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International Trade Theories
Presented By:
Jatin Vaid
jatinvaid@gmail.com
1International Business - Jatin Vaid
Introduction
 Trade theories explain trade patterns
(Quantity, range of products and countries)
 Laissez – faire approach: Allows market forces
to determine trade relations
 Interventionist approach: Propagates
government intervention.
2International Business - Jatin Vaid
Theories
I. Mercantilism
II. Absolute Advantage
III. Comparative Advantage
IV. Heckscher – Ohlin Theory
V. International Product Life Cycle Theory
VI. New Trade Theory
3International Business - Jatin Vaid
I. Mercantilism
 England – Mid 16th century
 A country’s wealth is measured by its holdings
of gold.
 Countries should export more than they
import.
 Gold empowered governments to invest in
armies & national institutions.
 Intended to benefit colonial powers.
4International Business - Jatin Vaid
.
 It was in best interest of countries to maintain
trade surplus.
 Imports limited by tariffs; Exports subsidized.
 IB treated as a zero – sum game (i.e., win –
loss)
5International Business - Jatin Vaid
II. Absolute Advantage
 Adam Smith in his book “Wealth of nations”,
1776.
 Real wealth of nation consists of goods &
services available to its citizens, in their quality
of living.
 Different countries produce some goods more
efficiently than other countries.
 Global efficiency can increase through free
trade.
6International Business - Jatin Vaid
.
 Buy V/S Build : Buy whatever you can’t
produce efficiently than others.
 Such specializations will give a country
competitive advantage.
 National resources will shift to more efficient
industries.
 Overall efficiency will increase due to :
i. Economies of specialization
ii. Labor time saved from job switching
iii. Economies of scale
7International Business - Jatin Vaid
.
 Natural Advantage: Climatic conditions, access
to natural resources, etc.
 Acquired Advantage: Product / process
technology, Research & Development, Skilled
manpower, etc.
8International Business - Jatin Vaid
III. Comparative Advantage
 David Ricardo, 1817.
 Global efficiency gains may still result from
trade if a country specializes in those products
it can produce more efficiently than other
products – regardless of whether other
countries can produce those same products
even more efficiently.
9International Business - Jatin Vaid
.
 A country gains if it concentrates its resources
in producing products it can produce most
efficiently.
 Trade considered to be a positive – sum game.
10International Business - Jatin Vaid
IV. Heckscher – Ohlin Theory
• Swedish economists, Eli Heckscher & Bertil
Ohlin (1991 – 1993)
• Patterns of international trade is determined
by differences in factor endowments, rather
than differences in productivity.
• Comparative advantage arise from difference
in national factor endowment.
11International Business - Jatin Vaid
.
 Factor endowments: the extent to which a
country is endowed (gifted) with resources
like land, labour and capital.
 Commonsensical approach to free trade.
 E.g., USA – Exporter of agricultural goods
(abundance of agricultural land);
China – Exporter of textiles and footwear
(Abundance of low cost labour)
12International Business - Jatin Vaid
.
 Factor endowment theory suggests 3 types of
relationships:
i. Land – Labour relationship
ii. Labour – capital relationship
iii. Technological complexities
13International Business - Jatin Vaid
V. International Product Life Cycle
Theory
 Raymond Vernon, 1996
 International markets tend to follow a cyclical
pattern due to a variety of factors over a
period of time, which explains the shifting of
markets as well as the location of production.
14International Business - Jatin Vaid
.
 It explains the variations & reasons for change
in production and consumption patterns
among various markets over a time period.
15International Business - Jatin Vaid
.
16International Business - Jatin Vaid
Thank You!
17International Business - Jatin Vaid

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Trade theories in International Business

  • 1. International Trade Theories Presented By: Jatin Vaid jatinvaid@gmail.com 1International Business - Jatin Vaid
  • 2. Introduction  Trade theories explain trade patterns (Quantity, range of products and countries)  Laissez – faire approach: Allows market forces to determine trade relations  Interventionist approach: Propagates government intervention. 2International Business - Jatin Vaid
  • 3. Theories I. Mercantilism II. Absolute Advantage III. Comparative Advantage IV. Heckscher – Ohlin Theory V. International Product Life Cycle Theory VI. New Trade Theory 3International Business - Jatin Vaid
  • 4. I. Mercantilism  England – Mid 16th century  A country’s wealth is measured by its holdings of gold.  Countries should export more than they import.  Gold empowered governments to invest in armies & national institutions.  Intended to benefit colonial powers. 4International Business - Jatin Vaid
  • 5. .  It was in best interest of countries to maintain trade surplus.  Imports limited by tariffs; Exports subsidized.  IB treated as a zero – sum game (i.e., win – loss) 5International Business - Jatin Vaid
  • 6. II. Absolute Advantage  Adam Smith in his book “Wealth of nations”, 1776.  Real wealth of nation consists of goods & services available to its citizens, in their quality of living.  Different countries produce some goods more efficiently than other countries.  Global efficiency can increase through free trade. 6International Business - Jatin Vaid
  • 7. .  Buy V/S Build : Buy whatever you can’t produce efficiently than others.  Such specializations will give a country competitive advantage.  National resources will shift to more efficient industries.  Overall efficiency will increase due to : i. Economies of specialization ii. Labor time saved from job switching iii. Economies of scale 7International Business - Jatin Vaid
  • 8. .  Natural Advantage: Climatic conditions, access to natural resources, etc.  Acquired Advantage: Product / process technology, Research & Development, Skilled manpower, etc. 8International Business - Jatin Vaid
  • 9. III. Comparative Advantage  David Ricardo, 1817.  Global efficiency gains may still result from trade if a country specializes in those products it can produce more efficiently than other products – regardless of whether other countries can produce those same products even more efficiently. 9International Business - Jatin Vaid
  • 10. .  A country gains if it concentrates its resources in producing products it can produce most efficiently.  Trade considered to be a positive – sum game. 10International Business - Jatin Vaid
  • 11. IV. Heckscher – Ohlin Theory • Swedish economists, Eli Heckscher & Bertil Ohlin (1991 – 1993) • Patterns of international trade is determined by differences in factor endowments, rather than differences in productivity. • Comparative advantage arise from difference in national factor endowment. 11International Business - Jatin Vaid
  • 12. .  Factor endowments: the extent to which a country is endowed (gifted) with resources like land, labour and capital.  Commonsensical approach to free trade.  E.g., USA – Exporter of agricultural goods (abundance of agricultural land); China – Exporter of textiles and footwear (Abundance of low cost labour) 12International Business - Jatin Vaid
  • 13. .  Factor endowment theory suggests 3 types of relationships: i. Land – Labour relationship ii. Labour – capital relationship iii. Technological complexities 13International Business - Jatin Vaid
  • 14. V. International Product Life Cycle Theory  Raymond Vernon, 1996  International markets tend to follow a cyclical pattern due to a variety of factors over a period of time, which explains the shifting of markets as well as the location of production. 14International Business - Jatin Vaid
  • 15. .  It explains the variations & reasons for change in production and consumption patterns among various markets over a time period. 15International Business - Jatin Vaid