1. International Economic Theory

2. International Trade Theory

Overview

Mercantilism

Absolute Advantage

Comparative Advantage

Competitive -Porters Diamond

Product Life Cycle Theory

New Trade Theory

3. An Overview of Trade Theory

Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy

from another country or what they can produce and sell to another country.

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.

4. An Overview of Trade Theory

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).

5. mercantilism

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

6. Mercantilism: mid-16th century

A nations wealth depends on accumulated treasure

• Gold and silver are the currencyoftrade

Theory says you should have a trade surplus.

• Maximize export through subsidies.

• Minimize imports through tariffsand quotas

Flaw: restrictions, impaired growth

7. Theory of absolute advantage

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 ismostefficient,and trade for those goods where it is not efficient

Trade between countries is, therefore, beneficial

Assumes there is anabsolutebalance amongnations

8. Theory of absolute advantage

destroys the mercantilist idea since there are gains to be had by both countries party to an exchange

questions the objective of national governments to acquire wealth through restrictive trade policies

measures a nations wealth by the living standards of its people

9. 10. Theory of comparative advantage

David Ricardo:Principles of Political Economy

Extends free trade argument

• Efficiency of resource utilization leads to more productivity

• Should import even if country is more efficient in the products production than country from which it is buying.

• Look to see how much more efficient.If only comparatively efficient, than import.

11. Theory of comparative advantage

Makes better use of resources

Trade is a positive-sum game

12. 13. Simple Extensions of the Ricardian Model

Diminishing returns:

• More a country produces, at some point, will require more resources.

However:

• Free trade can increase a countrys production resources, and

• Increase the efficiency of resource utilization.

14. Examples of National Comparative Advantage

China is a low labor cost production base

Indias Bangalore region offers a critical mass of IT workers

Irelands repositioning enabled a sophisticated service economy

Dubai, a previously obscure Emirate, has been transformed into a knowledge-based economy

15. Limitations of comparative advantage

Driven only by maximization of production and consumption

Only 2 countries engaged in production and consumption of just 2 goods?

What about the transportation costs?

Only resource labour (that too, non-transferable)

No consideration for learning theory

16. Assumptions of Absolute Advantage and Comparative Advantage

Resources fully employed

Countries primarily interested in profit maximization

Two countries, two commodities not very realistic.

Costs of transportation not considered

Assume that resources can move from one good to another domestically but not free to move internationally

17. Competitive advantage

Competitive advantageis a position a firm occupies against its competitors.

three methods for creating a sustainable competitive advantage are through

• cost leadership,

• differentiation

• focus

The primary factors of competitive advantage are innovation, reputation and relationships .

18. contd 19. Theory of national competitive advantage

The theory attempts to analyze the reasons for a nations success in a particular industry

Porter studied 100 industries in 10 nations

• Postulated determinants of competitive advantageof a nation based on four major attributes

• • Factor endowments

• • Demand conditions

• • Related and supporting industries

• • Firm strategy, structure and rivalry

20.

Success occurs where these attributes exist.

More/greater the attribute, the higher chance of success

21. Examples of Firm Competitive Advantage

Nokias design and technology leadership in telecommunications

Samsungs leadership in flat-panel TV

Herman Millers design leadership

in office furniture

(e.g., Aeron chairs)

22. Limitations of Early Trade Theories

Do not take into account the cost of international transportation

Tariffs and import restrictions can distort trade flows

Scale economies can bring about additional efficiencies

23. Limitations of Early Trade Theories

When governments selectively target certain industries for strategic investment, this may cause trade patterns contrary to theoretical explanations

Today, countries can access needed low-cost capital on global markets

Some services do not lend themselves to cross-border trade

full employment

24. Product life-cycle Theory R. Vernon (1966)

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

As products mature, both location of sales and optimal production changes

Affects the direction and flow of imports and exports

25. Product life-cycle 26. Limitations of PLC

There is no set amount of time

No real proof that all products must die

The theory can lead to an over-emphasis on new product releases at the expense of mature products

Individual products

27. Limitations of PLC

No stress product redesign

Most appropriate for technology-based products

Some products not easily characterized by stages of maturity

Most relevant to products produced through mass production

Globalization and integration of the economy makes this theory less valid

28. New trade theory

In industries with high fixed costs:

• Specialization increases output, and the ability to enhance economies of scale increases

• Learning effects are high. These are cost savings that come from learning by doing

29. New trade theory - applications

Typically, requires industries with high, fixed costs

• World demand will support few competitors

Competitors may emerge because of First-mover advantage

• Economies of scale may preclude new entrants

• Role of the government becomes significant

Some argue that it generates government intervention and strategic trade policy

30. Bibliography

www.wikipedia.com

www.google.com

http://ideas.repec.org/p/wop/afpswp/_001.html

http://en.wikipedia.org/wiki/New_Palgrave:_A_Dictionary_of_Economics

http://internationalecon.com/v1.0/ch40/ch40.html

A. O'Sullivan & S.M. Sheffrin (2003).Economics. Principles & Tools .

31.

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