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Week 4 - CH 5 Revision

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32 views

Week 4 - CH 5 Revision

nkf skdnvj s isedndfkjw inerkfjs

Uploaded by

Aynul Hoque
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 18

5

CHAPTER FIVE

INTERNATIONAL
TRADE THEORY

Copyright © 2016 Pearson Education Limited Chapter 5-1


International Trade Theories

Copyright © 2016 Pearson Education Limited Chapter 2-2


Mercantilism
How Mercantilism Worked
Mercantilism: Trade theory that nations should accumulate
financial wealth, usually in the form of gold, by encouraging
exports and discouraging imports

Maintain Trade Surplus

Three Pillars Government Intervention

Colonialism

Copyright © 2016 Pearson Education Limited Chapter 5-3


Mercantilism
Flaws of Mercantilism

World trade is a zero-sum game


Flaws
Limits colonies’ market potential

Constrains output and consumption

Copyright © 2016 Pearson Education Limited Chapter 5-4


Absolute Advantage

Ability of a nation to produce a good more efficiently than any


other nation (greater output using same or fewer resources)

Riceland Tealand

1 resource unit = 1 ton rice or 1 resource unit = 1/6 ton rice or


1/5 ton tea 1/3 ton tea

Specialization and trade allows each to


produce and consume more
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 5-5
Theories of Absolute and Comparative Advantage
Absolute Advantage

Absolute Advantage: Ability of a nation to produce a good more


efficiently than any other nation

Copyright © 2016 Pearson Education Limited Chapter 5-6


Theories of Absolute and Comparative Advantage
Absolute Advantage (Cont.)

Specialization and trade:

+ Riceland gets five times


more tea than it would
have produced itself.

+ Tealand gets two times


more rice than it would
have produced itself.

Copyright © 2016 Pearson Education Limited Chapter 5-7


Comparative Advantage
Inability of a nation to produce a good more efficiently than
other nations, but an ability to produce that good more
efficiently than it does any other good

Riceland Tealand

1 resource unit = 1 ton rice or 1 resource unit = 1/6 ton rice or


1/2 ton tea 1/3 ton tea

Specialization and trade allow each to


produce and consume more
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 5-8
Theories of Absolute and Comparative Advantage
Comparative Advantage
Comparative Advantage: Inability of a nation to produce a good
more efficiently than other nations but an ability to produce that
good more efficiently than it does any other good

Copyright © 2016 Pearson Education Limited Chapter 5-9


Theories of Absolute and Comparative Advantage
Comparative Advantage (Cont.)

Specialization and trade:

+ Riceland gets two times


more tea than it would
have produced itself.

+ Tealand gets two times


more rice than it would
have produced itself.

Copyright © 2016 Pearson Education Limited Chapter 5-10


Theories of Absolute and Comparative Advantage
Assumptions and Limitations

Nations strive only to maximize production and consumption.


Only two countries produce and consume just two goods.
No transportation costs of traded goods.
Labor is the only resource used to produce goods and it cannot
cross borders.
Specialization does not create efficiency and improvement gains.

Copyright © 2016 Pearson Education Limited Chapter 5-11


Factor Proportions Theory

Countries produce and export goods that require


resources (factors) in abundance, and import goods
that require resources in short supply

Labor Land and Capital

Two factor types

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 5 - 12


Factor Proportions Theory
Factor Proportions Theory: Trade theory stating that countries
produce and export goods that require resources (factors) that are
abundant and import goods that require resources in short supply
If the cost of labor is low If the cost of land and capital
relative to the cost of land and equipment is low relative to
capital the cost of labor

Specialize in products that


Specialize in products that
require land and capital
require labor
equipment
Copyright © 2016 Pearson Education Limited Chapter 5-13
Factor Proportions Theory
The Leontief Paradox
The Apparent Paradox
Leontief found evidence opposite of that predicted by the factor proportions
theory.
U.S. exports require more labor-intensive than U.S. imports.
Leontief’s findings are supported by more-recent research.
Paradox between the predictions using the factor proportions theory and the
actual trade flows.
What might account for the paradox?
Factor proportions theory assumes nation’s production factors to be
homogeneous.
Factor proportions theory seems to be supported when expenditures on labor
are taken into account.
Copyright © 2016 Pearson Education Limited Chapter 5-14
International Product Life Cycle
Stages of the Product Life Cycle
International Product Life Cycle: Theory stating that a company
will begin by exporting its product and later undertake foreign
direct investment as the product moves through its life cycle

Copyright © 2016 Pearson Education Limited Chapter 5-15


International Product Life Cycle
Limitati ons of the Theory
Vernon developed his model around the United States.
The United States is no longer the sole innovator of products in the
world.
The theory’s ability to accurately depict the trade flows of nations
is weak.
Today, there is quicker product obsolescence.
Older theories might better explain today’s global trade patterns.

Copyright © 2016 Pearson Education Limited Chapter 5-16


New Trade Theory

Fundamentals First-Mover Advantage

Gains from specialization and Economic and strategic


increasing economies of scale advantage
Barriers to entry Formidable barrier to market
entry for potential rivals
Role of government
Country’s export and home-
based firm

Copyright © 2016 Pearson Education Limited Chapter 5-17


National Competitive Advantage
• Basic Factors
1. Factor Conditions
• Advanced Factors

2. Demand Conditions • Sophisticated Buyers

3. Related and • Clusters


Supporting Industries
4. Firm Strategy, • Competitiveness
Structure, and Rivalry

Government and • Role of Government


Chance • Chance Events

Copyright © 2016 Pearson Education Limited Chapter 5-18

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