International Trade Theory

2. TOPIC
International Trade Theory

3. Zulqarnain Haider 13024854-056
Aftab Ahmad 13024854-008
M.Jawad 13024854-028
H.Bilal Raza 13024854-033
Adeel 13024854-053
Muavia 13024854-021
SaadAnwar 13024854-045

4.  Mercantilism
 Absolute advantage (Classical)
 Comparative advantage
 Factor Proportions Trade
 International Product Cycle
 New Trade Theory

5. Zulqarnain Haider

6.  Theory says you should have a trade surplus.
 Maximize export through subsidies.
 Minimize imports through tariffs
and quotas
 Mercantilism views trade as a zero-sum game -
one in which a gain by one country results in a
loss by another

7. Adeel

8.  Capability of one country to produce more of a
product with the same amount of input than
another country .
 countries should specialize in the production of
goods for which they have an absolute advantage
and then trade these goods for the goods produced
by other countries

10. Saad Anwar

11.  David Ricardo asked what might happen when
one country has an absolute advantage in the
production of all goods
 Ricardo’s theory of comparative advantage
suggests that countries should specialize in the
production of those goods they produce most
efficiently and buy goods that they produce less
efficiently from other countries, even if this
means buying goods from other countries that
they could produce more efficiently at home

13.  Driven only by maximization of production
and consumption
 Only 2 countries engaged in production and
consumption of just 2 goods?

14. Muavia

15.  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)
 comparative advantage arises from differences in
national factor endowments – the extent to which a
country is endowed with resources like land, labor,
and capital

16. The Findings:
The U.S. exported labor-intensive products and
imported capital-intensive products.
 Differences in technology leads to differences in
production.

17. H.Bilal Raza

18.  The product life-cycle theory - (Raymond Vernon) -
as products mature both the location of sales and the
optimal production location will change affecting the
flow and direction of trade.
 Demand for the new product would grow in other
advanced countries over time making it worthwhile
for foreign producers to begin producing for their
home markets.

19.  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

20. M.Jawad

21.  New trade theory suggests that the ability of firms to gain
economies of scale (unit cost reductions associated with a
large scale of output) can have important implications for
international trade
 Through its impact on economies of scale, trade can increase
the variety of goods available to consumers and decrease the
average cost of those goods
 First mover advantages
 The economic and strategic advantages that accrue to early
entrants into an industry
 First movers can gain a scale based cost advantage that
later entrants find difficult to match

22. Aftab Ahmad

23.  Michael Porter tried to explain why a nation achieves
international success in a particular industry and
Identified four attributes that promote or impede the
creation of competitive advantage

24.  Factor endowments: A nation’s position in
factors of production such as skilled labor or
infrastructure necessary to compete in a given
industry
 Basic factor endowments
 Advanced factor endowments
 Demand Condition:
 creates capabilities
 creates sophisticated and demanding consumers.

25.  Related and supporting industries:
 Creates clusters of supporting industries that are
internationally competitive
 Firm Strategy, Structure and Rivalry:
 Long term corporate vision is a determinant of
success
 Management ‘ideology’ and structure of the firm can
either help or hurt you.