International Trade Theories

N.Keerthi (128936)Narahari Sai G (128937)Nishanth Singh (128938)Valliappan (128939)

Presented by

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.

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.

Types of trade theories

Interventionist

Mercantilism

Neo mercantilism Free- trade theories

Theory of Absolute advantage

Comparative Advantage

Theory of trade patterns

Porter Diamond theory

Specialization theory

Theory of country Size

Factor proportion theory

Country similarity theory

What the major trade theories Do and Don’t discuss

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

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

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

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

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

Theories of Specialization

Both absolute and comparative advantage theories are based on specialization

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

Life Cycle of the International Product

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

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

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

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

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

Composition of Worldwide trade

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

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

References:

1) www.cis01.central.ucv.ro/iba/files/int_ec3.pdf2)www.worldbank.org3)www.uwf.edu/rsjoland/WEBPOSTEDFILES/6InternationalTradeTheory2004.pdf4)www.en.wikipedia.org/wiki/International_trade

Thank You