlin Theory
The Product Life-Cycle Theory
New Trade Theory
National Competitive Advantage: Porter’s Diamond
Article
Discussion
Quiz
3. Key Terms
Constant returns to specialization The units of resources
required to produce a good are assumed to remain constant no matter where
one is on a country’s production possibility frontier.
Factor endowments A country’s endowment with resources such as
land, labor, and capital
Economies of Scale Cost advantage associated with large-scale
production
First-mover Advantages accruing to the first to enter a market
4. Comparative advantage
Comparative advantage suggests that even if a
country has absolute advantage of two products they
can still benefit from trade
5. Gains From Trade
Combined output increases from both countries
Consumption increases
On a global scale:
Potential world production is greater with
unrestricted free trade than it is with restricted
trade.
6. Qualifications and Assumptions
Unrealistic assumptions
It is possible for many countries with many different
goods to still benefit
A rich country could possibly be worse off by
trading
7. Evidence of the Link Between Trade & Growth
Countries with a more open stance on international
trade have better growth rates
Open vs. Closed Growth Rates
Concludes that living standards and greater
economic results come from open trade policies
8. Heckscher-Ohlin Theory
• Eli Heckscher and Bertil Ohlin argued that comparative
advantages arise from differences in national factor
endowments (more abundant a factor, the lower the
cost)
9. Heckscher-Ohlin Theory
The Leontief Paradox
Found U.S. exports were less capital intensive than
U.S. imports
Produce what you are more efficient in, not
necessarily what your endowments favor
The U.S. exports commercial aircrafts and imports
textiles because they are
relatively more efficient at
producing aircrafts
10. The Product Life-Cycle Theory
Proposed by Raymond Vernon
Wealth and size = incentive to develop consumer
products
Cost of labor = incentive to develop cost-saving
process innovations
11. The Product Life-Cycle Theory
Evaluation
Exports began to decline because of other countries
entering the market quicker or simultaneously
Product Life Cycle Theory more accurate when U.S.
was dominating the global economies (1945-1975)
Relevance in modern world more limited
12. New Trade Theory
Focuses on Economies of Scale
Studied by Nobel Prize winner Paul Krugman
Trade increases variety available to consumer, and
decreases average cost of goods
13. New Trade Theory
Increasing Product Variety & Reducing Costs
Only valid where economies of scale is a factor
Trade offers mutual gain even when there are not
differences in resources or technology
Minivans vs. Sports Cars
Country A needs 80,000 minivans but must produce
100,000 for economies of scale to be reached
14. New Trade Theory
Economies of Scale, First-Mover Advantages & The Pattern of Trade
Ability to capture scale economies ahead of later
entrants and benefit from lower cost structure
Global market may only be able to support one
producer of certain products
The first mover advantage can lead to becoming a
leading exporter
“Whoever is first in the field will be fresh for the fight.
Whoever is second in the field and has to hasten to
battle will arrive exhausted.” Sun Tzu
15. New Trade Theory
Implications of New Trade Theory
• Government intervention and strategic trade policy
• Boeing was largely paid for by U.S. from a spin off of
a government-funded military program
16. National Competitive Advantage:
Porter’s Diamond
Four attributes that explain why nations have success
in particular industries – beyond the N.T.T.
Factor endowments
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry
Two Additional Factors
18. Evaluating Porter’s Theory
Argues presence of all factors is usually required
Government can positively or negatively effect all
four factors
If correct mirror Real World Trade, but is he?
19. “Australian Election: How do the Major Parties
Stack Up On Fair Trade”
As the election draws near, The Australian Fair Trade and Investment Network (AFTINET)
has analysed how the trade policies of our major political parties compare in relation to fair
trade and free trade.
Both the Labor party and the Coalition are committed to trade liberalization, but differ in
their approach. Labor policy emphasizes sharing the benefits of trade liberalization both
domestically and between countries. The policy recognizes that short-term support is needed
to assist some workers and sectors to adjust and that although trade is important, it is not
always sufficient for developing countries. On the other hand, the Coalition focuses on
increasing Australia’s exports through “fast tracking” Free Trade Agreements especially in
Asia and particularly with China, Indonesia, Japan and India. The Coalition aims to increase
Australia’s reputation as “a safe place to invest”. The Greens emphasize the importance of
fairness and democracy in their approach to international trade and highlight the need to
assist developing countries.
To compare the parties on key fair trade issues, we examined the policy documents of each
party, as well as pre-election statements and publications on nine key issues. They are labour
rights, the environment, health care and access to medicines, investor rights to sue
governments (ISDS), intellectual property, Australia’s cultural industries, transparency, the
Trans-Pacific Partnership and Multilateral versus bilateral and regional agreements.
20. Article Complications
All parties in favor of trade liberalization
Each party has different policies and views on
achieving it
21. Background
The Labor and Green parties have specific policies
for all issues related to international trade
Liberals have no specific policies and have a negative
policy on investor state dispute
22. How is this Relevant?
To our class: International trade is a major topic of
our course
To Australia: To see if parties stick to their policies
and to see how trade is effected by the elections
23. Implications Raised
If Liberal Party wins: International trade will be less
structured, they will focus on fast-tracking free trade
agreements
If Labor Party wins: Benefits of trade will be shared
both domestically and with other countries
If the Green Party wins: Fairness and democracy will
be implemented and they will enforce the need to
assist developing countries
