Theories of International Trade Business

7/30/2019 Theories of International Trade Business

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INTERNATIONAL TRADE

THEORIES

Presentation By: GROUP-8Nitesh A

M Kausik

Apoorva Potluri

Dilkash Merani

Sameen Mohammed Siddique

Under the Guidance of Dr. Ravi Raj Kumar


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PRODUCT LIFE CYCLE THEORY

PROPOSED BY RAYMOND VERNON IN THE

YEAR 1966

FOUR STAGES IN A PRODUCTS LIFE CYCLE

NAMELY

INTRODUCTION

GROWTH

MATURITY

DECLINE


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Heckscher Ohlin's (HO) Modern Theory

of International Trade

Advocated by Bertil Ohlin and ideas from

Heckschers General Equilibrium Analysis.

Trade arises due to the differences in the relative

prices of different goods in different countries.

Labour Intensive Goods and Capital Intensive Goods.


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Assumptions

Two countries, Two factors, Two commodities

Perfect Competition in both commodity and factor

market. Factors are freely mobile within country but immobile

between countries.

Two countries differ in factor supply and Each

commodity differ in factor intensity


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Production function remains the same in different

countries for the same commodity

full employment of resources and demand are

identical in both countries. Trade is free and no Transportation cost.


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Capital rich country will export capital

intensive commodity and the labour rich

country will export labour intensive

commodity.

Economists define factor abundance in

terms of factor prices.


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IMITATIONS OF HECKSCHER OHLIN'S THEOR

Unrealistic Assumptions: assumes no

qualitative difference in factors ofproduction, identical production function,constant return to scale

Restrictive: includes only twocommodities, two countries and twofactors

One-Sided: supply plays a significant role

than demand in determining factor prices Static in Nature: given state of economy

and with a given production function anddoes not accept any change


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Wijnholds's Criticism: it is commodityprices that determine the factor prices

Consumers' Demand ignored: commodity

prices influenced by consumer demand Leontief Paradox: tested H-O theory under

U.S.A conditions

Other Factors Neglected: technology,technique of production, natural factors,

different qualities of labour which also

influence international trade


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NATIONAL COMPETITIVE ADVANTAGE:PORTERS DIAMOND


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Home country Demand plays an important role

Enables better understanding of the needs and desires ofcustomers

It shapes the attributes of domestically made products and createspressure for innovation and quality

E.g. 1: Japans knowledgeable buyers of cameras

stimulated the Japanese camera industry to innovate

and grow tremendously

E.g. 2: Local demand for cellular phones in Scandinavia

made Nokia and Ericsson to invest in cellular phone

technology in other developing nations.

E.g. 3: The French wine industry. The French are

sophisticated wine consumers. These consumers force

and help French wineries to produce high quality wines.

Characteristicsof the Home

Demand

Shapes theattributes ofdomestically

made products

Createspressure forinnovation and

quality


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BASIC FACTORSNatural resources, climate, location and

demographics

ADVANCE FACTORSCommunication Infrastructure, skilled

labor, Research facilities and so on.

Basic factors can provide only an initial advantage

They must be supported by advanced factors to maintain success

Japan a country which lacks arable land and mineraldeposits.

Large pool of engineers - very vital for a manufacturingindustry.

Japan has high priced land and so its factory space is ata premium.


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Benefits of investment in advanced factors by Suppliers andrelated industries can spill over helping in the achievement of

competitive position internationally.

Creates clusters of supporting industries, thereby achieving a

strong competitive position internationally.

E.g.:

Switzerlands success in pharmaceutical industry is

closely related to its international success in technicaldye industry.

Swedish strength in fabricated steel industry is the

reason for development in the Sweden's specialty steel


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Rivalry breeds innovation. Porter argues that domestic rivalryleads to better products than competition from international

markets.

Porter supports his argument that international competition is

not motivating enough. The reason owes to the fact that in aglobal scenario, companies operate in separate environments.

Countries attract different kinds of industry depending on the

economic strategy they follow.

Different countries have different organizational structures.Countries will be become more competitive in industries that

support such kind of structures.


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GovernmentGovernment is an influencer to all four determinants

Porter states that , Governments proper role is as a catalyst, to

encourage and push firms to higher levels of competitive advantage.

Government investment in education can change factor

endowment.

Regulation can alter home demand conditions

ChanceChance Events such as major innovations, can reshape industry

structure.


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CONCLUSION

Product life cycle theory

Planning and proactive approach are the

advantages of product life cycle theory.

Unreliability and assumptions are the

limitations of this theory

Comparative advantage theory

The conclusion drawn is that each country

can gain by specializing in the good where ithas comparative advantage, and trading that

good for the other.


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Heckscher Ohlin theory

A country has a comparative advantage inproducing products that intensively use factors of

production (resources) it has in abundance


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References

Akrani, Gaurav. "Heckscher Ohlin's (HO) Modern

Theory of International Trade." Heckscher Ohlin's (HO)

Modern Theory of International Trade. N.p., 21 Mar.

2011. Web. 11 Aug. 2013. .

Valuebasedmanagement.net

Info.sms.uni.edu/blog Ebrahim mohamed porters diamond of national

advantage8/88

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Theories of International Trade Business