Chapter 2, 3 & 4 International Trade Theories PDF

IBT : BA-6 CLASSICAL COUNTRY- BASED THEORIES OF INTERNATIONAL TRADE LESSON 2 By: OJD Date：20XX.XX.XX  2.1 International Trade Theories Lesson 2.2 Mercantilism 2.3 Theory of absolute advantage 2.4 Theory of comparative advant...

IBT : BA-6 CLASSICAL COUNTRY- BASED THEORIES OF INTERNATIONAL TRADE LESSON 2 By: OJD Date：20XX.XX.XX  2.1 International Trade Theories Lesson 2.2 Mercantilism 2.3 Theory of absolute advantage 2.4 Theory of comparative advantage 2.5 Heckscher-Ohlin Theory 2.1 International Trade Theories TRADE is the concept of exchanging goods and services between two people or entities. INTERNATIONAL TRADE is then the concept of this exchange between people or entities in two different countries 2.1 International Trade Theories INTERNATIONAL TRADE THEORIES are various theories that analyze and explain the patterns and mechanism of international trade. They deal with how countries exchange goods and services and help countries in deciding what should be exported and what should be imported, in what quantity and with whom trade should be done globally. 2.2 Mercantilism COMMERCIAL REVOLUTION Commercial Revolution, Great increase in commerce in Europe that began in the late Middle Ages. It received stimulus from the voyages of exploration undertaken by England, Spain, and other nations to Africa, Asia, and the New World. Local economics National economies Feudalism Capitalism Rudimentary trade Globally larger international trade 2.2 Mercantilism 1. Core Principles Mercantilism is based on the idea that a nation’s wealth and power are best served by increasing exports and Mercantilism accumulating precious metals like gold and silver. It is an economic theory and practice emphasizes a positive that was prevalent in Europe from balance of trade, where the 16th to the 18th centuries exports exceed imports 2.2 Mercantilism 2. Government Regulation Mercantilist policies involve significant government intervention in the economy. This includes high tariffs on imported goods, Mercantilism subsidies for exports, and the is an economic theory and practice establishment of colonies to provide raw materials and that was prevalent in Europe from markets for the mother the 16th to the 18th centuries country 2.2 Mercantilism 3. Colonial Expansion Mercantilism often led to colonial expansion as countries sought to control more resources and Mercantilism markets. Colonies were expected to supply raw is an economic theory and practice materials to the mother that was prevalent in Europe from country and purchase the 16th to the 18th centuries manufactured goods in return 2.2 Mercantilism 4. Criticism and Decline Mercantilism was criticized by later economists, such as Adam Smith, who argued that free trade and minimal government intervention Mercantilism would lead to greater is an economic theory and practice prosperity. The theory eventually fell out of favor as that was prevalent in Europe from classical economics gained the 16th to the 18th centuries prominence 2.2 Mercantilism 5. Legacy While mercantilism is no longer a dominant economic theory, some of its principles can still Mercantilism be seen in modern economic policies, particularly in the is an economic theory and practice form of protectionism and that was prevalent in Europe from economic nationalism the 16th to the 18th centuries 2.3 Theory of absolute advantage 1. Definition Absolute advantage refers to the ability of a country, individual, or firm to produce a Theory of absolute good or service more efficiently than competitors, advantage using the same amount of was developed by Adam Smith in his resources seminal work, “The Wealth of Nations” (1776) 2.3 Theory of absolute advantage 2. Basis for Trade According to Smith, countries should specialize in producing goods where they have an absolute advantage and Theory of absolute trade with others. This advantage specialization and trade can was developed by Adam Smith in his lead to increased overall efficiency and wealth seminal work, “The Wealth of Nations” (1776) 2.3 Theory of absolute advantage 3. Example If Country A can produce both wine and cloth more efficiently than Country B, but it has a greater efficiency in producing wine, it should specialize in wine. Country B, even if less Theory of absolute efficient overall, should advantage specialize in cloth if it has a was developed by Adam Smith in his relative efficiency in that seminal work, “The Wealth of area. By trading, both Nations” (1776) countries can benefit 2.3 Theory of absolute advantage 4. Contrast with Comparative Advantage Absolute advantage differs from comparative advantage, which focuses on the relative efficiency of producing goods. Comparative Theory of absolute advantage suggests that advantage even if one country is less was developed by Adam Smith in his efficient in producing all goods, it can still benefit from seminal work, “The Wealth of trade by specializing in goods Nations” (1776) where it has the least disadvantage 2.4 Theory of comparative advantage 1. Definition Comparative advantage refers to the ability of a country to produce a good or Theory of comparative service at a lower opportunity advantage cost than its trading partners was developed by David Ricardo in the early 19th century. 