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Trade theories in International Business


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International Business Trade Theories

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Trade theories in International Business

  1. 1. International Trade Theories Presented By: Jatin Vaid 1International Business - Jatin Vaid
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 15. .  It explains the variations & reasons for change in production and consumption patterns among various markets over a time period. 15International Business - Jatin Vaid
  16. 16. . 16International Business - Jatin Vaid
  17. 17. Thank You! 17International Business - Jatin Vaid