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    International Business

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    Md Mehedi Hasan
    This document provides an overview of international trade theory. It discusses concepts like mercantilism, absolute advantage, comparative advantage, and more recent theories like the product life cycle theory and Porter's diamond model of national competitive advantage. Key points covered include how countries benefit from specializing production based on comparative costs and engaging in trade, as well as factors that influence what goods different countries export.

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    International Business

    Uploaded by

    Md Mehedi Hasan
    57 views8 pages
    This document provides an overview of international trade theory. It discusses concepts like mercantilism, absolute advantage, comparative advantage, and more recent theories like the product life cycle theory and Porter's diamond model of national competitive advantage. Key points covered include how countries benefit from specializing production based on comparative costs and engaging in trade, as well as factors that influence what goods different countries export.

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    This document provides an overview of international trade theory. It discusses concepts like mercantilism, absolute advantage, comparative advantage, and more recent theories like the product life cycle theory and Porter's diamond model of national competitive advantage. Key points covered include how countries benefit from specializing production based on comparative costs and engaging in trade, as well as factors that influence what goods different countries export.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    57 views8 pages

    International Business

    Uploaded by

    Md Mehedi Hasan
    This document provides an overview of international trade theory. It discusses concepts like mercantilism, absolute advantage, comparative advantage, and more recent theories like the product life cycle theory and Porter's diamond model of national competitive advantage. Key points covered include how countries benefit from specializing production based on comparative costs and engaging in trade, as well as factors that influence what goods different countries export.

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    International Trade Theory--------Slide

    An Overview of Trade Theory


    Question: What is free trade?
    Answer: Free trade refers to a situation where 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.
    Question: How has international trade theory evolved?
    Answer:
     Mercantilism (16th and 17th centuries) encouraged exports and discouraged
    imports
     Adam Smith (1776) promoted unrestricted free trade
     David Ricardo (19th century) built on Smith ideas
     Eli Heckscher and Bertil Ohlin (20th century) refined Ricardo's work
    The Benefits of Trade
    Question: Why is it beneficial for countries to engage in free trade?
    Answer:
     International trade allows a country to specialize in the manufacture and
    export of products that can be produced most efficiently in that country, and
    import products that can be produced more efficiently in other countries
     it is beneficial for a country to engage in international trade even for
    products it is able to produce for itself
    The Patterns Of International Trade
    ◆Some patterns of trade are fairly easy to explain - it is obvious why Saudi Arabia
    exports oil, Ghana exports cocoa, and Brazil exports coffee
    *But, why does Switzerland export chemicals, pharmaceuticals, watches, and
    jewelry? Why does Japan export automobiles, consumer electronics, and machine
    tools? Why does Bangladesh export garments?
    Trade Theory And Government Policy

     Mercantilism makes a crude case for government involvement in promoting


    exports and limiting imports
     Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade
     New trade theory and Porter's theory of national competitive advantage
    justify limited and selective government intervention to support the
    development of certain export-oriented industries

    Mercantilism
     Mercantilism (mid-16th century) - it is in a country's best - interest to
    maintain a trade surplus - to export more than it imports
     it advocated government intervention to achieve a surplus in the balance of
    trade
     it viewed trade as a zero-sum game (one in which a gain by one country
    results in a loss by another)
     Mercantilism is problematic and not economically valid, yet many political
    views today have the goal of boosting exports while limiting imports by
    seeking only selective liberalization of trade

    Absolute Advantage

    Smith (1776) - countries differ in their ability to produce goods efficiently


    A country has an absolute advantage in the production of a product when it is
    more efficient than any other country in producing it
    O According to Smith
    O trade is not a zero-sum game
    O countries should specialize in the production of goods for which they have an
    absolute advantage and then trade these goods for the goods produced by other
    countries
    *200 units of resources are available in each country
    Resources Required to Produce 1 Ton of Cocoa and Rice
    Country Cocoa Rice
    Ghana 10 20
    South Korea 40 10

    Production and consumption without Trade


    Country Cocoa Rice
    Ghana 10 5
    South Korea 2.5 10
    Total 12.5 15

    Production with Specialization


    Country Cocoa Rice
    Ghana 20 00
    South Korea 00 20
    Total 20 15

    Consumption after Ghana Trades 6 Tons of Cocoa for 6 Tons of South


    Korean Rice
    Country Cocoa Rice
    Ghana 14 06
    South Korea 06 14

    Increase in Consumption as a result of Specialization and Trade


    Country Cocoa Rice
    Ghana 04 01
    South Korea 3.5 04
    Comparative Advantage

    David Ricardo asked what happens when one country has an absolute advantage
    in the production of all goods
    The theory of comparative advantage (1817) - countries should specialize in the
    production of those goods they produce most efficiently and buy goods that they
    produce less efficiently from other countries
    even if this means buying goods from other countries that they could produce
    more efficiently at home.

