The Theories Of Trade

The Theories Of Trade

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  The Theories ofTrade
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  Learning Objectives To understandthe traditional arguments of how and why international trade improves the welfare of all countries To explore the similarities and distinctions between international trade and international investment
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  Evolution of TradeTheory The Age of Mercantilism Classical Trade Theory Factor Proportions Trade Theory International Investment and Product Cycle Theory The New Trade Theory: Strategic Trade
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  Mercantilism Mixed exchange throughtrade with accumulation of wealth Conducted under authority of government Demise of mercantilism inevitable
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  Classical Trade Theory TheTheory of Absolute Advantage – The ability of a country to produce a product with fewer inputs than another country The Theory of Comparative Advantage – The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other
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  Classical Trade Theory Contributions AdamSmith—Division of Labor – Industrial societies increase output using same labor-hours as pre-industrial society David Ricardo—Comparative Advantage – Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce Gains From Trade – A nation can achieve consumption levels beyond what it could produce by itself
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  Factor Proportions TradeTheory Developed by Eli Heckscher Expanded by Bertil Ohlin
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  Factor Proportions TradeTheory Considers Two Factors of Production Labor Capital
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  Factor Proportions TradeTheory A country that is relatively labor abundant (capital abundant) should specialize in the production and export of that product which is relatively labor intensive (capital intensive).
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  Product Cycle Theory RaymondVernon Focus on the product, not its factor proportions Two technology-based premises
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  Product Cycle Theory: Vernon’sPremises Technical innovations leading to new and profitable products require large quantities of capital and skilled labor The product and the methods for manufacture go through three stages of maturation
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  Stages of theProduct Cycle The New Product The Maturing Product The Standardized Product
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  The Product Cycleand Trade Implications Increased emphasis on technology’s impact on product cost Explained international investment Limitations – Most appropriate for technology-based products – Some products not easily characterized by stages of maturity – Most relevant to products produced through mass production
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  The New TradeTheory: Strategic Trade Two New Contributions Paul Krugman-How trade is altered when markets are not perfectly competitive Michael Porter-Examined competitiveness of industries on a global basis
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  Strategic Trade Krugman’s Economicsof Scale: Internal Economies of Scale External Economies of Scale
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  Strategic Trade Government canplay a beneficial role when markets are not purely competitive Theory expands to government’s role in international trade Four circumstances exist that involve imperfect competition in which strategic trade may apply
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  Strategic Trade The FourCircumstances Involving Imperfect Competition: 1.Price 2.Cost 3. Repetition 4.Externalities