International Trade Theories

GROUP 1

International Trade Theory

GROUP MEMBERS

Princess Diane Argosino

Andrea Amoranto

LEADER

SECRETARY

Shejelyn Amante

Jeosa Mae Atos

Marelle Aquino

RESAERCHER

EDITOR

DIGITAL ASSISTATNT

International Trade Theory

International Operations and Economic Connections

Learning Objectives

Questions

Laissez Fair Vs Interventionist Approach

Absolute Advantage

Mencantilism

Factor Propotion

Comparative Advantage

Country Size

Diamond of Internatinal Advantage

12

10

Country Similarly

11

Product Life Cycle

Learning Objectives

LEARNING OBJECTIVES

1. To understand theories of international trade.
2. To explain how free trade improves global efficiency.
3. To identify factors affecting national trade patterns.
4. To explain why a country’s export capabilities are dynamic.
5. To understand why production factors, especially labor and capital, move internationally.
6. To explain the relationship between foreign trade and international factor mobility

INTERNATIONAL OPERATION AND ECONOMIC CONNECTIONS

objectives

strategy

• MEANS OF OPERATION
• Importing and exporting goods and services (trade)
• Transferring production factors, such as labor and capital, internationally.

COUNTRY b

COUNTRY A

QUESTIONS INTERNATIONAL MANAGERS ARE FACING

How much should we trade? With whom and with which country should we trade?

What products should we import and export?

How can we improve our competitiveness by increasing the quality and quantity of capital, technical competence, and worker skills?

What can we produce efficiently?

• Approaches to Exports and Imports
• Some countries take a more laissez-faire approach, one that allows market forces to determine trading relations. Free-trade theories (absolute advantage and comparative advantage) take a complete laissez.
• Faire approach because they prescribe that governments should not intervene directly to affect trade.
• At the other extreme are mercantilism and neomercantilism, which prescribe a great deal of government intervention in trade. Whether taking a laissez-faire or interventionist approach.
• Whether taking a laissez-faire or interventionist approach, countries rely on trade theories to guide policy development.

Laissez-faire vs. Interventionist

TYPES OF INTERNATIONAL TRADE THEORIES

01

INTERVENTIONIST THEORIES* Mercantilism

FREE TRADE THEORIES* Absolute advantage * Comparative advantage

02

03

TRADE PATTERN THEORIES* Theory of Country Size * Factor-Proportions Theory * Contry Similarity Theory

04

TRADE DYNAMICS THEORIES* Product Life Cycle Theory * Diamond of National Advantage Theory

THE EVOLUTION OF TRADE THEORY

1500 - 1800

MERCANTILISM & NEO MERCHANTILISM

THE THEORY OF ABSOLUTE ADVANTAGE

ADAM SMITH, 1776

DAVID RICARDO, 1819

THE THEORY OF COMPARATIVE ADVANTAGE

THEORY OF COUNTRY SIZE

EARLY 20TH CENTURY

THE THEORY OF FACTORS PROPORTIONS - ELI HECKSCHER & BERTIL OHLIN

COUNTRY SIMILARITY THEORY

PRODUCT CYCLE THEORY

RAYMOND VERMON, 1996

MICHAEL PORTER, 1990S

DIAMOND OF NATIONAL ADVANTAGE

INTERVENTIONIST THEORY

MERCANTILISM

Mercantilism

• Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. • Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a surplus. Mercantilism a form of economic nationalism funds corporate, military, and national growth. It advocates trade policies that protect domestic industries.

• In mercantilism, the government strengthens the private owners of the factors of production. These four factors of production are:

1. Entrepreneurship2. Capital goods 3. Natural resources 4. Labor

MERCANTILISM

• Mercantilism establishes monopolies, grants tax-free status, and grants pensions to favored industries. It imposes tariffs on imports. It also prohibits the emigration of skilled labor, capital, and tools. It doesn't allow anything that could help foreign companies.

