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International Theories

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International Theories

  1. 1. International Economic Theory
  2. 2. International Trade Theory <ul><li>Overview </li></ul><ul><li>Mercantilism </li></ul><ul><li>Absolute Advantage </li></ul><ul><li>Comparative Advantage </li></ul><ul><li>Competitive -Porter’s Diamond </li></ul><ul><li>Product Life Cycle Theory </li></ul><ul><li>New Trade Theory </li></ul>
  3. 3. An Overview of Trade Theory <ul><li>Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy </li></ul><ul><li>from another country or what they can produce and sell to another country. </li></ul><ul><li>The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country. </li></ul>
  4. 4. An Overview of Trade Theory <ul><li>The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or Mexico/labor intensive goods). Others are not so easy to understand (Japan and cars). </li></ul>
  5. 5. mercantilism <ul><li>Mercantilism is a trade theory holding that nations should accumulate financial wealth, usually in the form of gold ( forget things like living standards or human development ) by encouraging exports and discouraging imports </li></ul>
  6. 6. Mercantilism: mid-16th century <ul><li>A nation’s wealth depends on accumulated treasure </li></ul><ul><ul><li>Gold and silver are the currency of trade </li></ul></ul><ul><li>Theory says you should have a trade surplus. </li></ul><ul><ul><li>Maximize export through subsidies. </li></ul></ul><ul><ul><li>Minimize imports through tariffs and quotas </li></ul></ul><ul><li>Flaw: restrictions, impaired growth </li></ul>
  7. 7. Theory of absolute advantage <ul><li>Adam Smith: Wealth of Nations ( 1776) argued: </li></ul><ul><ul><li>Capability of one country to produce more of a product with the same amount of input than another country </li></ul></ul><ul><ul><li>A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient </li></ul></ul><ul><li>Trade between countries is, therefore, beneficial </li></ul><ul><li>Assumes there is an absolute balance among nations </li></ul>
  8. 8. Theory of absolute advantage <ul><li>… destroys the mercantilist idea since there are gains to be had by both countries party to an exchange </li></ul><ul><li>… questions the objective of national governments to acquire wealth through restrictive trade policies </li></ul><ul><li>… measures a nation’s wealth by the living standards of its people </li></ul>
  9. 10. Theory of comparative advantage <ul><li>David Ricardo: Principles of Political Economy </li></ul><ul><li>Extends free trade argument </li></ul><ul><ul><li>Efficiency of resource utilization leads to more productivity </li></ul></ul><ul><ul><li>Should import even if country is more efficient in the product’s production than country from which it is buying. </li></ul></ul><ul><ul><li>Look to see how much more efficient. If only comparatively efficient, than import. </li></ul></ul>
  10. 11. Theory of comparative advantage <ul><li>Makes better use of resources </li></ul><ul><li>Trade is a positive-sum game </li></ul>
  11. 13. Simple Extensions of the Ricardian Model <ul><li>Diminishing returns: </li></ul><ul><ul><li>More a country produces, at some point, will require more resources. </li></ul></ul><ul><li>However: </li></ul><ul><ul><li>Free trade can increase a country’s production resources, and </li></ul></ul><ul><ul><li>Increase the efficiency of resource utilization. </li></ul></ul>
  12. 14. Examples of National Comparative Advantage <ul><li>China is a low labor cost production base </li></ul><ul><li>India’s Bangalore region offers a critical mass of IT workers </li></ul><ul><li>Ireland’s repositioning enabled a sophisticated service economy </li></ul><ul><li>Dubai, a previously obscure Emirate, has been transformed into a knowledge-based economy </li></ul>
  13. 15. Limitations of comparative advantage <ul><li>Driven only by maximization of production and consumption </li></ul><ul><li>Only 2 countries engaged in production and consumption of just 2 goods? </li></ul><ul><li>What about the transportation costs? </li></ul><ul><li>Only resource – labour (that too, non-transferable) </li></ul><ul><li>No consideration for ‘learning theory’ </li></ul>
  14. 16. Assumptions of Absolute Advantage and Comparative Advantage <ul><li>Resources fully employed </li></ul><ul><li>Countries primarily interested in profit maximization </li></ul><ul><li>Two countries, two commodities — not very realistic. </li></ul><ul><li>Costs of transportation not considered </li></ul><ul><li>Assume that resources can move from one good to another domestically but not free to move internationally </li></ul>
