This presentation covers the fundamental concepts and models related to the study of international trade. It includes discussions on comparative advantage, international trade models, and trade policies. The aim is to provide a basic understanding of the theories of the international trade.

1. International Trade Theory
Sudhanshu Bhatt (https://www.linkedin.com/in/sudhanshu-bhatt-b3665115/)
MBA –IBA
16.04.2023
References
Bulatov, A. (2023). World Economy and International Business Theories, Trends, and Challenges. In Springer. https://doi.org/10.12737/16614
Hill, C. W. L. (2022). Global Business Today 12e Charles.
Hill, C. W. L. (2023). International Business: Competing in Global Marketplace. In McGraw Hill LLC. https://doi.org/10.4324/9780203879412
Shenkar, O., Luo, Y., & Chi, T. (2022). International Business, Routledge. Routledge.
Images sourced from the internet

2. What is the meaning of Globalization and what are its major drivers?

3. Q1. What is the meaning of Globalization and what are its
major drivers?
Globalization refers to the increasing interconnectedness and integration of economies, societies, and cultures across
national borders. This integration is facilitated by advances in technology, transportation, and communication, and it
has led to increased trade, investment, migration, and cultural exchange among countries.
The major drivers of globalization include:
1. Technological advancement: The rapid advancement in technology, particularly in the fields of communication
and transportation, has made it easier for people, goods, and ideas to move across borders.
2. Liberalization of trade and investment: The removal of trade and investment barriers, such as tariffs and quotas,
has facilitated the flow of goods and capital across borders.
3. Economic integration: The creation of regional economic agreements, such as the European Union and NAFTA,
has further reduced barriers to trade and investment among member countries.
4. Multinational corporations: Large multinational corporations have played a significant role in driving globalization
by investing in and expanding operations in multiple countries.
5. Migration: The movement of people across borders for work, education, or other reasons has also contributed to
globalization.
6. Cultural exchange: The increasing exchange of cultural products, such as music, movies, and literature, has helped
to create a more interconnected and global culture.

4. Q2. What do you mean by International Trade?
1. International trade refers to the exchange of goods and services between countries or regions.
2. Over the last 70 years, there has been a dramatic increase in the volume of international trade. Initially, much
of the growth in trade was due to rising cross-border trade for physical goods, including commodities,
agricultural products, and manufactured goods such as semiconductor chips.
3. However, in recent years, there has been an acceleration in the value of services that are traded across borders,
including financial services, entertainment, software offerings, telecommunications services, computing
services, and education.
4. The motivation for trading both physical goods and services is to realize what economists refer to as the gains
from trade, whereby countries specialize in the production of goods and services they can produce most
efficiently, while importing goods and services that they cannot produce as efficiently from other nations.
5. By increasing the efficiency of resource utilization in the global economy, international trade results in greater
economic growth and provides economic benefits to all countries that participate in a global trading system.
6. However, trade policies can vary, ranging from free trade to managed trade, and they can have a significant
impact on businesses both large and small. Trade policies also influence foreign direct investment and the
creation of trading blocs.

5. Q3. What does international trade theory mean?
1. International trade theory refers to a set of ideas and concepts that explain the patterns and effects of
international trade.
2. These theories attempt to answer questions such as why countries engage in international trade, what
determines the goods and services that they trade, and how trade affects economic growth and
development.
3. Some of the most influential theories include mercantilism, absolute advantage, comparative advantage,
factor proportions, and international product life cycle theory.
4. By understanding these theories, businesses and policymakers can make more informed decisions about
trade policies, market entry strategies, and supply chain management.

6. Q4. What are the major theories of international
trade?
CLASSICAL OR COUNTRY-BASED TRADE THEORIES MODERN OR FIRM-BASED TRADE THEORIES
1. Mercantilism / The Mercantilist Doctrine
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher–Ohlin Theory (Factor Proportions
Theory)
1. The Product Life-Cycle Theory
2. New Trade Theory
3. Global Strategic Rivalry Theory
4. Porter’s Diamond (Porter’s theory of National
Competitive Advantage)

7. Q5. WHAT ARE CLASSICAL OR COUNTRY-BASED
TRADE THEORIES?
CAL OR COUNTRY-BASED TRADE
• These are theories that focus on explaining why certain countries
have a comparative advantage in producing certain goods or
services. These theories are based on the assumption that factors of
production, such as labor, capital, and natural resources, are
immobile between countries and that trade is driven by differences in
these factors.

