Post on 05-Apr-2018
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INTERNATIONAL FINANCE & MANAGEMENT
PRESENTED TO:
PROF. SARFARAZ ANSARIFACULTY (IFM)
PIMR, INDORE
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MERCANTALISM
THEORY
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Model was given by William Petty, Thomas Mun and Antoine de
Montchrtien.
It is a philosophy from about 300 years ago.
The base of this theory was the commercial revolution, the
transition from local economies to national economies, from
feudalism to capitalism, from a rudimentary trade to a larger
international trade.
HISTORY:
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Mercantilism was the economic system of the major trading nations
during the 16th, 17th, and 18th century, based on the premise that
national wealth and power were best served by increasing exports
and collecting precious metals in return.
It superseded in Western Europe where the policy was to export in
the countries that they controlled and not to import in order to have
positive BOP.
Geographical discoveries: Stimulated international trade as well as
produced an affluent flow of gold and silver- encourage money and
price based economy.
PHILOSOPHY:
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The theory states that the world only contained a fixed amount of
wealth and that to increase a country wealth; one country had to
take some wealth from another, either through having a higher
import/export ratio.
So, this tendency, to export more and import less and to receive in
exchange gold (the deficit is paid in gold) is called
MERCANTILISM.
The theory was criticized by the newly appeared class. More money
was associated with less products and inflation. The standard of
living is weaker.
Industrial revolution- Absolute advantage theory.
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Important assumptions of comparativeadvantages theoryTo simplify analysis the following assumptions should be held.There are no transport costs.
Costs are constant and there are no economies of scale.
There are only two economies producing two goods.
The theory assumes that traded goods are homogeneous.
Factors of production are assumed to be perfectly mobile withina country but no movement internationally.
There are no tariffs or other trade barriers.
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Basic principle of
comparative advantages theory
For the country enjoying overall advantages in the both industries, choose one in which it
is comparatively more advantageous, while for the other country with overall
disadvantages in the both industries, choose one in which it is comparatively less
disadvantageous.
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Gains from Comparative Advantage
Even if a country had a considerable absoluteadvantage in the production of both goods, Ricardo
would argue that specialization and trade are stillmutually beneficial.
When countries specialize in producing the goods in
which they have a comparative advantage, they
maximize their combined output and allocate theirresources more efficiently.
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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY[ H O MODEL ]
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
A general equilibrium mathematical model of
International Trade
It builds on David Ricardos theory of
comparative advantage by predicting patterns of
commerce and production based on the factor
endowments of a trading region.
The model essentially says that countries willexport products that utilize their abundant and
cheap factor(s) of production and import
products that utilize the countries' scarce
factor(s).
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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Relative endowments of the factors of production
(land, labour and capital) determine a country's
comparative advantage.
Countries have comparative advantages in thosegoods for which the required factors of production are
relatively abundant locally. This is because the pricesof goods are ultimately determined by the prices of
their inputs.Goods that require inputs that are locally abundantwill be cheaper to produce than those goods that
require inputs that are locally scarce.
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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Capital Intensive & Labour Intensive Goods:A country where capital and land are abundant but labor is scarce will havecomparative advantage in goods that require lots of capital and land, but littlelabour - grains, for example. If capital and land are abundant, their prices will below. As they are the main factors used in the production of grain, the price of grainwill also be low - and thus attractive for both local consumption and export. LabourIntensive goods on the other hand will be very expensive to produce since labor isscarce and its price is high. Therefore, the country is better off importing thosegoods.
The Labour-rich countries export labour intensive goods whilethe Capital-rich countries export capital intensive goods andthus, international trade takes place.
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CLASSICAL TRADE THEORIES HECKSCHER-OHLIN THEORY
(Eli Heckscher & Bertil Ohlin - Stockholm School of Economics, 1933)
Assumptions of H-O Model:
Both countries have identical production technology
Production output must have constant Return to ScaleThe technologies used to produce the two commoditiesdifferLabor mobility within countriesCapital mobility within countries
Capital immobility between countriesLabour immobility between countriesCommodities have the same price everywherePerfect internal competition