International Trade Theory PDF

INTERNATIONAL TRADE THEORY *Colbert's contributions to the organization of France's politics and 1. What is International Trade Theory? markets are collectively known as International Trade The...

INTERNATIONAL TRADE THEORY *Colbert's contributions to the organization of France's politics and 1. What is International Trade Theory? markets are collectively known as International Trade Theories are set "Colbertism." of economic model that aim to explain * Colbertism refers to a form of trade patterns, meaning which goods mercantilistic policy. and services are exported and imported, and who imports and *He was also a devout monarchist and exports those goods and services. wanted an economic strategy to protect the French crown from a rising International Trade Theory explains Dutch mercantile class. why nations trade with each other. 4. JUSTIFICATION OF 2. WHAT IS MERCANTILISM? MERCANTILISM -Mercantilism was a form of economic * Favorable Balance of Trade nationalism that sought to increase the prosperity and power of a nation - emphasized the need for a trade through restrictive trade practices. surplus where exports exceeded imports. Mercantilism 6 Characteristic * Protectionism 1. The Belief in the Static Nature of Wealth. - Mercantilist sought to control their 2. The need to increase the supply of colonies to ensure a steady supply of gold resources. 3. The need to maintain a trade *Justification for Mercantilism rested Surplus on the belief that a nation's economic 4. The importance of a large success was a zero - sum game, Population where one nation's gain came at the expense of another. 5. The use of colonies to support wealth 5. THEORY OF ABSOLUTE 6. The use of protectionism ADVANTAGE 3. JEAN-BAPTISTE COLBERT: THE * Adam Smith is the founder of CHAMPION OF MERCANTILISM modern economy and developed the theory of absolute advantage. *French Secretary of State (1619- 1683) he was one of the most * It focused on the ability of a country influential proponents of mercantilism. to produce a good more efficiently than another nation. *Smith’s theory reasoned that with increased efficiencies, people in both particular good or service at a lower countries would benefit and trade opportunity cost than its trading should be encouraged. His theory partners. stated that a nation’s wealth shouldn’t *The theory of comparative be judged by how much gold and silver advantage introduces opportunity it had but rather by the living cost as a factor for analysis in standards of its people. choosing between different options 6. ORIGIN OF ABSOLUTE THEORY for production. AND CRITICISM The Theory of Absolute Advantage is one of the earliest economic theories that explains the benefits of 8. ASSUMPTIONS OF DAVID specialisation and international trade RICARDO'S THEORY between countries. The theory of absolute advantage is based on the * Labor is the only factor of production. idea that countries can benefit from There is perfect labour mobility within trade if they specialise in producing a country, but no mobility between goods or services in which they have countries. an absolute advantage over other *Production technologies differ countries. It was proposed by Adam between countries. Smith, the father of modern *There are no economies of scale. Markets are perfectly competitive. 7. DAVID RICARDO’s THEORY OF CORE ASSUMPTIONS OF DAVID COMPARATIVE ADVANTAGE RICARDO’S THEORY *It argues that countries can benefit *Labor is the only factor of production. from trading with each other by focusing on making the things they -Labor is considered the sole factor of are best at making, while buying the production, highlighting its essential things they are not as good at making role in the creation of goods and from other countries. services. *Ricardo’s research demonstrated that *There is perfect labor mobility within even if one country can make a country, but no mobility between everything more efficiently than countries another country, international trade is -Perfect labor mobility refers to the still beneficial.Comparative Advantage ability of workers to freely relocate *Comparative advantage is an and change occupations within a economy's ability to produce a country, thereby optimizing economic efficiency. Neglects the role of technology *Production technologies differ One sided theory between countries Impossibility of complete -This assumption posits that labor specialization- to protect domestic cannot move freely across industries from foreign competition international borders, creating Government intervention significant differences in labor market dynamics globally. - regulation was needed to protect industries *There are no economies of scale *Colonization -The absence of economies of scale indicates that increasing production 10. WHAT IS HECKSCHER-OHLIN does not lead to a decrease in per-unit THEOREM OF INTERNATIONAL costs. TRADE? *Markets are perfectly competitive  Countries which are rich in labor will export labor extensive -Perfectly competitive markets are goods and countries rich in characterized by numerous buyers and capital exports capital sellers, homogeneous products, extensive goods. perfect information, and the freedom for firms to enter or exit without barriers. 9. CRITICISM OF DAVID RICARDO'S THEORY Some Criticism of Comparative Advantage Theory in Relation to  Ohlin's simple model- is an International Trade economic theory argues Unrealistic assumption of labour cost countries export what they can most efficiently produce. Ignores transport costs Two-country Two- commodity model 11. THE PRICE CRITERION OF is unrealistic RELATIVE FACTOR ABUNDANCE Unrealistic assumption of free trade Self-interest hinders its operation The Criterion states that regardless of the actual amounts of capital and labor that a nation possesses; it is life-cycle stages of a product, from capital-abundant if it’s labor is its invention to global adoption relatively pricey and it’s capital is and production migration. comparatively cheap. Growth Stage  If the product is successful, it Exports of capital-intensive goods are then moves to the growth stage. made by countries with a surplus of This is characterized by: capital, whereas exports of labor- 1. Growing demand intensive goods are made by nations with a surplus of labor. 2. Increase in production 3. Expanded availability 12. LIMITATIONS OF HECKSCHER OHLIN’S H-O THEORY Maturity Stage  The maturity stage of the a) Unrealistic Assumption product life cycle is the most profitable stage, the time when b) Restrictive the costs of producing and c) One-Sided Theory marketing decline. With the d) Static in Nature market saturated with the product, competition is now e) Wijnholds’s Criticism higher than at other stages, and f) Consumer’s Demand Ignored profit margins start to shrink. g) Leontief Paradox 13. PRODUCT LIFE CYCLE THEORY Decline Stage  An economic theory that explains the observed pattern of international trade based on the The decline stage of a product's life cycle is when a product loses popularity with consumers and its market share declines.   Product and Production absence of supplier industries process is well known that are internationally competitive  Revenue drop and many products phase out  Firm strategy, structure and  Products Shifts to Developing rivalry - the conditions countries Import Star governing how companies are created, organized, and managed, and the nature of 14. INTERNATIONAL PRODUCT LIFE domestic rivalry. CYCLE  The international product life cycle theory (IPLC) describes how a product's internationalization causes it to mature and decline through five phases: Local innovation, Overseas innovation, Maturity, Worldwide imitation, and Reversal. 15. MICHAEL PORTER’S THEORY OF COMPETITIVE ADVANTAGE  Michael Porter is the founder of the modern strategy field. He proposed the theory of competitive advantage in 1985. Four (4) Factors of Competitive Advantage  Factor Endowments - a nation’s position in factors of production necessary to compete in a given industry  Demand Conditions - the nature of home demand for the industry’s product or service  Relating and supporting industries - the presence and