• In return, businesses funnel the riches from foreign expansion back to their governments. Its taxes pay for increase national growth and political power.

• Mercantilism was based on the idea that a nation's wealth and power were best served by increasing exports and so involved increasing trade.

• Under mercantilism, nations frequently engaged their military might to ensure local markets and supply sources were protected, to support the idea that a nation's economic health heavily relied on its supply of capital.

FREE TRADE THEORIES

ABSOLUTE & COMPARATIVE ADVANTAGE

FREE TRADE THEORY

Absolute Advantage and comparative advantage both hold that nations should neither artificially limit imports nor promote exports. • Both theories imply specification. National specification means that producing some things for domestic consumption and export while using the export earning to buy imports of products and services produces abroad.

THE THEORY OF ABSOLUTE ADVANTAGE (ADAM SMITH, 1776)

• According to Adam Smith, a country’s wealth is based on its available goods and services rather than on gold.
• The theory of absolute advantage proposes 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.

ABSOLUTE ADVANTAGE (ADAM SMITH, 1776)

Through specialization, countries could increase their efficiency because of three reason:1. Labor could become more skilled by repeating the same tasks. 2. Labor would not lose time in switching from the production of one kind of product to another.3. Long production runs would provide incentives for the development of more effective working methods.

• Absolute advantage: the capability to produce more of a given product using less of a given resource than a competing entity.

ABSOLUTE

In economics, the principles of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a food or service than competitions, using the same amount of resources.

The Theory of Comparative ADVANTAGEDavid Ricardo 1819

• The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production.
• Comparative advantage theory also proposes specialization through free trade because it says that trade increase total global output even if one country has an absolute advantage in the production of all products

Comparative Theory

• Comparative advantage is a foundational principle in the theory of international trade.

• It is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.
• Suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in.
• Comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products.

TRADE PATTERN THEORIES

COUNTRY SIZE, FACTOR PROPORTIONS & COUNTRY SIMILARITY

COUNTRY SIZE THEORY

• The theory of country size holds that large countries tend to be more self-sufficient than smaller ones because of varied climatic conditions (resulting in the production of a wide variety of agricultural products) and more natural resources.

COUNTRY SIZE THEORY

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

Factors Propotion Theory

The factor proportions theory developed by the Swedish economist Eli Heckscher, and later expanded by his former graduate student Bertil Ohlin, formed the major theory of international trade and is still widely accepted today. Whereas Smith and Ricardo emphasized a labor theory of value, the factor proportions theory is based on a more modern concept of production that raises capital to the same level of importance as labor.

FACTORS PROPOTION THEORY

• According to factor proportions theory, factor intensities depend on the state of technology and the current method of manufacturing of a given product.
• The theory assumes that the same technology of production would be used for the same goods in all countries.
• Factor proportions theory assumed no such productivity differences.
• Operating with these assumptions, the factor proportions theory states that a country should specialize in the production and export of those products that make use of its relatively abundant factor.
• A country that is relatively labor abundant should specialize in the production of relatively labor intensive goods.

Country Similarity theory

Country similarity theory was developed by a Swedish economist named Steffan Linder. This theory suggests that intra-industry trade takes place between the countries with similar levels of development

• The country similarity theory is based on the idea that economic actors with similar qualities are going to want many of the same things.
• These qualities may include level of development, savings rates, and natural resources, among others.
• According to Linder, the similarities in consumer preferences in the countries that are at the same economic development provide the scope for intra-industry trade among countries. Example India and China.

Basis for trade among countries

Similarity of Location

Similarity of Political and Economic Interest

Cultural Similarity

Countries prefer to export to the neighbouring countries in order to have the advantages of less transportation cost. For example, Finland is a major exporter to Russia due to less transportation costs.

Countries prefer to export to those countries having similar culture. For example, exports and imports among European countries, between USA and Canada, among the Asian countries, and among the Islamic countries.

Similar political interests close political relations and economic interests enable the countries to enter into agreements for exports and imports. Countries prefer to trade with their politically friendly countries.

