Upload
laura-gilbert
View
231
Download
2
Embed Size (px)
Citation preview
Trade theories
2 extremes: Mercantilism v/s Free Trade Or Interventionist v/s Laissez faire
Interventionist theories
Free Trade theories
Competitive Advantage theory
Mercantilism Absolute advantage
Product Life Cycle (PLC) Theory
Neomercantilism
Comparative advantage
Porter Diamond Theory
H-O Theory
Mercantilism
Best way of becoming rich is by exporting more than importing..
Difference settled in gold.. Trade theory that says: ‘country’s wealth is
measured by its treasure holding’, usually gold Thus:
X more, M less Gold empowers Govt., which empowers the
army and national institutions.. Time 1500 – 1750 cen. Outcome: accumulation of gold by colonial
powers Unrest: American revolution (1775–1783).. And
many more..
EXPLORER COUNTRY YEAR[in order] GEOGRAPHIC AREA EXPLORED
Columbus Italian sponsored by Spain 1492 Sailed westward to find route to India and China, found the New World America…
Amerigo Vespucci Italy 1498 Sailed South America's coast - later maps called it "America"
Vasco Da Gama: Portugal 1498 Sailed around the tip of Africa: cape of good hope.. and reached the Indies.. India..
Neomercantilism
Mercantilism justifies favorable trade to pile up gold..
Neomercantilism: Approach to have favorable BoT for social or political advantage
Social advantage: to have full employment of resources in order to have surplus production to send abroad..
Political advantage: to give aid and grant to other countries..
Free Trade Theories
Absolute advantage: Adam Smith, 1776 Comparative advantage: David Ricardo,
1817 Factor-proportions: Heckscher-Ohlin,
1919
Absolute Advantage
Adam Smith: The Wealth of Nations, 1776 Mercantilism weakens country in long run;
enriches only a few A country
Should specialize in production and export of products in which it has absolute advantage; import other products
Has absolute advantage when it is more productive than another country in producing a particular product
Comodity US UK
Wheat (kg/labor)
6 1
Cloth (mts/labor)
1 2
Production Possibility Curve
A curve that shows Total output (of 2 commodities) that can
be produced By a country using all its resources…
So theory of absolute advantage shows world’s production increases due to international trade..
Comparative Advantage
David Ricardo: Principles of Political Economy, 1817
Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces
Absolute Advantage is a special case of Comparative AdvantageCommodity US UK Comparative
disadvantageComparative adv US
Wheat 6 1 1/6 6/1=6 more adv
Cloth 3 2 2/3 3/2=1.5
Classic Theory Conclusion
Free Trade expands the world “pie” for goods/services
Theory Limitations: Simple world (two countries, two products) no transportation costs no price differences in resources resources immobile across countries constant returns to scale full employment
Theory of Relative Factor Endowments (Heckscher-Ohlin): Modern Theory
Factor endowments vary among countries
Products differ according to the types of factors they need as inputs
A country has a comparative advantage in producing products that intensively use factors of production it has in abundance and which is thus cheap..
Factors of production: labor, capital
Heckscher--Ohlin (1919)
Differences in factor endowments and not differences in productivity determine patterns of trade
Theory: ‘H-O postulates that each nation will export commodity intensive in its relatively abundant and cheap labor and vice-versa’.
Important determinants
Factor endowments: commodity: high in K/L , L/K
Factor prices: low in r/w and w/r
US and UK PPF pre trade Post trade
International trade continues until relative and absolute factor prices are equalized.. HOW???
Factor Price equalization theorem
Trade leads to equalization of relative and absolute factor prices between nations…
K-abundant nation: high K/L and low r/w ratio
L-abundant nation: high L/K and low w/r ratio..
Labor intensive and capital intensive commodity..
Empirical Test
Leontief paradox: US has relatively more abundant capital yet
imports goods more capital intensive than those it exports.. 1947.. Ms30% more k-intensive than Xs..
Explanation(?): US has special advantage on producing new
products made with innovative technologies These may be less capital intensive till they
reach mass-production state
Factor Intensity Reversal Test (FIR)
Situation where a commodity is L-intensive in labor intensive country and k-intensive in K abundant country…
International Product Life-Cycle :Vernon, 1966
Most new products conceived / produced in the US in 20th century
US firms kept production close to their market initially
Limited initial demand in other advanced countries initially
When demand increases in advanced countries, production follows
With demand expansion in secondary markets Product becomes standardized production moves to low production cost areas Product now imported to US and to advanced
countries
Vernon Product Life-Cycle Model
Introduction: Requires highly skilled labor
Growth: to advanced countries, home country sales increase
Maturity: Requires standardized production, unskilled labor
Decline: in production in home country and increased production in low skilled developing countries. Home country produces new products..
5-20
What Is Porter’s Diamond Of Competitive Advantage?
Michael Porter tried to explain why a nation achieves international success in a particular industry
He identified four attributes that promote or impede the creation of competitive advantage
1. Factor endowments - a nation’s position in factors of production necessary to compete in a given industry
can lead to competitive advantage can be either basic (natural resources, climate, location) or
advanced (skilled labor, infrastructure, technological know-how)
2. Demand conditions - 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
5-21
What Is Porter’s Diamond Of Competitive Advantage?
3. Relating and supporting industries - the presence or absence of 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
4. Firm strategy, structure, and rivalry - the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry
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
5-22
What Is Porter’s Diamond Of Competitive Advantage?
Determinants of National Competitive Advantage: Porter’s Diamond