INTERNATIONAL FINANCE & MANAGEMENT
PRESENTED TO: PROF. SARFARAZ ANSARI FACULTY (IFM) PIMR, INDORE
MERCANTALISM THEORY
HISTORY:
Model was given by William Petty, Thomas Mun and Antoine de
Montchrtien.
It is a philosophy from about 300 years ago. The base of this theory was the commercial revolution, the transition from local economies to national economies, from feudalism to capitalism, from a rudimentary trade to a larger international trade.
PHILOSOPHY:
Mercantilism was the economic system of the major trading nations during the 16th, 17th, and 18th century, based on the premise that national wealth and power were best served by increasing exports and collecting precious metals in return. It superseded in Western Europe where the policy was to export in the countries that they controlled and not to import in order to have positive BOP. Geographical discoveries: Stimulated international trade as well as produced an affluent flow of gold and silver- encourage money and price based economy.
The theory states that the world only contained a fixed amount of
wealth and that to increase a country wealth; one country had to take some wealth from another, either through having a higher import/export ratio. So, this tendency, to export more and import less and to receive in exchange gold (the deficit is paid in gold) is called
MERCANTILISM.
The theory was criticized by the newly appeared class. More money was associated with less products and inflation. The standard of
living is weaker.
Industrial revolution- Absolute advantage theory.
ABSOLUTE ADVANTAGE
This theory was propounded by adam smith in year 1776 At the time of barter system In his book Wealth of Nations, he used the principle of absolute advantage as the justification for international trade It was based on the premise that every country is a specialised in producing certain commodities and therefore can benefit by exporting that commodities According to this principle, a country should export a commodity that can be produced at a lower cost than can other nations. Conversely, it should import a commodity that can only be produced at a higher cost than can other nations example
EXAMPLE:
COUNTRIE S INDIA USA TELEVISIO N 10 20 WASHING MACHINE 20 10
Both countries are producing both the products
With 1 unit of labour cost , India can produce either 10 sets of T.V or 20 washing.m and USA can produce 20 sets of T.v and or 10 w.m The disparity might be bettr skills by both the countries in making those products. India has absolute advantage for w.m If each country specializes in the prooduct for which it has an avsolute , each can use its resources more effectively while improving consumer welfare at the same time.
Important assumptions of comparative advantages theory
To simplify analysis the following assumptions should be held. There are no transport costs. Costs are constant and there are no economies of scale. There are only two economies producing two goods. The theory assumes that traded goods are homogeneous. Factors of production are assumed to be perfectly mobile within a country but no movement internationally. There are no tariffs or other trade barriers.
Basic principle of comparative advantages theory
For the country enjoying overall advantages in the both industries, choose one in which it is comparatively more advantageous, while for the other country with overall disadvantages in the both industries, choose one in which it is comparatively less disadvantageous.
Gains from Comparative Advantage
Even if a country had a considerable absolute advantage in the production of both goods, Ricardo would argue that specialization and trade are still mutually beneficial.
When countries specialize in producing the goods in which they have a comparative advantage, they maximize their combined output and allocate their resources more efficiently.
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CLASSICAL TRADE THEORIES
HECKSCHER-OHLIN THEORY [ H O MODEL ]
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
A general equilibrium mathematical model of International Trade It builds on David Ricardos theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s).
CLASSICAL TRADE THEORIES
HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Relative endowments of the factors of production (land, labour and capital) determine a country's comparative advantage. Countries have comparative advantages in those goods for which the required factors of production are relatively abundant locally. This is because the prices of goods are ultimately determined by the prices of their inputs. Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce.
CLASSICAL TRADE THEORIES
HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Capital Intensive & Labour Intensive Goods:
A country where capital and land are abundant but labor is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example. If capital and land are abundant, their prices will be low. As they are the main factors used in the production of grain, the price of grain will also be low - and thus attractive for both local consumption and export. Labour Intensive goods on the other hand will be very expensive to produce since labor is scarce and its price is high. Therefore, the country is better off importing those goods.
The Labour-rich countries export labour intensive goods while the Capital-rich countries export capital intensive goods and thus, international trade takes place.
CLASSICAL TRADE THEORIES
HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Assumptions of H-O Model:
Both countries have identical production technology Production output must have constant Return to Scale The technologies used to produce the two commodities differ Labor mobility within countries Capital mobility within countries Capital immobility between countries Labour immobility between countries Commodities have the same price everywhere Perfect internal competition
