International Trade Theories This document discusses several theories of international trade. It begins by defining international trade as the exchange of capital, goods, and services across borders. It then explains that the main purposes of trade theories are to explain observed trade patterns, understand the effects of trade on domestic economies, and evaluate policy. The major theories discussed include absolute advantage, comparative advantage, product life cycle theory, and theories related to country size, factor proportions, and country similarity. Limitations and relationships between theories are also examined.

1. International Trade Theories
N.Keerthi (128936)
Narahari Sai G (128937)
Nishanth Singh (128938)
Valliappan (128939)
Presented by

2. What is international trade?
• International trade is the exchange of capital,
goods, and services across international
borders or territories.
• Trade mainly have two components EXPORTS
and IMPORTS.

3. Why trade theories?
 The first purpose of trade theory is to explain observed
trade. That is, we would like to be able to start with
information about the characteristics of trading
countries, and from those characteristics deduce what
they actually trade, and be right. That’s why we have
a variety of models that postulate different kinds of
characteristics as the reasons for trade.
 Secondly, to know about the effects of trade on the
domestic economy.
 A third purpose is to evaluate different kinds of policy.

4. Types of trade theories
 Interventionist
Mercantilism
Neo mercantilism
 Free- trade theories
Theory of Absolute advantage
Comparative Advantage

5. Theory of trade patterns
 Porter Diamond theory
 Specialization theory
 Theory of country Size
 Factor proportion theory
 Country similarity theory

6. What the major trade theories Do
and Don’t discuss

7. Mercantilist Theory
Mercantilist theory proposed that a country
should try to achieve a favorable balance of trade
(export more than it imports)
Mercantilism was at its height in the 17th and
18th centuries. The term Merchantilism was
coined by the Marquis de Mirabeau in 1763, and
was popularised by Adam Smith in 1776.
Neomercantilist policy also seeks a favorable
balance of trade, but its purpose is to achieve
some social or political objective

8. Mercantilism: mid-16th century
 A nation’s wealth depends on accumulated
treasure
 Gold and silver are the currency of
trade
 Theory says you should have a trade surplus.
 Maximize export through subsidies.
 Minimize imports through tariffs and quotas
 Flaw: restrictions, impaired growth

9. Theory of Absolute Advantage
 Suggests specialization through free trade
because consumers will be better off if they can
buy foreign-made products that are priced more
cheaply than domestic ones
 A country may produce goods more efficiently
because of a natural advantage or because of an
acquired advantage

10.  Adam Smith: Wealth of Nations (1776) argued:
 Capability of one country to produce more of a
product with the same amount of input than another
country
 A country should produce only goods where it is most
efficient, and trade for those goods where it is not
efficient
 Trade between countries is, therefore, beneficial
 Assumes there is an absolute balance among nations

11. Theory of Comparative Advantage
 Also proposes specialization through free trade
because it says that total global output can
increase even if one country has an absolute
advantage in the production of all products

12. Theories of Specialization
Both absolute and comparative advantage
theories are based on specialization

13. Product Life Cycle (PLC) Theory
I. Companies will manufacture products first in
the countries in which they were researched
and developed, almost always developed
countries
II. Over the product’s life cycle, production will
shift to foreign locations, especially to
developing economies as the product reaches
the stages of maturity and decline

14. Life Cycle of the International Product

15. The Porter Diamond theory
Four conditions as important for competitive
superiority:
1) demand conditions
2) factor conditions
3) related and supporting industries
4) firm strategy, structure, and rivalry

17. Limitations of the Porter Diamond
Theory
 Capital and labor move internationally to gain
more income and flee adverse political situations
 Although international mobility of production
factors may be a substitute for trade, the mobility
may stimulate trade through sales of
components, equipment, and complementary
products

19. Trade Pattern Theories
 How much a country will depend on trade if it
follows a free trade policy
 What types of products countries will export and
import
 With which partners countries will primarily trade

20. Theory Of Country Size
 Countries with large land areas are apt to have
varied climates and natural resources.
 They are generally more self-sufficient than
smaller countries.
 Large countries’ production and market centers
are more likely to be located at a greater distance
from other countries, raising the transport costs
of foreign trade

21. Factor-Proportions Theory
 A country’s relative endowments of land, labor,
and capital will determine the relative costs of
these factors
 Factor costs will determine which goods the
country can produce most efficiently

22. Composition of Worldwide trade

23. Country-similarity Theory
 Most trade today occurs among high-income
countries because they share similar market
segments and because they produce and
consume so much more than emerging
economies
 Much of the pattern of two-way trading partners
may be explained by cultural similarity between
the countries, political and economic agreements,
and by the distance between them

24. The Relationship between Trade and
Factor Mobility
 Capital and labor move internationally to gain more
income and flee adverse political situations
 Although international mobility of production factors
may be a substitute for trade, the mobility may stimulate
trade through sales of components, equipment, and
complementary products

26. References:
1) www.cis01.central.ucv.ro/iba/files/int_ec3.pdf
2)www.worldbank.org
3)www.uwf.edu/rsjoland/WEBPOSTEDFILES/6International
TradeTheory2004.pdf
4)www.en.wikipedia.org/wiki/International_trade

27. Thank You