INTERNATIONAL BUSINESS

Topics: International trade, Export, Comparative advantage Pages: 27 (1123 words) Published: September 24, 2014
INTERNATIONAL BUSINESS

Pham To Mai
Faculty of Economics
National University of HCMC

Part II

INTERNATIONAL
BUSINESS ENVIRONMENT

INTERNATIONAL TRADE
THEORY AND POLICY

INTERNATIONAL

TRADE
THEORY

Mercantilism
Gold and silver were
mainstays of national wealth.
It was in a country‟s best
interests to maintain a trade
surplus  maximize exports
and minimize imports.
Limitation: “Zero-sum game”

Theory of Absolute Advantage
Adam Smith (1776)

Countries should produce only goods for
which they have an absolute advantage, then
trade for those they do not have an
absolute advantage.
 “positive-sum game”
Limitation: What will a country gain from
trade if it has an absolute advantage in both
products or it do not have an absolute
advantage in any product?

Theory of Comparative Advantage
David Ricardo (1817)

Countries should produce only goods for which
they have an comparative advantage, then trade
for those they do not have an comparative
advantage.
All countries that participate in trade realize
economic gain  “positive-sum game”

8

Theory of Absolute
Advantage

Absolute advantage =

Capability of one country
to produce more of a
product with the same
amount of input than
another country.
Patterns of trade are
determined by the
differences in
productivity.
Subjects to compare:
production of the same
product in another country.

PTM – Trade Theory and Policy

Theory of Comparative
Advantage

Comparative advantage =
Capability of one
country to produce a
product more
efficiently than to
produce another one.
Patterns of trade are
determined by the
differences in
productivity.
Subjects to compare:
Production of another
product in own country.

07-Sep-14

Heckscher (1919)-Olin (1933) Theory
Factor endowments: extent to which a country is
endowed with such resources as land, labor, and
capital.
Export goods that intensively use factor
endowments which are locally abundant.
Corollary: import goods made from locally scarce
factors.

Patterns of trade are determined by differences
in factor endowments - not productivity.
Focus on relative advantage, not absolute
advantage.

Product Life-Cycle Theory
Raymond Vernon (1966)

As products mature, both location of
sales and optimal production changes.
Affects the direction and flow of
imports and exports.
Globalization and integration of the
economy makes this theory less valid.

International Product Trade Cycle Model
production

High Income Countries
Imports

Exports

Q
u
a
n
t
i
t
y

1

2

3

4

5

6

7

8

9

10

Medium Income Countries

11

12

13

14

consumption

15

Exports

Imports
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Low Income Countries
Exports
Imports

1

2

3

4

New Product

5

6

7

8

9

Maturing Product

10

11

12

13

14

15

Standardized Product

Stages of Production Development

Time

The New Trade Theory, 1970s
Where substantial economies of scale are
present: Intra-industry trade allows
specialization  increases output and
ability to enhance economies of scale 
increases variety of goods available and
decreases their average costs.
In those industries with high fix costs and
world market that supports only few
competitors: those firms that enter the
world market first may gain first-mover
advantage.

Implication of New Trade Theory
Nations may benefit from trade even when they
do not differ in resource endowments or
technology.
A country may predominate in export of a good
simply because it was lucky enough to have one or
more firms among the first to produce that good.
There is an economic rationale for a proactive
trade policy: by sophisticated and judicious use of
subsidies, a government can increase changes of
its domestic firms becoming first movers in newly
emerging...
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