International Trade Theory

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Examples of early spice trade
2600 BC – feed labors spices for strength 600 BC – China Confucius use of ginger Ancient Egypt – cassia & cinnamon for embalming, also anise, marjoram & cumin Food preservation – salt with pepper; plague in Middle ages Mary Rose English ship sunk in 1545 – every sailor pockets contained peppercorns Romans – heavily used in food, wine, perfumes; saffron pillows Arab became middlemen in spice trade between Europe & India Search for sea routes to avoid high prices Portuguese and Spain frontrunners & rivalry in exploration to India

Early developments in spice trade
Dutch muscled in and monopolized the spice trade and became distributors for N & W Europe Formed the Dutch East India Company – to reduce competition, share risk & realize economies of scale DEIC richest corporation in the world – annual dividend of 40%; 50,000 employees; 30,000 fighting men; 200 ships; extremely ruthless; trade New Amsterdam with English for Banda Islands for complete control of the netmeg trade

Historical Developments in International Business
s The

Commercial Era 1500-1850

– age of great explorers – individual entrepreneurs seeking personal fortunes in distant lands – trade in gold, spices, silk, and slaves – close relationship between European monarchs and entrepreneurs – formation of first MNEs - Dutch East India Co., Levant Co., British Royal American Co., Hudson Bay Co.


Exploitative Era 1850-1915
s creation

of industrial empire’s based on industrial products rather than exotic goods s secure cheap sources of raw materials overseas s home govts. become involved in colonial rule s colonies become dependent on imperial powers politically and industrially

Concessionary Era 1914-1945
s western

cos. become very powerful s rise of nationalism & economic development s countries try to seek independence & encourage local business

The National Era 1945-1960
s increasing

hostility towards western companies, antagonism towards foreign influence in local affairs s desire for self-government & sovereignty s imposition of restrictions on foreign cos. s era of political instability s many countries in Asia, Africa, and S. America become independent


Intl. Trade Theory - Mercantilism
s countries

should export more than they import - balance of trade surplus - result in more gold & silver for governments s trade conducted by governments led consolidation of power s trade with colonies – import less-valued raw materials – export more-valued manufactured goods s views

trade as zero-sum game

Intl. Trade Theory Absolute Advantage
s proposed

by Adam Smith s countries differed in their ability to produce different goods efficiently and should specialize in the production of goods they can produce more efficiently s views trade as a positive sum game s countries will benefit from trade if they have an absolute advantage in one product

Intl. Trade Theory Comparative Advantage
s even

if a country has an absolute advantage in both products it should specialize in production of that good in which it has a comparative advantage s proposed by Ricardo


Assumptions Comparative Advantage
s Full

employment s 2 products and 2 countries only s Ignores role of technology and marketing s Perfect competition s Mobility of resources s Transportation costs ignored s Max efficiency - countries produce goods for other reasons

A Link Between Trade and Growth
Sachs and Warner: 1970 to 1990 study Open economy developing countries grew 4.49%/year. Closed economy developing countries grew 0.69%/year. Open economy developed countries grew 2.29%/year. Closed economy developed countries grew 0.74%/year. Frankel and Romer: On average, a one percentage point increase in the ratio of a country’s trade to its GDP increases income/person by at least 0.5%. For every 10% increase in the importance of international trade in an economy, average income levels will rise by at least 5%....
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