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The Theories Of Trade


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Published in: Business, Technology

The Theories Of Trade

  1. 1. The Theories of Trade
  2. 2. Learning Objectives <ul><li>To understand the traditional arguments of how and why international trade improves the welfare of all countries </li></ul><ul><li>To explore the similarities and distinctions between international trade and international investment </li></ul>
  3. 3. Evolution of Trade Theory <ul><li>The Age of Mercantilism </li></ul><ul><li>Classical Trade Theory </li></ul><ul><li>Factor Proportions Trade Theory </li></ul><ul><li>International Investment and Product Cycle Theory </li></ul><ul><li>The New Trade Theory: Strategic Trade </li></ul>
  4. 4. Mercantilism <ul><li>Mixed exchange through trade with accumulation of wealth </li></ul><ul><li>Conducted under authority of government </li></ul><ul><li>Demise of mercantilism inevitable </li></ul>
  5. 5. Classical Trade Theory <ul><li>The Theory of Absolute Advantage </li></ul><ul><ul><li>The ability of a country to produce a product with fewer inputs than another country </li></ul></ul><ul><li>The Theory of Comparative Advantage </li></ul><ul><ul><li>The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other </li></ul></ul>
  6. 6. Classical Trade Theory Contributions <ul><li>Adam Smith—Division of Labor </li></ul><ul><ul><li>Industrial societies increase output using same labor-hours as pre-industrial society </li></ul></ul><ul><li>David Ricardo—Comparative Advantage </li></ul><ul><ul><li>Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce </li></ul></ul><ul><li>Gains From Trade </li></ul><ul><ul><li>A nation can achieve consumption levels beyond what it could produce by itself </li></ul></ul>
  7. 7. Factor Proportions Trade Theory <ul><li>Developed by Eli Heckscher </li></ul><ul><li>Expanded by Bertil Ohlin </li></ul>
  8. 8. Factor Proportions Trade Theory Considers Two Factors of Production <ul><li>Labor </li></ul><ul><li>Capital </li></ul>
  9. 9. Factor Proportions Trade Theory <ul><li>A country that is relatively labor abundant (capital abundant) should specialize in the production and export of that product which is relatively labor intensive (capital intensive). </li></ul>
  10. 10. Product Cycle Theory <ul><li>Raymond Vernon </li></ul><ul><li>Focus on the product, not its factor proportions </li></ul><ul><li>Two technology-based premises </li></ul>
  11. 11. Product Cycle Theory: Vernon’s Premises <ul><li>Technical innovations leading to new and profitable products require large quantities of capital and skilled labor </li></ul><ul><li>The product and the methods for manufacture go through three stages of maturation </li></ul>
  12. 12. Stages of the Product Cycle <ul><li>The New Product </li></ul><ul><li>The Maturing Product </li></ul><ul><li>The Standardized Product </li></ul>
  13. 13. The Product Cycle and Trade Implications <ul><li>Increased emphasis on technology’s impact on product cost </li></ul><ul><li>Explained international investment </li></ul><ul><li>Limitations </li></ul><ul><ul><li>Most appropriate for technology-based products </li></ul></ul><ul><ul><li>Some products not easily characterized by stages of maturity </li></ul></ul><ul><ul><li>Most relevant to products produced through mass production </li></ul></ul>
  14. 14. The New Trade Theory: Strategic Trade <ul><li>Two New Contributions </li></ul><ul><li>Paul Krugman-How trade is altered when markets are not perfectly competitive </li></ul><ul><li>Michael Porter-Examined competitiveness of industries on a global basis </li></ul>
  15. 15. Strategic Trade <ul><li>Krugman’s Economics of Scale: </li></ul><ul><li>Internal Economies of Scale </li></ul><ul><li>External Economies of Scale </li></ul>
  16. 16. Strategic Trade <ul><li>Government can play a beneficial role when markets are not purely competitive </li></ul><ul><li>Theory expands to government’s role in international trade </li></ul><ul><li>Four circumstances exist that involve imperfect competition in which strategic trade may apply </li></ul>
  17. 17. Strategic Trade <ul><li>The Four Circumstances Involving Imperfect Competition: </li></ul><ul><li>1.Price </li></ul><ul><li>2.Cost </li></ul><ul><li>3. Repetition </li></ul><ul><li>4.Externalities </li></ul>