2.4 Theory of comparative advantage 2. Opportunity Cost The theory introduces the concept of opportunity cost, which is the cost of forgoing Theory of comparative the next best alternative when advantage making a decision was developed by David Ricardo in the early 19th century. 2.4 Theory of comparative advantage 3. Basis for Trade According to Ricardo, even if one country is more efficient in producing all goods (absolute Theory of comparative advantage), it can still benefit from trade by specializing in advantage goods where it has a was developed by David Ricardo in comparative advantage the early 19th century. 2.4 Theory of comparative advantage 4. Economic Efficiency By specializing and trading based on comparative advantage, countries can Theory of comparative achieve higher overall production and consumption, advantage leading to increased was developed by David Ricardo in economic welfare the early 19th century. 2.5 Heckscher-Ohlin Theory Swedish economists 1. Factor Endowments Eli Heckscher and Bertil Ohlin. The theory posits that countries will export goods that utilize their abundant and cheap factors of production Heckscher-Ohlin Theory and import goods that require is a fundamental concept in factors that are scarce international trade. 2.5 Heckscher-Ohlin Theory 2. Comparative Advantage It builds on the idea of comparative advantage by explaining that differences in Heckscher-Ohlin Theory factor endowments (like labor, land, and capital) determine is a fundamental concept in trade patterns international trade. 2.5 Heckscher-Ohlin Theory 3. Trade Predictions According to the theory, a country with abundant capital will export capital-intensive Heckscher-Ohlin Theory goods, while a country with abundant labor will export is a fundamental concept in labor-intensive goods international trade. 2.5 Heckscher-Ohlin Theory 4. Economic Implications This model helps explain why countries engage in trade and how they benefit from it by specializing in the production Heckscher-Ohlin Theory of goods that they can produce most is a fundamental concept in efficiently international trade. IBT : BA-6 MODERM FIRMED-BASED THEORIES OF INTERNATIONAL TRADE LESSON 3 By: OJD Date：20XX.XX.XX  3.1 Porter’s National Lesson Competitive Advantage Theory 3.2 Country Similarity Theory 3.3 Product Life Cycle Theory 3.4 Global Strategic Rivalry Theory  3.1 Porter’s National Competitive Advantage Theory 1. Factor condition Michael Porter 1990 These include a nation’s resources, such as skilled labor, infrastructure, and technological capabilities. For example, a country rich in Porter Diamond Model natural resources explains why certain nations or or with a highly educated workforce industries within nations are more can have a competitive internationally. competitive edge. “ The Competitive Advantage of Nations.” 3.1 Porter’s National Competitive Advantage Theory 2. Demand conditions The nature and size of the domestic market influence how companies perceive and respond to consumer needs. A Porter Diamond Model sophisticated and demanding local market drives companies explains why certain nations or to innovate and improve their industries within nations are more products. competitive internationally. 3.1 Porter’s National Competitive Advantage Theory 3. Related and supporting industries The presence of competitive and innovative suppliers and related industries supports and enhances the Porter Diamond Model competitiveness of firms. For instance, a strong automotive explains why certain nations or industry can benefit from industries within nations are more advanced local suppliers of competitive internationally. parts and technology. 3.1 Porter’s National Competitive Advantage Theory 3. Firm strategy, structure and rivalry The way companies are organized and managed, along with the intensity of domestic competition, affects Porter Diamond Model their ability to compete internationally. Intense local explains why certain nations or competition forces firms to be industries within nations are more more efficient, innovative, and competitive internationally. responsive to market changes. 3.2 Country Similarity Theory Developed by Swedish economist 1. Consumer preferences Steffan Linder in 1961 Linder proposed that consumers in countries at similar stages of development have similar preferences. This means that products Country Similarity Theory developed for the domestic Countries with similar levels of market in one country are likely to be successful in development and per capita another country with a similar incomes are more likely to engage in economic status trade with each other. 