Trade theory(6)kk


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Trade theory(6)kk

  2. 2. TOPICS TO BE DISCUSSED <ul><li>WHAT IS TRADE? </li></ul><ul><li>WHY WE STUDY TRADE THEORY? </li></ul><ul><li>DIFFERENT TRADE THEORIES </li></ul>
  3. 3. WHAT IS TRADE? <ul><li>Trade is nothing but Voluntary exchange of goods and services between one person/organization & another with intension of gain from such trade. </li></ul>
  4. 4. WHY WE STUDY TRADE THEORIES? <ul><li>To decide what should be imported and what should be exported i.e. EXIM policies of an Economy. </li></ul><ul><li>Government use these theories in designing different policies. </li></ul><ul><li>Managers use them to identify promising markets. </li></ul>
  5. 5. 1. MERCANTAILISM <ul><li>It is the first formal theory of trade. </li></ul><ul><li>According to Mercantilist Version, “A country’s wealth is measured by its holding of gold and silver, and the Country’s Goal should be to enlarge these holdings.” </li></ul>
  6. 6. 1. MERCANTAILISM <ul><li>The Mercantilist advocates Government intervention to achieve surplus balance trade i.e. exports should be increased and imports should be reduced. </li></ul><ul><li>Imports can be reduced by imposing tariffs and quotas. </li></ul><ul><li>Exports can be increased by providing subsidies. </li></ul>
  7. 7. FLAWS OF MERCANTAILISM <ul><li>According to Davis Hume, in the Long run, no country could sustain a surplus on the balance of trade. </li></ul><ul><li>Government imports restrictions are paid by consumers in the form of higher taxes. </li></ul><ul><li>Government Subsidies of exports of certain industries are paid by taxes payers in form of higher taxes. </li></ul>
  8. 8. 2. ABSOLUTE ADVANTAGE THEORY <ul><li>This theory is proposed by Adam Smith. </li></ul><ul><li>Adam Smith says that trade is a Zero Sum game. </li></ul><ul><li>He advocates free trade to encourage a country’s wealth. </li></ul><ul><li>the basic argument by Adam smith was Countries differ in their ability to produce goods efficiently. </li></ul>
  9. 9. 2. ABSOLUTE ADVANTAGE THEORY <ul><li>This Theory answered a Question that, “ What goods and services should be exported and imported?” </li></ul><ul><li>According to this Theory,” A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.” </li></ul>
  10. 10. 2. ABSOLUTE ADVANTAGE THEORY <ul><li>Therefore Smith says that, ”A country should never produce that product at home which it can buy from some other country at comparatively low cost.” </li></ul><ul><li>Smith says that, “Global efficiency increases through free trade.” </li></ul>
  11. 11. 3. COMPARATIVE ADVANTAGE THEORY <ul><li>This theory is given David Ricardo. </li></ul><ul><li>The concept of opportunity cost is introduced in this theory. </li></ul><ul><li>This theory explains that what happens when one country has an absolute advantage in the production of all goods? </li></ul>
  12. 12. 3. COMPARATIVE ADVANTAGE THEORY <ul><li>David Ricardo showed that such a country may still derive benefits from International Trade. </li></ul><ul><li>A country which have absolute advantage in production of all goods can specialize in the production of those goods that the country produces most efficiently & buy those goods that it produces less efficiently from other countries. </li></ul>
  13. 13. 4. FACTOR PROPORTION THEORY <ul><li>This theory is given by Eli Heckscher and Bertil Ohlin. </li></ul><ul><li>So this theory is also known as HO Theory (Heckscher – Ohlin. </li></ul><ul><li>This theory is also known as Factor Endowment Theory. </li></ul><ul><li>This theory tells that, “What determine the product for which the country will have comparative advantage?” </li></ul>
  14. 14. 4. FACTOR PROPORTION THEORY <ul><li>According to Heckscher and Ohlin, “Factor Endowment (types of resources) varies from country to country. </li></ul><ul><li>Goods differ according to the types of factors that are used to produce them. </li></ul><ul><li>Difference in factor endowment leads to difference in factor costs. </li></ul>
  15. 15. 4. FACTOR PROPORTION THEORY <ul><li>According to HO Theory, “A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance. </li></ul><ul><li>Ex: Saudi Arabia-abundance of crude oil reserves </li></ul><ul><li>India - abundance of unskilled labour </li></ul><ul><li>US – abundance of capital </li></ul><ul><li>China – abundance of labour </li></ul><ul><li>Australia & Canada – abundance of land </li></ul>