    The Gains From Trade:

    Resources Required to Produce 1 Ton of Cocoa and Rice


    Country Cocoa Rice
    Ghana 10 13.33
    South Korea 40 20

    Production and consumption without Trade


    Country Cocoa Rice
    Ghana 10 7.5
    South Korea 2.5 05
    Total 12.5 12.5

    Production with Specialization


    Country Cocoa Rice
    Ghana 15 3.75
    South Korea 00 10
    Total 15 13.75
    Consumption after Ghana Trades 6 Tons of Cocoa for 6 Tons of South
    Korean Rice
    Country Cocoa Rice
    Ghana 11 7.75
    South Korea 04 06

    Increase in Consumption as a result of Specialization and Trade


    Country Cocoa Rice
    Ghana 01 0.25
    South Korea 1.5 01

    The Product Life Cycle Theory

    U.S. firms might also set up production facilities in those advanced countries
    where demand was growing limiting the exports from the U.S.
    As the market in the U.S. and other advanced nations matured, the product would
    become more standardized, and price the main competitive weapon
    Producers based in advanced countries where labor costs were lower than the
    United States might now be able to export to the U.S.
    If cost pressures became intense, developing countries would begin to acquire a
    production advantage over advanced countries
    The United States switched from being an exporter of the product to an importer
    of the product as production becomes more concentrated in lower-cost foreign
    locations
    ➤ According to the product life-cycle theory
    the size and wealth of the U.S. market gave U.S. firms a strong incentive to
    develop new products
    initially, the product would be produced and sold in the U.S.
    as demand grew in other developed countries, U.S. firms would begin to export
    demand for the new product would grow in other advanced countries over time
    making it worthwhile for foreign producers to begin producing for their home
    markets
    Producers based in advanced countries where labor costs were lower than the
    United States might now be able to export to the United States
    If cost pressures were intense, developing countries would acquire a production
    advantage over advanced countries
    Production became concentrated in lower-cost foreign locations, and the U.S.
    became an importer of the product

    National Competitive Advantage: Porter's Diamond


    Michael Porter tried to explain why a nation achieves international success in a
    particular industry and identified four attributes that promote or impede the creation
    of competitive advantage:

     Factor endowments
     Demand conditions
     Relating and supporting industries
     Firm strategy, structure, and rivalry

    Factor Endowments
     Factor endowments refer to a nation's position in factors of production
    necessary to compete in a given industry
     A nation's position in factors of production can lead to competitive advantage
     These factors can be either basic (natural resources, climate, location) or
    advanced (skilled labor, infrastructure, technological know-how)
    Demand Conditions
    Demand conditions refer to the nature of home demand for the industry's product or
    service
    The nature of home demand for the industry's product or service influences the
    development of capabilities
    Sophisticated and demanding customers pressure firms to be competitive

    Relating and Supporting Industries

    Relating and supporting industries refer to the presence or absence of supplier


    industries and related industries that are internationally competitive
    The presence supplier industries and related industries that are internationally
    competitive can spill over and contribute to other industries
    Successful industries tend to be grouped in clusters in countries - having world class
    manufacturers of semi- conductor processing equipment can lead to (and be a result
    of having) a competitive semi-conductor industry

    Firm Strategy, Structure, And Rivalry

    Firm strategy, structure, and rivalry refers to the conditions governing how
    companies are created, organized, and managed, and the nature of domestic rivalry

    The conditions in the nation governing how companies are created, organized, and
    managed, and the nature of domestic rivalry impacts firm competitiveness

    Different management ideologies affect the development of national competitive


    advantage
    Vigorous domestic rivalry creates pressures to innovate, to improve quality, to
    reduce costs, and to invest in upgrading advanced features

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