The Theory of Trade and Investment by ZInkota

1. Hello!
I am Nilofer Rasheed

2. The Theory
of Trade
and
Investment

3. Evolution of Trade Theory
■The Age of Mercantilism
■Classical Trade Theory
■Factor Proportions Trade Theory
■International Investment and Product
Cycle Theory
■The New Trade Theory: Strategic Trade
■The Theory of International Investment

4. The Age of Mercantilism
The evolution of trade into the form we see
today reflects three events:
The Collapse of Feudal Society
The Emergence of the Mercantilist Philosophy
The Life Cycle of the Colonial Systems of the
European Nation-States

5. Mercantilism
■Mixed exchange through
trade with accumulation of
wealth
■Conducted under authority of
government
■Demise of mercantilism
inevitable

6. Classical Trade Theory
■The Theory of Absolute Advantage
The ability of a country to produce a product with
fewer inputs than another country
■The Theory of Comparative Advantage
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

7. Classical Trade Theory
Contributions
■Adam Smith—Division of Labor
Industrial societies increase output using same
labor-hours as pre-industrial society
■David Ricardo—Comparative Advantage
Countries with no obvious reason for trade can
specialize in production, and trade for products
they do not produce
■Gains From Trade
A nation can achieve consumption levels beyond
what it could produce by itself

8. Factor Proportions Trade
Theory
Developed by Eli
Heckscher
Expanded by Bertil
Ohlin

9. Factor Proportions Trade
Theory
Considers Two Factors of
Production
■Labor
■Capital

10. Factor Proportions Trade
Theory
■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).

11. The Leontief Paradox
■The Test:
Could Factor Proportions Theory
be used to explain the types of
goods the United States imported
and exported?
■The Method:
Input-output analysis

12. The Leontief Paradox
■The Findings:
The U.S. exported labor-intensive
products and imported capital-intensive
products.
■The Controversy:
Findings were the opposite of
what was generally believed to be true!

13. Overlapping Product Ranges Theory:
Staffan Burenstam Linder
■Trade in manufactured goods dictated not by
cost concerns, but by similarity in product
demands across countries.
■Work focused on preferences of consumer
demand.
■Today, termed market segments.

14. Product Cycle Theory
■Raymond Vernon
■Focus on the product, not its
factor proportions
■Two technology-based
premises

15. Product Cycle Theory:
Vernon’s Premises
■Technical innovations leading to new
and profitable products require large
quantities of capital and skilled labor
■The product and the methods for
manufacture go through three stages of
maturation

16. Stages of the Product Cycle
■The New Product
■The Maturing Product
■The Standardized Product

17. The Product Cycle and
Trade Implications
■Increased emphasis on technology’s
impact on product cost
■Explained international investment
■Limitations
□Most appropriate for technology-based
products
□Some products not easily characterized by
stages of maturity
□Most relevant to products produced through
mass production

18. The New Trade Theory:
Strategic Trade
Two New Contributions
■Paul Krugman-How trade is
altered when markets are not
perfectly competitive
■Michael Porter-Examined
competitiveness of industries on a
global basis

19. Strategic Trade
Krugman’s Economics of Scale:
• Internal Economies
of Scale
• External
Economies of
Scale

20. Strategic Trade
■Government can play a beneficial
role when markets are not purely
competitive
■Theory expands to government’s
role in international trade
■Four circumstances exist that
involve imperfect competition in
which strategic trade may apply

21. Strategic trade
The Four Circumstances Involving Imperfect Competition:
PRICE Cost
REPETITION EXTERNALITIES

22. Strategic trade
Porter’s Diamond of National
Advantage
■Innovation is what drives and
sustains competitiveness
■Four components of competition
□Factor Conditions
□Demand Conditions
□Related and Supporting Industries
□Firm Strategy, Structure, and Rivalry

23. Michael Porter’s
Competitive Clusters
Critical masses of unusual competitive
success in particular fields, located in
one place

24. The Theory of
International
Investment
The movement of capital has
allowed foreign direct
investments across the globe

25. ■Firms as Seekers
□Seeking Resources
□Seeking Factor
Advantages
□Seeking Knowledge
□Seeking Security
□Seeking Markets
The Theory of International
Investment

26. The Theory of International
Investment
■Firms as Exploiters of Imperfections
□Imperfections in Access
□Imperfections in Factor Mobility
□Imperfections in Management
■Firms as Internalizes
□Establish their own multinational
operations-internalize production
□Competitive advantage due to
confidentiality

27. Thanks!
Any questions?