3.2 Country Similarity Theory Developed by Swedish economist 2. Industry trade Steffan Linder in 1961 The theory is particularly useful for understanding intraindustry trade, where countries export and import similar kinds of goods. Country Similarity Theory Countries with similar levels of For example, two developed countries might both produce development and per capita and trade high-tech incomes are more likely to engage in electronics trade with each other. 3.2 Country Similarity Theory Developed by Swedish economist 3. Cultural and economic Steffan Linder in 1961 similarities countries with similar cultural, political, and economic environments are more likely Country Similarity Theory to trade with each other. This Countries with similar levels of is because their markets have development and per capita comparable demands and conditions incomes are more likely to engage in trade with each other. 3.2 Country Similarity Theory Developed by Swedish economist 4. Geographical factors Steffan Linder in 1961 Countries with similar geographical features, such as climate, may also trade Country Similarity Theory more with each other due to similar needs and production Countries with similar levels of capabilities development and per capita incomes are more likely to engage in trade with each other. 3.3 Product Life Cycle Theory Developed by Raymond Vernon in 1960’s Product Life Cycle Theory Developed by Raymond Vernon in 1960’s 3.3 Product Life Cycle Theory Developed by 1. Product Life Cycle Raymond Vernon in 1960’s The product life cycle is the length of time that a product is available to customers. It Product Life Cycle Theory starts when a product (a good or a service) is introduced into This theory explains how a product the market and ends when it's evolves through different stages removed from the shelves. from its introduction to its decline 3.4 Global Strategic Rivalry Theory Developed by economists in 1980s 1. Competitive advantage Paul Krugman & Kelvin Lancaster Firms compete globally by developing and maintaining competitive advantages. These advantages can include owning intellectual Global Strategic Rivalry property rights, investing in Theory research and development, Focuses on how MNCs strive to gain achieving economies of scale, a competitive advantage in the and leveraging unique business processes global marketplace. 3.4 Global Strategic Rivalry Theory Developed by economists in 1980s 2. Barriers to entry Paul Krugman & Kelvin Lancaster The theory emphasizes the importance of barriers to entry, which are obstacles that new firms face when trying to enter an industry. Global Strategic Rivalry Theory Common barriers include high initial costs, access to Focuses on how MNCs strive to gain technology, and established a competitive advantage in the brand loyalty global marketplace. 3.4 Global Strategic Rivalry Theory Developed by economists in 1980s 3. Intraindustry trade Paul Krugman & Kelvin Lancaster The theory predicts that intraindustry trade, where countries export and import similar kinds of goods, will be common. Global Strategic Rivalry Theory This is because firms in the same industry compete on a Focuses on how MNCs strive to gain global scale, leading to trade a competitive advantage in the in similar products global marketplace. 3.4 Global Strategic Rivalry Theory Developed by economists in 1980s 4. Strategic decisions Paul Krugman & Kelvin Lancaster Firms make strategic decisions to enhance their competitive position, such as forming Global Strategic Rivalry alliances, engaging in mergers Theory and acquisitions, and Focuses on how MNCs strive to gain optimizing their supply chains a competitive advantage in the global marketplace. IBT : BA-6 OTHER THEORIES OF INTERNATIONAL TRADE LESSON 4 By: OJD Date：20XX.XX.XX  4.1 The specific factor model Lesson 4.2 Standard model of trade 4.3 Leontief paradox 4.1 The Specific Factor Model Key Features: The Specific Factor Model, also known as the Ricardo-Viner 1. Factors of Production The model assumes an economy produces two model, is an extension of the goods using two factors of production: capital and Ricardian model used in labor. international trade theory. It was originally discussed by 2. Specific Factor Jacob Viner and later developed One factor (typically capital) is specific to a by economists Ronald Jones and particular industry, meaning it cannot move between Michael Mussa. industries. The other factor (typically labor) is mobile and can move freely between industries 4.1 The Specific Factor Model Key Features: The Specific Factor Model, also known as the Ricardo-Viner 3. Industry-Specific Capital: Capital in each industry is different and not model, is an extension of the substitutable, making it specific to that industry Ricardian model used in international trade theory. 