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Module 3 - International Trade

This document provides an overview of theories of international trade. It discusses early theories like mercantilism and absolute advantage. Later, it introduces comparative advantage theory and factor proportions theory. More recent theories covered include international product life cycle theory, new trade theory, and Porter's Diamond model of national competitive advantage. The document aims to explain the benefits of trade and how thinking around trade theories has evolved over time.

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Kareem Rasmy
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74 views

Module 3 - International Trade

This document provides an overview of theories of international trade. It discusses early theories like mercantilism and absolute advantage. Later, it introduces comparative advantage theory and factor proportions theory. More recent theories covered include international product life cycle theory, new trade theory, and Porter's Diamond model of national competitive advantage. The document aims to explain the benefits of trade and how thinking around trade theories has evolved over time.

Uploaded by

Kareem Rasmy
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Module 3

International Trade

DR. Ghada Mohamed AbdelFattah


[email protected]
International Trade

Purchase, sale, or exchange of goods and


services across national borders

 People have larger selection of products


 Important engine for job creation
International Trade Main Issues

International Trade Provides


Indications related to:

1- Export Performance.
2- International Demand.
3- Alternative Markets.
4- The Role of Competitors.
Trade and World Output

• World trade
• 80% merchandise
• 20% services

• World output impacts trade


• Growing output = growing trade
• Sluggish output = sluggish trade

• World trade grows faster


than world output
Trade Theory Timeline
Trade Theories:
It was not until the fifteenth century that people tried to explain why trade
occurs. Efforts continue to refine existing trade theories and develop new
ones.

1- Mercantilism
- Nations should accumulate financial wealth, usually in the form of gold,
by encouraging exports and discouraging imports. Other measures of a
nation’s well-being, such as living standards or human development, are
irrelevant. Practiced from around 1500 to the late 1700s by European
nations, including Britain, France, the Netherlands, Portugal, and Spain.

How Mercantilism Worked?


-Trade was to benefit mother countries; colonies (in Africa, Asia, and
North, South, and Central America) were exploitable resources.
Mercantilism
Nations accumulate financial wealth by
encouraging exports and discouraging imports

Three pillars Inherent flaws


• Maintain trade • World trade is
surplus zero-sum game
• Constrains output
• Government
and consumption
intervention
• Limits colonies’
• Exploit colonies market potential
2- Absolute Advantage Theory

Absolute advantage is the ability of a nation to produce a


good more efficiently than any other nation (produce a
greater output using the same, or fewer, resources)

Adam Smith reasoned that international trade should not be


burdened by tariffs and quotas, but should flow according to
market forces

A country should produce the goods in which it holds an


absolute advantage and trade with others to obtain the goods
it needs but does not produce efficiently

Ex: Rice-land has an absolute advantage in rice production


and Tea-land has an absolute advantage in tea production.
The theory of absolute advantage destroys the mercantilist idea that
international trade is a zero-sum game. Because both countries gain,
international trade is a positive-sum game.
 
The theory argues against restrictive trade policies and for nations to
instead open their doors to trade so their people obtain more goods more
cheaply in order to raise living standards.

Riceland Tealand

Specialization and trade allows each to


produce and consume more
3- Comparative Advantage Theory
Is the ability of a nation to produce one good more
efficiently than it does with any other good, so that country
should specialize in the production of goods it has
comparative advantage in, and import other goods

Thus, trade is still beneficial even if one country is less


efficient in the production of two goods, as long as it is less
inefficient in the production of one of the two goods.

The theory has limitations because of its assumptions, like the


assumption of free transportation, and the assumption of only two
countries are involved in trade.

The theory was introduced by David Ricardo.


4- Factor Proportions Theory
Leontief Paradox

Research discovered evidence opposite the


prediction of factor proportions theory

 U.S. exports are more labor-intensive than U.S. imports


although U.S. uses an abundance of capital intensive

- Try to explain how this is possible?


- What are the implications of this result?
5- International Product Life Cycle

A company begins by exporting its product and later undertakes


foreign direct investment as a product moves through its life
cycle
6- New Trade Theory

Fundamentals

 Gains from specialization


and increasing
economies of scale
 Companies first to market
create barriers to entry
 Government may help by
assisting home
companies
7- National Competitive
Advantage
Nation’s competitiveness in an industry depends on the industry’s capacity to
innovate and upgrade, which in turn depends on four main determinants (Porter’s
Diamond)
(plus government and chance)

1- Factor conditions

2- Demand conditions

3- Related and supporting industries

4- Firm strategy, structure, and rivalry


1- Factor Conditions

Basic factors Advanced factors

Nation’s resources Result of investing in


(large workforce, natural education and innovation
resources, climate, and (skill of workforce segments,
surface features) technological infrastructure)

Basic factors can spark initial production, but advanced


factors account for sustained competitive advantage
2- Demand Conditions

Sophisticated home-market
buyers drive companies to
improve existing products and
develop entirely new products
and technologies

This should improve the


competitiveness of the entire
group of companies in a market
3- Related and Supporting
Industries
Companies in an internationally competitive
industry do not exist in isolation

Supporting industries form “clusters” of


economic activity in the geographic area

Each industry reinforces the competitiveness of


every other industry in the cluster
4- Firm Strategy, Structure,
and Rivalry

 Highly skilled managers are


essential because strategy
has lasting effects on firm
competitiveness

 Domestic industry whose


structure and rivalry create
an intense struggle to
survive, strengthens its
competitiveness
Bottom line for Business

This module explores the benefits of international trade


by introducing classical trade theories.

Trade can free a nation’s entrepreneurial spirit and


bring economic development.

New theories emerged to explain why countries trade.

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