8. Mercantilism / The Mercantilist Doctrine
Example - A country that imposes high tariffs on imported goods in order to protect its
domestic industries.

9. Q6. Mercantilism / The Mercantilist
Doctrine
1. Mercantilism is a theory of international trade that emerged in England in the 16th century.
2. Its main idea was that a country's wealth depended on the amount of gold and silver it had. To
accumulate gold and silver, a country should aim to export more than it imported.
3. The mercantilists believed that governments should intervene to achieve a trade surplus, limiting imports
through tariffs and quotas and subsidizing exports.
4. However, the classical economist David Hume pointed out that this approach was flawed as it viewed trade
as a zero-sum game in which one country's gain would result in another's loss.
5. This was because it assumed that the size of the economic pie was fixed, and only the distribution of
wealth could change.
6. It also failed to recognize the benefits of trade for all countries involved.
7. Today, the Mercantilism theory is not widely accepted by economists, but some countries still use
protectionist policies to limit imports and promote exports, believing that it will benefit their economy.

10. Absolute Advantage Theory
Example - if Country A can produce 2 units of milk in the same amount of time that Country B can
produce 4 units of milk, Country A has an absolute advantage in milk production and should focus
on producing that good.

11. Q7. Absolute Advantage Theory
1. Adam Smith's theory of absolute advantage states that countries should specialize in producing goods they
are most efficient at producing, and then trade those goods with other countries to obtain the goods they
are less efficient at producing.
2. This theory argues that both countries will benefit from the efficient allocation of resources globally.
3. For example, the United States has an absolute advantage in producing wheat, while Colombia has an
absolute advantage in producing coffee. Both countries benefit from specializing in the production of these
goods and trading with each other.
4. This example illustrates the positive-sum game of trade, where all parties involved can benefit from
specialization and trade.
5. The theory does not explain what would happen if one country has an absolute advantage in producing
all goods, which is addressed by the comparative advantage theory.

12. Comparative Advantage theory
Example - if Country A can produce both wheat and cotton more efficiently than Country B, but
has a lower opportunity cost of producing wheat, it should specialize in wheat production and trade
with Country B for cotton.

13. Q8. Comparative Advantage theory
1. The Comparative Advantage theory, developed by David Ricardo, states that even if one country has an
absolute advantage in producing all goods, both countries would still benefit from trade based on their
comparative advantage in producing a good relative to the other country.
2. This comparative advantage is determined by the opportunity cost of producing a good, which is the
amount of other goods that must be given up in order to produce one unit of the good.
3. A country has a comparative advantage in producing a good if the opportunity cost for producing the good
is lower at home than in the other country.
4. By specializing in producing goods in which they have a comparative advantage, countries can increase
their production efficiency and benefit from trade.
5. Comparative advantage is explained by differences in production cost, which are influenced by factors such
as technology and the availability and cost of production factors such as labor, land, capital, and natural
resources.

14. Heckscher–Ohlin Theory
Example - if a country has abundant labor but scarce capital, it should specialize in labor-
intensive industries and trade with countries that have the opposite factor endowment.

15. Q9. Heckscher–Ohlin Theory (Factor
Proportions Theory)
1. Unlike Ricardo's theory of comparative advantage, which stresses differences in labor productivity, the
Heckscher–Ohlin theory emphasizes differences in national factor endowments.
2. Factor endowments refer to a country's resources such as land, labor, and capital. The theory predicts that
countries will export goods that make intensive use of factors that are locally abundant and import goods that
make intensive use of factors that are locally scarce.
3. For example, a country with an abundance of labor relative to capital would tend to export labor-intensive
goods, while a country with an abundance of capital relative to labor would tend to export capital-intensive
goods.
4. The theory has been tested empirically, including through the Leontief Paradox, which found that the United
States, a capital-rich country, imported more capital-intensive goods than it exported.
5. Possible explanations for this paradox, such as the United States having a special advantage in producing new
products or goods made with innovative technologies that are less capital-intensive.

