The Theories Of Trade
- 1. The Theories of Trade
- 2. Learning Objectives To understand the traditional arguments of how and why international trade improves the welfare of all countries To explore the similarities and distinctions between international trade and international investment
- 3. Evolution of Trade Theory The Age of Mercantilism Classical Trade Theory Factor Proportions Trade Theory International Investment and Product Cycle Theory The New Trade Theory: Strategic Trade
- 4. Mercantilism Mixed exchange through trade with accumulation of wealth Conducted under authority of government Demise of mercantilism inevitable
- 5. Classical Trade Theory The Theory of Absolute Advantage The ability of a country to produce a product with fewer inputs than another country The Theory of Comparative Advantage The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other
- 6. Classical Trade Theory Contributions Adam Smith—Division of Labor Industrial societies increase output using same labor-hours as pre-industrial society David Ricardo—Comparative Advantage Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce Gains From Trade A nation can achieve consumption levels beyond what it could produce by itself
- 7. Factor Proportions Trade Theory Developed by Eli Heckscher Expanded by Bertil Ohlin
- 8. Factor Proportions Trade Theory Considers Two Factors of Production Labor Capital
- 9. Factor Proportions Trade Theory 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).
- 10. Product Cycle Theory Raymond Vernon Focus on the product, not its factor proportions Two technology-based premises
- 11. Product Cycle Theory: Vernon’s Premises Technical innovations leading to new and profitable products require large quantities of capital and skilled labor The product and the methods for manufacture go through three stages of maturation
- 12. Stages of the Product Cycle The New Product The Maturing Product The Standardized Product
- 13. The Product Cycle and Trade Implications 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
- 14. The New Trade Theory: Strategic Trade Two New Contributions Paul Krugman-How trade is altered when markets are not perfectly competitive Michael Porter-Examined competitiveness of industries on a global basis
- 15. Strategic Trade Krugman’s Economics of Scale: Internal Economies of Scale External Economies of Scale
- 16. Strategic Trade Government can play a beneficial role when markets are not purely competitive Theory expands to government’s role in international trade Four circumstances exist that involve imperfect competition in which strategic trade may apply
- 17. Strategic Trade The Four Circumstances Involving Imperfect Competition: 1.Price 2.Cost 3. Repetition 4.Externalities