unit ii,iii,&iv - international trade theory

8/7/2019 Unit II,III,&IV - International Trade Theory

1/23

Unit II, III, & IV International Trade

Theory

Day and Date:


2/23

Unit Highlights

Introduction

Mercantilism

Trade based on absolute advantage Trade based on Comparative advantage and

concept of Opportunity Cost

Heckscher Ohlin Theory

Technological gap theories

Product life cycle theory

Theories of economies of scale

Linders hypothesis


3/23

Text book referencechapters

International Economics by Dominick

Salvatore Chapter 2

International Economics by Francis

Cherunilam Chapter 6


4/23

Let us recapitulate

International trade theory helps us assimilate,

Why nations trade?

What are gains from trade?

What is the pattern of trade?


5/23

Mercantilism: Origin

Essays and pamphlets written by merchants,

bankers, government officials, andphilosophers in the 17th and 18th centuries in

England, Spain, France, Portugal, and

Netherlands.


6/23

Mercantilism: Basic tenets

Maintain EXPORT SURPLUS (i.e.,

Export>Imports)

Export Surplus = inflow of bullion More bullion -- More global power

Since all nations cannot simultaneously have

export surplus, one nations gain implied

anothers loss ECONOMIC NATIONALISM


7/23

The dilemma

If a nation lost in trade why would it trade???


8/23

Trade based onabsolute

advantage - Adam Smith

A nation can gain by SPECIALIZING in the

production of a commodity of its ABSOLUTEADVANTAGE and exchanging it with another

nation for a commodity of its ABSOLUTE

DISADVANTAGE.


9/23

Trade based onabsolute

advantagebasicpostulates

Free trade

Laissez-faire

However, protection extended to industrycrucial for national defense.


10/23

Trade basedonabsolute

advantage Benefits

Efficient utilization of world resources

Maximum world welfare


11/23

Thedilemma

Trade restrictions for national welfare???


12/23

Trade basedon Comparative

advantage David Ricardo

If two countries want to benefit from

specialization and free trade, country 1

should specialize and trade the commodity inwhich it is MOST BEST at producing, while

country 2 should specialize and trade the

commodity in which it is LEAST WORSE at

producing.


13/23

Whatis comparativeadvantage?

The ability of a country to produce a

commodity at lower cost, relative to othercommodities, compared to another country.


14/23

Comparativeadvantageand

Opportunity CostGottfried Haberler

Cost of something in terms of opportunity

foregone.

Opportunity cost to a country of producing a

unit more of a good, such as for export or to

replace an import, is the quantity of some

other good that could have been producedinstead.


15/23

Thedilemmasimplistic

assumptions

Two nations; two commodities

Free trade

Perfect mobility of resources

No transportation costs

No technological advancement Constant costs of production


16/23

HeckscherOhlinTheorybasic

postulate

Countries trade because they differ with

respect to the availability of the factors of

production.

Capital-abundant country will export the

capital-intensive good, while the labor-

abundant country will export the labor-intensive good.


17/23

Thedilemma

All international trade happens because of

resource advantage? Do the trends reflect

that???


18/23

Technologicalgap theories

International Trade is governed by relative

technological sophistication of nations.

Competitive trade advantage is a function of

ability to innovate


19/23

Productlifecycle

theoryRaymond Vernon

There are four stages in a products life cycle

introduction, growth, maturity and decline

Early in a product's life-cycle resources are acquired

domestically. Once it becomes adopted in the world

markets, production gradually moves away from the

point of origin.

In some situations, the product becomes an import

item for the country of invention.


20/23

Theoryofeconomies of scale

Production at a larger scale (more output)can be achieved at a lower cost (i.e. witheconomies or savings).

When production within an industry has thischaracteristic, specialization and trade canresult in improvements in world productiveefficiency and welfare benefits that accrue toall trading countries.


21/23

Linders hypothesisStaffan

Burenstam Linder

The more similar are the demand structures

of countries the more they will trade with one

another.

International trade will still occur between two

countries having identical preferences and

factor endowments.


22/23

Toconclude

Markets have been going global, and

everyone knows it. Theoretical reasons

include, Differences in Technology

Differences in resource endowments

Differences in demand

Economies of Scale


23/23

You shouldnow know

Why nations trade?

What are the theoretical foundations of

international trade?

unit ii,iii,&iv - international trade theory

Documents