16. What are the major theories of international trade?
CLASSICAL OR COUNTRY-BASED TRADE THEORIES
focus on explaining why certain countries have a comparative
advantage in producing certain goods or services. These theories are
based on the assumption that factors of production, such as labor,
capital, and natural resources, are immobile between countries and
that trade is driven by differences in these factors.
MODERN OR FIRM-BASED TRADE THEORIES
focus on explaining why certain firms have a comparative advantage in
producing certain goods or services, regardless of the country in which
they are located. These theories are based on the assumption that
firms are the primary actors in international trade and that they are
able to take advantage of economies of scale, product differentiation,
and other competitive advantages to compete in global markets.
1. Mercantilism / The Mercantilist Doctrine
2. Absolute Advantage
3. Comparative Advantage
4. Heckscher–Ohlin Theory (Factor Proportions
Theory)
1. The Product Life-Cycle Theory
2. New Trade Theory
3. Global Strategic Rivalry Theory
4. Porter’s Diamond (Porter’s theory of National
Competitive Advantage)

17. Q10. WHAT ARE MODERN OR FIRM-BASED
TRADE THEORIES ?
• focus on explaining why certain firms have a comparative advantage
in producing certain goods or services, regardless of the country in
which they are located.
• These theories are based on the assumption that firms are the
primary actors in international trade and that they are able to take
advantage of economies of scale, product differentiation, and other
competitive advantages to compete in global markets.

18. The Product Life-Cycle (PLC) Theory
Example - a new product may be developed and initially produced in a country with a high level of
technological expertise, but as the product becomes more standardized and mature, production may
shift to countries with lower labor costs.

19. Q11. The Product Life-Cycle (PLC) Theory
1. Proposed by Raymond Vernon in the mid-1960s, the product life cycle (PLC) theory is a model that explains
changes in production and trade in new product lines. Vernon postulated that producers in the innovating
country are likely to be the first to exploit market opportunities for a technology-intensive new product.
2. The PLC theory helps to explain changes in production and trade in new product lines, as an innovation would
originate in one country and production spreads rapidly to other countries that have been technically competent
or those which have had a comparative advantage in terms of cheap labor.
3. The model is associated with the life-cycle stage of the product itself. As the product moves through its life cycle,
the life cycle of international trade will change. The new-product stage is characterized by unstable production
functions, rapidly changing techniques, and a small number of firms. The growth-product stage is associated with
mass-production methods used to exploit expanding markets, high returns from economies of scale, and market
growth. Finally, the mature-product stage is characterized by standardized products with stable techniques and
intense price competition.
4. However, the theory has some weaknesses. From an Asian or European perspective, Vernon's argument that most
new products are developed and introduced in the United States seems ethnocentric and dated. Many new
products are now first introduced in Japan or South Korea, and an increasing number of new products are now
introduced globally due to the increased globalization and integration of the world economy.

20. New Trade Theory
Example - if a country has a dominant player in a particular industry (e.g., the United States in the
technology industry), that industry may continue to thrive and attract new players even if other countries
have similar factor endowments.

21. Q12. New Trade Theory
1. The new trade theory emerged in the 1970s, emphasizing that firms' ability to achieve economies of scale
could have significant implications for international trade.
2. Economies of scale are cost reductions associated with large output volumes, resulting from the ability to
spread fixed costs over a large volume and to utilize specialized employees and equipment that are more
productive than less specialized ones.
3. Economies of scale are found in many industries, such as software, automobiles, pharmaceuticals, and
aerospace. New trade theory suggests that trade can increase the variety of goods available to consumers
and decrease their average cost, mainly through its impact on economies of scale.
4. The theory also suggests that global trade in certain products may be dominated by countries whose firms
were first movers in their production.
5. In other words, the pattern of trade may reflect first-mover advantages, which are the economic and
strategic advantages that accrue to early entrants into an industry, allowing them to capture scale
economies ahead of later entrants, and benefit from a lower cost structure.

