2. What is international trade?
• International trade is the exchange of capital,
goods, and services across international
borders or territories.
• Trade mainly have two components EXPORTS
and IMPORTS.
3. Why trade theories?
The first purpose of trade theory is to explain observed
trade. That is, we would like to be able to start with
information about the characteristics of trading
countries, and from those characteristics deduce what
they actually trade, and be right. That’s why we have
a variety of models that postulate different kinds of
characteristics as the reasons for trade.
Secondly, to know about the effects of trade on the
domestic economy.
A third purpose is to evaluate different kinds of policy.
4. Types of trade theories
Interventionist
Mercantilism
Neo mercantilism
Free- trade theories
Theory of Absolute advantage
Comparative Advantage
5. Theory of trade patterns
Porter Diamond theory
Specialization theory
Theory of country Size
Factor proportion theory
Country similarity theory
7. Mercantilist Theory
Mercantilist theory proposed that a country
should try to achieve a favorable balance of trade
(export more than it imports)
Mercantilism was at its height in the 17th and
18th centuries. The term Merchantilism was
coined by the Marquis de Mirabeau in 1763, and
was popularised by Adam Smith in 1776.
Neomercantilist policy also seeks a favorable
balance of trade, but its purpose is to achieve
some social or political objective
8. Mercantilism: mid-16th century
A nation’s wealth depends on accumulated
treasure
Gold and silver are the currency of
trade
Theory says you should have a trade surplus.
Maximize export through subsidies.
Minimize imports through tariffs and quotas
Flaw: restrictions, impaired growth
9. Theory of Absolute Advantage
Suggests specialization through free trade
because consumers will be better off if they can
buy foreign-made products that are priced more
cheaply than domestic ones
A country may produce goods more efficiently
because of a natural advantage or because of an
acquired advantage
10. Adam Smith: Wealth of Nations (1776) argued:
Capability of one country to produce more of a
product with the same amount of input than another
country
A country should produce only goods where it is most
efficient, and trade for those goods where it is not
efficient
Trade between countries is, therefore, beneficial
Assumes there is an absolute balance among nations
11. Theory of Comparative Advantage
Also proposes specialization through free trade
because it says that total global output can
increase even if one country has an absolute
advantage in the production of all products
13. Product Life Cycle (PLC) Theory
I. Companies will manufacture products first in
the countries in which they were researched
and developed, almost always developed
countries
II. Over the product’s life cycle, production will
shift to foreign locations, especially to
developing economies as the product reaches
the stages of maturity and decline
15. The Porter Diamond theory
Four conditions as important for competitive
superiority:
1) demand conditions
2) factor conditions
3) related and supporting industries
4) firm strategy, structure, and rivalry
16.
17. Limitations of the Porter Diamond
Theory
Capital and labor move internationally to gain
more income and flee adverse political situations
Although international mobility of production
factors may be a substitute for trade, the mobility
may stimulate trade through sales of
components, equipment, and complementary
products
18.
19. Trade Pattern Theories
How much a country will depend on trade if it
follows a free trade policy
What types of products countries will export and
import
With which partners countries will primarily trade
20. Theory Of Country Size
Countries with large land areas are apt to have
varied climates and natural resources.
They are generally more self-sufficient than
smaller countries.
Large countries’ production and market centers
are more likely to be located at a greater distance
from other countries, raising the transport costs
of foreign trade
21. Factor-Proportions Theory
A country’s relative endowments of land, labor,
and capital will determine the relative costs of
these factors
Factor costs will determine which goods the
country can produce most efficiently
23. Country-similarity Theory
Most trade today occurs among high-income
countries because they share similar market
segments and because they produce and
consume so much more than emerging
economies
Much of the pattern of two-way trading partners
may be explained by cultural similarity between
the countries, political and economic agreements,
and by the distance between them
24. The Relationship between Trade and
Factor Mobility
Capital and labor move internationally to gain more
income and flee adverse political situations
Although international mobility of production factors
may be a substitute for trade, the mobility may stimulate
trade through sales of components, equipment, and
complementary products