4. Income Distribution It was originally discussed by The model is particularly useful for analyzing how Jacob Viner and later developed trade affects the distribution of income within a by economists Ronald Jones and country. It shows how opening up to trade can Michael Mussa. benefit some factors of production while harming others 4.2 The Standard Model of Trade Key Features: The Standard Trade Model is a comprehensive framework that 1. Production Possibility Frontier (PPF Capital in each industry is different and not integrates elements from various substitutable, ma The PPF represents the trade theories, including the maximum output combinations of two goods that an economy can produce given its resources and Ricardian model and the technology. Heckscher-Ohlin model. It Differences in PPFs between countries create provides a more nuanced opportunities for trade king it specific to that understanding of international industry trade by considering multiple factors and their interactions. 4.2 The Standard Model of Trade Key Features: The Standard Trade Model is a comprehensive framework that 2. Relative Supply and Demand The model examines the relationship between integrates elements from various relative prices and relative demand for goods. trade theories, including the World equilibrium is determined by the Ricardian model and the intersection of world relative supply and world Heckscher-Ohlin model. It relative demand provides a more nuanced 3. Terms of Trade The terms of trade refer to the ratio of a country’s understanding of international export prices to its import prices. trade by considering multiple Changes in the terms of trade can affect a factors and their interactions. nation’s welfare by altering the purchasing power of its exports 4.2 The Standard Model of Trade Key Features: The Standard Trade Model is a comprehensive framework that 4. National Welfare The model assesses how trade policies and integrates elements from various global economic changes impact a country’s trade theories, including the overall welfare. Ricardian model and the It considers both the gains from trade and the Heckscher-Ohlin model. It distributional effects within the country provides a more nuanced Applications: Policy Analysis: Evaluating the impact of tariffs, understanding of international subsidies, and other trade policies on national trade by considering multiple welfare. factors and their interactions. Economic Growth: Understanding how changes in productivity and resource endowments influence trade patterns and economic growth 4.3 Leontief Paradox Key Features: The Leontief Paradox is a famous empirical finding in international 1. Empirical Finding Leontief found that the United States, which was trade theory, named after considered capital-abundant, exported more economist Wassily Leontief. It labor-intensive goods and imported more capital-intensive goods. challenges the Heckscher-Ohlin (H-O) theory, which predicts that This was contrary to the H-O theory, which would predict the opposite. countries will export goods that Background: According to the H-O model, the United States, being a capital- abundant country, should export capital-intensive goods and import labor- use their abundant factors of intensive goods. Leontief’s Findings: Wassily Leontief conducted an empirical study in 1953 production intensively and import using data from 1947. He found that U.S. exports were more labor-intensive than its imports. goods that use their scarce Data: Leontief calculated that the capital-to-labor ratio for U.S. exports factors intensively. was lower than that for U.S. imports. Specifically, U.S. imports were 30% more capital-intensive than U.S. exports. 4.3 Leontief Paradox Key Features: The Leontief Paradox is a famous empirical finding in international 2. Implications The paradox suggests that factors other than trade theory, named after factor endowments, such as technology and economist Wassily Leontief. It human capital, might play a significant role in determining trade patterns. challenges the Heckscher-Ohlin (H-O) theory, which predicts that It led to further research and alternative theories, such as the Linder hypothesis and new trade countries will export goods that theory, which consider factors like demand and use their abundant factors of economies of scale production intensively and import Implication: This finding was surprising because it contradicted the H-O model’s prediction. It suggested that goods that use their scarce the U.S. was exporting labor-intensive goods and importing capital-intensive goods, despite being capital-abundant factors intensively. 4.3 Leontief Paradox Key Features: The Leontief Paradox is a famous empirical finding in international 3. Explanations Some economists argue that the U.S. has a trade theory, named after comparative advantage in highly skilled labor, economist Wassily Leontief. It which is not captured by simply looking at capital and labor. challenges the Heckscher-Ohlin (H-O) theory, which predicts that Others suggest that technological differences and the role of human capital are crucial in countries will export goods that understanding trade patterns use their abundant factors of production intensively and import goods that use their scarce factors intensively. THANK YOU FOR LISTENING Presentations are communication tools that can be used as speeches, reports, and more. Reported By Ojd Date：9-7-2024