  16. 16. 5. PRODUCT LIFE CYCLE THEORY <ul><li>This theory was developed in 1960s by Raymond Vernon of the Harvard Business School. </li></ul><ul><li>According to him, Location of the production shifts as products move through their life cycle. </li></ul>
  17. 17. 5. PRODUCT LIFE CYCLE THEORY <ul><li>There are 4 stages in Product Life cycle:- </li></ul><ul><ul><li>Introductory Stage </li></ul></ul><ul><ul><li>Maturing Stage </li></ul></ul><ul><ul><li>Standardized product Stage </li></ul></ul><ul><ul><li>Declining Stage </li></ul></ul>
  18. 18. 5. PRODUCT LIFE CYCLE THEORY <ul><li>INTRODUCTORY STAGE:- </li></ul><ul><ul><li>Also known as Innovation stage. </li></ul></ul><ul><ul><li>In this stage, A firm develops & introduces an innovative product. </li></ul></ul><ul><ul><li>Early production generally occurs in the domestic market. </li></ul></ul><ul><ul><li>Better to keep production facilities close to the markets & to the centre of decision making. </li></ul></ul><ul><ul><li>Companies may sell a small part of their production in foreign markets – Exports </li></ul></ul>
  19. 19. 5. PRODUCT LIFE CYCLE THEORY <ul><li>MATURING STAGE:- </li></ul><ul><ul><li>In this stage, Demand of product expands domestically & abroad. </li></ul></ul><ul><ul><li>Domestic production reaches its peak </li></ul></ul><ul><ul><li>Foreign competitors expands productive capacity. </li></ul></ul><ul><ul><li>Set up production unit in host country to minimize distribution cost – Internationalization of Production . </li></ul></ul>
  20. 20. 5. PRODUCT LIFE CYCLE THEORY <ul><li>STANDARDIZED PRODUCT STAGE:- </li></ul><ul><ul><li>In this stage, Product become more standardized & prices becomes the main competitive weapon. </li></ul></ul><ul><ul><li>Production techniques are no longer exclusive & innovative. </li></ul></ul><ul><ul><li>Stiff competition from home as well as other developed countries. </li></ul></ul><ul><ul><li>Domestic production slumps. </li></ul></ul>
  21. 21. 6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE <ul><li>This theory was given by Michael Porter in 1990 in Harvard Business School. </li></ul><ul><li>Porter said that, ”Success in International Trade comes from the interaction of four elements: </li></ul><ul><ul><li>Factor Conditions. </li></ul></ul><ul><ul><li>Demand Conditions. </li></ul></ul><ul><ul><li>Related & supporting Industry. </li></ul></ul><ul><ul><li>Firm’s strategy, structure & rivalry. </li></ul></ul>
  22. 22. 6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE <ul><li>FACTOR CONDITIONS:- </li></ul><ul><ul><li>Porter differentiated between Basic factors & Advanced factors. </li></ul></ul><ul><ul><li>Basic Factors: Land, Labor, Capital, Natural resources, etc. </li></ul></ul><ul><ul><li>Advanced Factors: Technology, Infrastructure, Education level of work force. </li></ul></ul><ul><ul><li>Porter said, “Favorable Factor conditions leads to favorable competitive conditions in the markets.” </li></ul></ul>
  23. 23. 6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE <ul><li>DEMAND CONDITIONS: </li></ul><ul><ul><li>This represents the Consumer Demand, </li></ul></ul><ul><ul><li>If the consumers are well aware then the firm has to develop high quality product & firm can compete internationally with good quality product & vice versa. </li></ul></ul>
  24. 24. 6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE <ul><li>RELATED & SUPPORTING INDUSTRY:- </li></ul><ul><ul><li>These are the industries which gives input to the firms & have spill over effect. </li></ul></ul><ul><ul><li>If the input produced by supporting Industry is superior i.e. of good quality, then the final product is also of good quality & the firm can compete internationally. </li></ul></ul>
  25. 25. 6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE <ul><li>FIRM’S STRATEGY, STRUCTURE & RIVALRY:- </li></ul><ul><ul><li>Different Countries have different ideologies. </li></ul></ul><ul><ul><li>The more is the rivalry, the more pressure to produce good product & firm can compete internationally with good quality product. </li></ul></ul><ul><ul><li>Therefore, Rivalry is important to develop world class product. </li></ul></ul>
  26. 26. REFRENCES <ul><li>International Business </li></ul><ul><ul><li>By V. Sharan </li></ul></ul>