  15. 17. Competitive advantage <ul><li>Competitive advantage is a position a firm occupies against its competitors. </li></ul><ul><li>three methods for creating a sustainable competitive advantage are through </li></ul><ul><ul><li>cost leadership, </li></ul></ul><ul><ul><li>differentiation </li></ul></ul><ul><ul><li>focus </li></ul></ul><ul><li>The primary factors of competitive advantage are innovation, reputation and relationships . </li></ul>
  16. 18. contd
  17. 19. Theory of national competitive advantage <ul><li>The theory attempts to analyze the reasons for a nations success in a particular industry </li></ul><ul><li>Porter studied 100 industries in 10 nations </li></ul><ul><ul><li>Postulated determinants of competitive advantage of a nation based on four major attributes </li></ul></ul><ul><ul><ul><li>Factor endowments </li></ul></ul></ul><ul><ul><ul><li>Demand conditions </li></ul></ul></ul><ul><ul><ul><li>Related and supporting industries </li></ul></ul></ul><ul><ul><ul><li>Firm strategy, structure and rivalry </li></ul></ul></ul>
  18. 20. <ul><li>Success occurs where these attributes exist. </li></ul><ul><li>More/greater the attribute, the higher chance of success </li></ul>
  19. 21. Examples of Firm Competitive Advantage <ul><li>Nokia’s design and technology leadership in telecommunications </li></ul><ul><li>Samsung’s leadership in flat-panel TV </li></ul><ul><li>Herman Miller’s design leadership </li></ul><ul><li>in office furniture </li></ul><ul><li>(e.g., Aeron chairs) </li></ul>
  20. 22. Limitations of Early Trade Theories <ul><li>Do not take into account the cost of international transportation </li></ul><ul><li>Tariffs and import restrictions can distort trade flows </li></ul><ul><li>Scale economies can bring about additional efficiencies </li></ul>
  21. 23. Limitations of Early Trade Theories <ul><li>When governments selectively target certain industries for strategic investment, this may cause trade patterns contrary to theoretical explanations </li></ul><ul><li>Today, countries can access needed low-cost capital on global markets </li></ul><ul><li>Some services do not lend themselves to cross-border trade </li></ul><ul><li>full employment </li></ul>
  22. 24. Product life-cycle Theory R. Vernon (1966) <ul><li>Trade theory holding that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its lifecycle </li></ul><ul><li>As products mature, both location of sales and optimal production changes </li></ul><ul><li>Affects the direction and flow of imports and exports </li></ul>
  23. 25. Product life-cycle
  24. 26. Limitations of PLC <ul><li>There is no set amount of time </li></ul><ul><li>No real proof that all products must die </li></ul><ul><li>The theory can lead to an over-emphasis on new product releases at the expense of mature products </li></ul><ul><li>Individual products </li></ul>
  25. 27. Limitations of PLC <ul><li>No stress product redesign </li></ul><ul><li>Most appropriate for technology-based products </li></ul><ul><li>Some products not easily characterized by stages of maturity </li></ul><ul><li>Most relevant to products produced through mass production </li></ul><ul><li>Globalization and integration of the economy makes this theory less valid </li></ul>
  26. 28. New trade theory <ul><li>In industries with high fixed costs: </li></ul><ul><ul><li>Specialization increases output, and the ability to enhance economies of scale increases </li></ul></ul><ul><ul><li>Learning effects are high. These are cost savings that come from ‘learning by doing’ </li></ul></ul>
  27. 29. New trade theory - applications <ul><li>Typically, requires industries with high, fixed costs </li></ul><ul><ul><li>World demand will support few competitors </li></ul></ul><ul><li>Competitors may emerge because of “ First-mover advantage” </li></ul><ul><ul><li>Economies of scale may preclude new entrants </li></ul></ul><ul><ul><li>Role of the government becomes significant </li></ul></ul><ul><li>Some argue that it generates government intervention and strategic trade policy </li></ul>
  28. 30. Bibliography <ul><li>www.wikipedia.com </li></ul><ul><li>www.google.com </li></ul><ul><li>http://ideas.repec.org/p/wop/afpswp/_001.html </li></ul><ul><li>http://en.wikipedia.org/wiki/New_Palgrave:_A_Dictionary_of_Economics </li></ul><ul><li>http://internationalecon.com/v1.0/ch40/ch40.html </li></ul><ul><li>A. O'Sullivan & S.M. Sheffrin (2003). Economics. Principles & Tools . </li></ul>
  29. 31. <ul><li>THANK </li></ul><ul><li>YOU </li></ul>

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