International-Trade-Theories-_ppt_

docx

School

Augusta University *

*We aren’t endorsed by this school

Course

MISC

Subject

Economics

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by MinisterDinosaurPerson622

An Overview of Trade Theory Question: What is free trade?  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 The Pattern of International Trade ◦ Some patterns of trade are fairly easy to explain it is obvious why Saudi Arabia exports oil, Ghana exports cocoa, and Brazil exports coffee

◦ But, why does Switzerland export chemicals, pharmaceuticals, watches, and jewelry? Why does Japan export automobiles, consumer electronics, and machine tools?  International trade theory helps explain trade patterns The Pattern of International Trade  Ricardo’s theory of comparative advantage suggests that existing trade patterns are related to differences in labor productivity  Heckscher and Ohlin’s theory explains trade through different factor endowments of countries  Ray Vernon suggested that trade patterns could be explained by looking at a product’s life cycle

 Paul Krugman developed new trade theory which suggests that the world market can only support a limited number of firms in some industries, and so trade will skew toward those countries that have firms that were able to capture first mover advantages  Michael Porter focused on the importance of country factors to explain a nation’s dominance in the production and export of certain products Mercantilism  Mercantilism (mid-16 th century) asserted that it is in a country’s best interest to maintain a trade surplus, to export more than it imports ◦ it advocated government intervention to achieve a surplus in the balance of trade

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

◦ it viewed trade as a zero-sum game (one in which a gain by one country results in a loss by another)  Mercantilism is problematic and not economically valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade Absolute Advantage  In 1776, Adam Smith attacked the mercantilist assumption that trade is a zerosum game and argued that countries differ in their ability to produce goods efficiently, and that a country has an absolute advantage in the production of a

product when it is more efficient than any other country in producing it  According to Smith, 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 Comparative Advantage  In 1817, David Ricardo explored what might happen when one country has an absolute advantage in the production of all goods  According to Ricardo’s theory of comparative advantage , it makes sense for

a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries, even if this means buying goods from other countries that it could produce more efficiently itself The Gains from Trade  The theory of comparative advantage argues that trade is a positive sum gain in which all gain ◦ Potential world production is greater with unrestricted free trade than it is with restricted trade

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

 The theory of comparative advantage provides a strong rationale for encouraging free trade Heckscher-Ohlin Theory  Heckscher and Ohlin argued that comparative advantage arises from differences in national factor endowments (the extent to which a country is endowed with resources such as land, labor, and capital) ◦ The more abundant a factor, the lower its cost Absolute Versus Comparative Advantage: Worker Productivity

◦ Countries will export goods that make intensive use of those factors that are locally abundant, and import goods that make intensive use of factors that are locally scarce The Leontief Paradox  Wassily Leontief (1953) argued that since the U.S. was relatively abundant in capital, it would be an exporter of capital intensive goods and an importer of labor-intensive goods. ◦ Leontief found however, that U.S. exports were less capital intensive than U.S. imports  Possible explanations for these findings include

◦ that the U.S. has a special advantage in producing products made with innovative technologies that are less capital intensive ◦ differences in technology lead to differences in productivity which then drives trade patterns

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Evaluating The Product Life Cycle Theory  While the product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the US in the 1960s and 1970s, the increasing globalization and integration of the world economy has made this theory less valid in today's world ◦ Today, many new products are initially introduced in Japan or Europe, or are introduced simultaneously in the U.S., Japan, and Europe ◦ Production may also be dispersed to those locations where it is most favorable

New Trade Theory New trade theory (1970s) suggests 1. Because of economies of scale (unit cost reductions associated with a large scale of output), trade can increase the variety of goods available to consumers and decrease the average cost of those goods 2. In those industries when the output required to attain economies of scale represents a significant proportion of total world demand, the global market may only be able to support a small number of firms

Increasing Product Variety and Reducing Costs  Without trade ◦ a small nation may not be able to support the demand necessary for producers to realize required economies of scale, and so certain products may not be produced  With trade ◦ a nation may be able to specialize in producing a narrower range of products and then buy the goods that it does not make from other countries ◦ each nation then simultaneously increases the variety of goods available to

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

its consumers and lowers the costs of those goods Economies of Scale, First Mover Advantages and the Pattern of Trade  Firms with first mover advantages (the economic and strategic advantages that accrue to many entrants into an industry) will develop economies of scale and create barriers to entry for other firms  The pattern of trade we observe in the world economy may be the result of first mover advantages and economies of scale Implications of New Trade Theory

 New trade theory suggests ◦ nations may benefit from trade even when they do not differ in resource endowments or technology ◦ a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good  Thus, new trade theory provides an economic rationale for a proactive trade policy that is at variance with other free trade theories National Competitive Advantage: Porter’s Diamond

 Porter (1990) tried to explain why a nation achieves international success in a particular industry  Porter identified four attributes he calls the diamond that promote or impede the creation of competitive advantage 1. Factor endowments 2. Demand conditions 3. Related and supporting industries 4. Firm strategy, structure, and rivalry  In addition, Porter identified two additional variables (chance and government) that can influence the diamond in important ways National Competitive Advantage:

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Porter’s Diamond Determinants of National Competitive Advantage: Porter’s Diamond Evaluating Porter’s Theory  Porter suggests that the four attributes of the diamond together with government policy , and chance work as a reinforcing system, complementing each other and in combination creating the conditions appropriate for competitive advantage  Porter believes that government policy can affect demand through product

standards, influence rivalry through regulation and antitrust laws, and impact the availability of highly educated workers and advanced transportation infrastructure Trade Theory and Government Policy  While the theories all suggest that trade is beneficial, they lack agreement in their recommendations for government policy ◦ Mercantilism makes a case for government involvement in promoting exports and limiting imports ◦ Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade

◦ New trade theory and Porter justify limited and selective government intervention to support the development of certain export-oriented industries Implications for Managers Question: What are the implications of international trade theory for international businesses?  There are at least three main implications for international businesses 1. Location implications 2. First-mover implications 3. Policy implications Location

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

1. Different countries have advantages in different productive activities These differences influence a firm’s decision about where to locate productive activities a It makes sense for a firm to disperse its various productive activities to those countries where they can be performed most efficiently First-Mover Advantages  Firms that establish a first-mover advantage in the production of a new product may later dominate global trade in that product

◦ It can be worthwhile for a firm to invest resources in trying to build first-mover advantages, even if it means losses for a few years before a venture becomes profitable Government Policy  Firms that establish a first-mover advantage in the production of a new product may later dominate global trade in that product ◦ It can be worthwhile for a firm to invest resources in trying to build first-mover advantages, even if it means losses for a

few years before a venture becomes profitable

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

International-Trade-Theories-_ppt_

Related Documents