- 1. International Economic Theory
2. International Trade Theory
- Competitive -Porters Diamond
- Product Life Cycle 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
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- Gold and silver are the currencyoftrade
- Theory says you should have a trade surplus.
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- Maximize export through subsidies.
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- Minimize imports through tariffsand quotas
- Flaw: restrictions, impaired growth
7. Theory of absolute advantage
- Adam Smith: Wealth of Nations( 1776) argued:
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- Capability of one country to produce more of a product with the
same amount of input than another country
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- 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
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- Efficiency of resource utilization leads to more
productivity
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- 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
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- More a country produces, at some point, will require more
resources.
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- Free trade can increase a countrys production resources,
and
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- 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
- 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
- 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
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- Postulated determinants of competitive advantageof a nation
based on four major attributes
-
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- Related and supporting industries
-
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- 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
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
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
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:
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- Specialization increases output, and the ability to enhance
economies of scale increases
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- 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
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- World demand will support few competitors
- Competitors may emerge because of First-mover advantage
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- Economies of scale may preclude new entrants
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- Role of the government becomes significant
- Some argue that it generates government intervention and
strategic trade policy
30. Bibliography
- 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.