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ITT 1.pptx
- 1. THEORIES OF INTERNATIONAL TRADE An Overview of International Trade and International Trade Theory Joseph Owusu,PhD
- 2. Learning Objectives Understand why nations trade with each other Discuss how distance and borders reduce trade. Describe how the value of trade between any two countries depends on the size of these countries’ economies and explain the reasons for that relationship.
- 3. Introduction What is international trade?
- 4. International Trade Defined. International trade is the exchange of goods and services as well as resources between countries. It involves transactions between residents of different countries.
- 5. Why nations engage in International trade? Economic view: there must be economic gains from trade from both sides in trade Resource based view: some nations have unique resources to create exports (goods and services) that are unique to imitate. Institution view: nations have different rules that govern trade which determine gains that are shared among nations.
- 6. Importance of international free trade The absence of restrictions to the flow of goods and services among nations. Free trade is usually best because: Consumers and firms can buy the products they want. Imported products may be cheaper than domestically produced products Lower-cost imports help reduce business costs, thereby raising company profits Lower-cost imports help consumers save money, thereby increasing their living standards Unrestricted international trade tends to increase the overall prosperity of nations.
- 7. Who Trades with Whom?
- 8. Economic size Matter Three of the top 15 U.S. trading partners are European nations: Germany, the United Kingdom, and France. Why does the United States trade more heavily with these three European countries than with others? The answer is that these are the three largest European economies. That is, they have the highest values of gross domestic product (GDP), which measures the total value of all goods and services produced in an economy. There is a strong empirical relationship between the size of a country’s economy and the volume of both its imports and its exports.
- 9. Impediments to Trade: Distance, Barriers, and Borders Canada and Mexico. As you can see, the two neighbors of the United States do a lot more trade with the United States than European economies of equal size. In fact, Canada, whose economy is roughly the same size as Spain’s, trades as much with the United States as all of Europe does. Why does the United States do so much more trade with its North American neighbors than with its European partners? The main reason is the simple fact that Canada and Mexico are much closer.
- 10. The Changing Pattern of International Trade The direction and composition of international trade is quite different today from what it was a generation ago and even more different from what it was a century ago. Let’s look at some of the main trends.
- 11. Has the World Gotten Smaller? 1of2 Modern transportation and communications have abolished distance, so that the world has become a small place. The Internet makes instant and almost free communication possible between people thousands of miles apart, while jet transport allows quick physical access to all parts of the globe.
- 12. Has the World Gotten Smaller? 2of2 Due to advances in transportation and telecommunications technology barriers to cross-border trade and investment are declining. We are moving toward a world in which national economies are merging into an interdependent and integrated global economic system. E.g. In today’s interdependent global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by Ford from components made from Korean steel and Malaysian rubber.
- 13. What do we Trade? When countries trade, what do they trade? Manufactured goods: such as automobiles, computers, and clothing to each other. Mineral products—a category that includes everything from copper ore to coal, but whose main component in the modern world is oil— remains an important part of world trade. Agricultural products-- such as wheat, soybeans, and cotton are another key piece of the picture, and Services of various kinds play an important role and are widely expected to become more important in the future. E.g. traditional transportation fees charged by airlines and shipping companies, insurance fees received from foreigners, and spending by foreign tourists.
- 15. Arguments in support and against international trade Support Reduction in domestic monopoly Economic growth and rising income Inputs at competitive prices Supply of goods during natural calamities Generating employment and rising standard of living Strengthen bonds between nations Contribute to human resource development Enhance efficiency and profitability Against Rivalry on account of severe competition Depletion of natural resources Threats to the survival of domestic companies Loss of cultural identity Harmful imports will damage the environment and health Low demand for unskilled and semi skilled workers Risk of trade embargoes
- 16. An overview of International Trade Theory What Is International Trade Theory? International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two countries. The aim of Trade Theory is to explain Trade theory explains why nations trade and the benefits they stand to gain Trade theory explains the pattern of trade and distribution of gains arising from such trade Trade theory explains the observe trade and the effect on the domestic trade
- 17. Trade Theories Mercantilism Propagated in the 16th and 17th centuries, mercantilism advocated that countries should simultaneously encourage exports and discourage imports. Although mercantilism is an old and largely discredited doctrine, its echoes remain in modern political debate and in the trade policies
- 18. Trade Theories Theory of Absolute Advantage Proposed in 1776, Adam Smith’s theory was the first to explain why unrestricted free trade is beneficial to a country. Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country. Smith argued that the invisible hand of the market mechanism, rather than government policy, should determine what a country imports and what it exports.
- 19. Trade Theories Building on Smith’s work are two additional theories that we shall review. Theory of Comparative Advantage. Advanced by English economist David Ricardo. Heckscher-Ohlin Theory. By two Swedish economists, Eli Heckscher and Bertil Ohlin.
- 20. The Benefit Of Trade The great strength of the theories of Smith, Ricardo, and Heckscher-Ohlin is that they identify with precision the specific benefits of international trade. These theories go beyond this commonsense notion (exact benefit between two countries for trading ) however, to show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself.
- 21. The Benefit Of Trade The theories of Smith, Ricardo, and Heckscher-Ohlin tell us that a country’s economy may gain if its citizens buy certain products from other nations that could be produced at home. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries.
- 22. The Benefit Of Trade Some economist argued that economies are threatened by imports because of international trade; The theories of Smith,Ricardo, and Heckscher-Ohlin suggest that the economy as a whole is hurt by restricting imports the reason being that; One of the key insights of international trade theory is that limits on imports are often in the interests of domestic producers and their employees but not domestic consumers.
- 23. Trade Theory and Government Policy Although all these theories agree that international trade is beneficial to a country, they lack agreement in their recommendations for government policy. Mercantilism makes a crude case for government involvement in promoting exports and limiting imports. The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for unrestricted free trade. The argument for unrestricted free trade is that both import controls and export incentives (such as subsidies) are self- defeating and result in wasted resources.
- 24. Why do nations trade? What would the world be like without international trade?
- 25. What would the world be like without international trade? 1 of 2 Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Even resource-rich countries like the United States would suffer greatly without international trade. Some types of food would become unavailable or very expensive such as Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, and people would not be able to heat their homes in winter.
- 26. What would the world be like without international trade? 2 of 2 In short, not only do nations, companies and citizens benefit from international trade, modern life would be nearly impossible without it.
- 27. Answer Trade enables countries to use their national resources more efficiently through specialization. Trade allows industries and workers to be more productive. These outcomes help keep the cost of many everyday products low, which translates into higher living standards. Without international trade, most nations would be unable to feed, clothe, and house their citizens at current levels. Even resource-rich countries like the United States would suffer greatly without trade. Some types of food would become unavailable or very expensive. Coffee and sugar would be luxury items. Petroleum-based energy sources would dwindle. Vehicles would stop running, freight would go undelivered, and people would not be able to heat their homes in winter.