22. Global Strategic Rivalry Theory
Example - a company may gain a competitive advantage through aggressive marketing, superior
quality, or cost leadership, but that advantage may be eroded over time as competitors develop
similar capabilities.

23. Q13. Global Strategic Rivalry Theory
1. It is an economic theory that explains the behavior of multinational corporations (MNCs) in a globalized
marketplace.
2. The theory asserts that MNCs compete with each other in the international marketplace in order to gain a
competitive advantage.
3. In order to achieve a sustainable competitive advantage, firms must develop and maintain barriers to entry
in their respective industries. These barriers to entry can be achieved through various means such as
research and development, ownership of intellectual property rights, economies of scale, unique business
processes or methods, and control of resources or favorable access to raw materials.
4. The theory suggests that MNCs engage in strategic behavior to gain a competitive advantage and maintain
their position in the global marketplace. This behavior includes investing in (R&D) research and
development, developing new technologies, and acquiring firms with complementary resources or
capabilities. MNCs also seek to protect their intellectual property rights, establish economies of scale, and
develop unique business processes or methods to gain a competitive edge.

24. Porter’s theory of National Competitive Advantage
(Diamond)
Example - the automotive industry in Germany is highly competitive due in part to the
country's skilled labor force, strong domestic demand for cars, and the presence of related
industries such as auto parts suppliers.

25. Q14. Porter’s Diamond (Porter’s theory of
National Competitive Advantage)
• Developed by Michael Porter that explains why a nation achieves international success in a
particular industry. It suggests that four broad attributes of a nation shape the environment in
which local firms compete, and these attributes promote or impede the creation of competitive
advantage.
1. Factor endowments refer to a nation's position in factors of production, such as skilled labor or the
infrastructure necessary to compete in a given industry. Advanced factors, such as communication
infrastructure, skilled labor, and technological know-how, are the most significant for sustainable
competitive advantage.
2. Demand conditions refer to the nature of home-country demand for the industry's product or service. The
characteristics of home demand are particularly important in shaping the attributes of domestically made
products and in creating pressures for innovation and quality.
3. Related and supporting industries refer to the presence or absence of supplier industries and related
industries that are internationally competitive. The benefits of investments in advanced factors of
production by related and supporting industries can spill over into an industry, thereby helping it achieve a
strong competitive position internationally.
4. Firm strategy, structure, and rivalry refer to the conditions governing how companies are created,
organized, and managed and the nature of domestic rivalry. A highly competitive domestic environment is
an important determinant of international success because it creates pressures to innovate and upgrade.

26. Q15. Two additional variables to Porter’s
theory of National Competitive Advantage
• Porter argues that firms are most likely to succeed in industries or industry segments where the diamond is
most favorable.
• The effect of one attribute is contingent on the state of others. Two additional variables that can influence
the national diamond in important ways are Chance Events and Government.
• Chance events, such as major innovations, can reshape industry structure and provide the opportunity for
one nation's firms to supplant another’s.
• Government, by its choice of policies, can detract from or improve national advantage.

27. Q16. How applicable are those theories in
today’s environment?
• some older theories such as the mercantilist doctrine and the absolute advantage theory are no longer
accurate in today's world due to changes in technology, information exchange, capital flow, and the
enhanced role of multinational enterprises (MNEs).
• However, the Heckscher-Ohlin theorem, which explains the general concept of trade, is still applicable by
integrating advanced technology and skilled workforce into systems of comparative advantage between
countries. Furthermore, the new trade theory can explain intra-industry and intra-firm trade.
• It is important to note that theories of international trade need to be revised continuously to account for
new technology and political and economic realities that create a different global climate.
• In conclusion, while existing theories provide valuable insights, a new line of theoretical development is
necessary to assess country capabilities or competitiveness beyond factor endowments and explain the full
range of motives for international trade in today's environment.

28. • IBA to be continued………