International Trade Theories PDF

MODULE 2: INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT WHAT IS INTERNATIONAL TRADE THEORY International Trade Theories -- are different theories to explain International Trade. Trade -- concept of exchanging goods and services between two people or entities. International Trade - the concep...

MODULE 2: INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT WHAT IS INTERNATIONAL TRADE THEORY International Trade Theories -- are different theories to explain International Trade. Trade -- concept of exchanging goods and services between two people or entities. International Trade - the concept of exchange between people or entities in two different countries. This involves exporting and importing. THE DIFFERENT INTERNATIONAL TRADE THEORIES CLASSICAL OR COUNTRY-BASED TRADE THEORIES a\. Mercantilism -- states that a country's wealth was determined by the amount of its gold and silver holdings. (promotes exports and discourages imports by imposing restrictions, a strategy called "Protectionism") b\. Absolute Advantage -- postulated by Adam Smith in 1776, it is the inherent ability of a country to produce goods in an efficient and effective manner at a relatively lower cost compared to other countries. c\. Comparative Advantage -- postulated by David Ricardo in 1817, it is based on the opportunity cost of producing a good. If a country can produce a particular good at a lower opportunity cost (by losing an opportunity for the production of other goods) than any other country, then it is said to have a comparative advantage. Opportunity Cost -- refers to the value of the best-foregone alternative. It represents the benefits an individual misses out on when choosing one alternative over another. In simple words, it is what you need to give up or forgo in order to get something. d\. Heckscher-Ohlin Theory (Factor Proportions Theory) -- postulated by Eli Heckscher and Bertil Ohlin in 1900s, and states that countries should produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. e\. Leontief Paradox -- postulated by Wassily Leontif in 1950s, states that countries with great deal of capital are importing capital-intensive commodities and exporting labor-intensive commodities. Labour-Intensive Production -- the way that goods are produced depends heavily on. H    Capital-Intensive Production -- processes that require a relatively high level of capital investment. MODERN OR FIRM-BASED TRADE THEORIES \*Intraindustry Trade -- refers to trade between two countries of goods produced in the same industry. a\. Country Similarity Theory -- postulated by Steffan Linder in 1961, which states that consumers in countries that are in the same or similar stage of development would have similar preferences. b\. Product Life Cycle Theory -- postulated by Raymond Vernon in 1960s. The theory assumed that production of the new product will occur completely in the home country of its innovation. He stated that a product life cycle has three distinct stages: \*New Product \*Maturing Product \*Standardized Products c\. Global Strategic Rivalry Theory - emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry that corporations may seek to optimize include: Research and development; the ownership of intellectual property rights; economies of scale; unique business processes or methods as well as extensive experience in the industry; the control of resources or favorable access to raw materials. d\. Porter's National Competitive Advantage - Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter's theory stated that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. The four determinants are: \*Local Market Resources and Capabilities (Factor Conditions) \*Local Market Demand Conditions \*Local Suppliers \*Local Firm Characteristics