TRADE DYNAMICS THEORIES

PRODUCT LIFE CYCLE & DIAMOND OF NATIONAL ADVANTAGE

PRODUCT LIFE CYCLE

The Product Life Cycle Stages or International Product Life Cycle, which was developed by the economist Raymond Vernon in 1966, is still a widely used model in economics and marketing. Products enter the market and gradually disappear again. According to Raymond Vernon, each product has a certain life cycle that begins with its development and ends with its decline.

PRODUCT LIFE CYCLE

• According to Raymond Vernon there are four stages in a product’s life cycle: introduction, growth, maturity and decline.
• The length of a stage varies for different products, one stage may last some weeks while others even last decades.
• This shows that the Product Life Cycle is very similar to the diffusion of innovation model that was developed by Everett Rogers in 1976Lorem ipsum dolor sit amet
• The life span of a product and how fast it goes through the entire cycle depends on for instance market demand and how marketing instruments are used.

Product Life Cycle stages

Diamond of National Advantage

Micheal Porter gave the diamond theory of national advantage, which states that the features of home country are crucial for the success of an organization in the international markets.This theory is called the diamond theory, as it is depicted in the shape of a diamond framework. It describes the factors that contribute to the success of organizations in global industries. These factors are called the determinants of the national advantage.

Figure-4 depicts these determinants:

Factors of Production

• The basic factors to carry out a business include natural resources and labor; whereas, advanced factors include infrastructure, such as communication systems. The skilled personnel form the part of specialized factors. If a country is endowed with all these factors of production, it would be successful in the global market. However, there may be countries that have advanced and specialized factors but lack in the basic factors.

Demand Conditions

Refer to the nature and size of the customers of the products in the home market. The strong demand conditions in the home country persuade the domestic organizations to constantly improve the product. If the demand of a product is more in the domestic market then it can influence the demand of customers in the foreign market

+info

Related and Supporting Industries

Involve industries in the country that are considered as the leader of a particular product. These industries help in innovation that helps organization under them to produce at low cost. In addition, the growth of one industry influences the growth of other industries. For instance, the growth and development of the automobile industry would enhance the growth opportunities of the steel industry.

These four determinants can also be called as the dimensions of the diamond model that help in contributing to the national advantage. According to Porter, these dimensions interact with each other and help in increasing the competitiveness of the organizations.

THE STRATEGIES, STRUCTURES AND RIVALRY

- Are very important for the success of an organization. The strategies help in setting new goals, the structure helps in managing operations, and rivalry helps in generating innovative ideas in organizations.

REFERENCES

Background of International trade theory https://en.ppt-online.org/342812 Mercantilism and advance https://www.thebalance.com/mercantilism-definition-examples-significance-today-4163347 https://www.britannica.com/topic/mercantilism https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-international-trade/ https://courses.lumenlearning.com/suny-internationalbusiness/chapter/reading-absolute-advantage/ https://www.investopedia.com/terms/a/absoluteadvantage.asp Comparative and country size https://mediawiki.middlebury.edu/IPE/Comparative_Advantage https://www.investopedia.com/terms/c/comparativeadvantage.asp https://www.coursehero.com/file/p1dln1l/35-Theory-of-country-size http://people.tamu.edu/

REFERENCES

Product life cycle https://www.emerald.com/insight/content/doi/10.1108/EUM0000000004793/full/html?utm_source=TrendMD&utm_medium=cpc&utm_campaign=European_Journal_Of_Marketing_TrendMD_0&WT.mc_id=Emerald_TrendMD_0 https://www.toolshero.com/marketing/product-life-cycle-stages/ https://www.economicsdiscussion.net/international-economics/porters-diamond-theory-of-national-advantage/4223 Factor proportion https://www.mbaknol.com/international-business/country-similarity-theory-of-international-trade/ https://qsstudy.com/business-studies/country-similarity-theory-of-international-trade

THANKS!

GROUP 1