Slide 2: International Trade
Definition: Buying, selling, or exchanging goods and services across
national borders.
Benefits:
o More choices for consumers.
o Efficient production.
o Job creation.
Slide 3: Benefits of Trade
A country can gain by importing goods it can produce less efficiently and
exporting goods it can produce more efficiently.
Example: The US specializes in jet aircraft because it has skilled labor in
that area.
Slide 7: Mercantilism
Time Period: 1500-1800.
Idea: Countries should export more and import less to accumulate wealth
(gold).
Government Role: Use tariffs and quotas to limit imports and encourage
exports.
Slide 8: Problems with Mercantilism
David Hume's Critique: Trade is not a zero-sum game; all countries can
benefit.
Modern Example: China might be seen as following a neo-mercantilist
strategy by keeping its currency value low to boost exports.
Slide 9: Neo-Mercantilism
Modern Version: Countries aim for favorable trade balances to achieve
social or political goals.
Example: A country might encourage its companies to produce more than
domestic demand and export the surplus.
Slide 10: Theory of Absolute Advantage
Adam Smith's Idea: Countries should specialize in goods they produce
most efficiently and trade for others.
Assumption: Assumes a balance among nations.
Slide 12: Absolute Advantage Example
Scenario: Ghana and South Korea have different resource requirements
for producing cocoa and rice.
Without Trade: Both countries produce some of both goods.
With Trade: Each country specializes in the good it produces most
efficiently.
Slide 13: Comparative Advantage
David Ricardo's Idea: Even if a country is less efficient in producing a
good, it can still benefit from trade by specializing in the good it is
relatively more efficient in producing.
Example: Ghana has an absolute advantage in both goods, but it is
comparatively more efficient in producing cocoa.
Slide 15: Absolute vs. Comparative Advantage
Example: The US has an absolute advantage in corn, while Switzerland has
an absolute advantage in chocolate.
Outcome: Both countries benefit from trade by specializing in their
respective goods.
Slide 16: Comparative Advantage
David Ricardo's Theory: Countries should specialize in goods they
produce most efficiently and trade for others.
Outcome: Trade is a positive-sum game where all countries benefit.
Slide 18: Comparative Advantage Example
Scenario: South Korea and Ghana have different resource requirements
for producing cocoa and rice.
Without Trade: Both countries produce some of both goods.
With Trade: Each country specializes in the good it is comparatively more
efficient in producing.
Slide 20: Basic Assumptions
Key Assumptions:
o Full employment.
o Economic efficiency.
o Differences in resource prices.
o Constant returns to scale.
o Two countries/two commodities.
o No transportation costs.
o Mobility of resources.
Slide 21: Heckscher-Ohlin Theory
Idea: Comparative advantage arises from differences in national factor
endowments (resources like land, labor, capital).
Prediction: Countries export goods that use their abundant factors and
import goods that use their scarce factors.
Example: Bangladesh exports labor-intensive textiles because it has
abundant low-cost labor.
Slide 22: The Leontief Paradox
Wassily Leontief's Theory: The US, being capital-abundant, should
export capital-intensive goods and import labor-intensive goods.
Paradox: US exports were less capital-intensive than imports,
contradicting the theory.
Slide 23: The Product Life-Cycle Theory
Raymond Vernon's Theory: As products mature, the optimal production
location changes, affecting trade patterns.
Example: Products like IBM and Apple start in the US and eventually move
to developing countries.
Slide 25: New Trade Theory
Paul Krugman's Theory: Trade can increase product variety and lower
costs through economies of scale.
First Mover Advantage: Early entrants in an industry can gain a scale-
based cost advantage.
Slide 26: Economies of Scale
Idea: Trade allows countries to specialize, achieve economies of scale, and
lower production costs.
Benefit: Increased variety of products at lower costs.
Slide 27: First Mover Advantage
Idea: Early entrants in an industry gain economic and strategic
advantages.
Example: Aircraft manufacturing industry.
Slide 29: Porter's Diamond Model
Michael Porter's Theory: Factors that promote national competitive
advantage include:
o Factor endowments.
o Demand conditions.
o Related and supporting industries.
o Firm strategy, structure, and rivalry.
o Government policy.
o Chance events.
Slide 30: Evaluating Porter's Diamond Theory
Government Role: Can influence demand, rivalry, and factor availability.
Overall: The theory is a reinforcing system where all factors work together
to create competitive advantage.
