4820 CH 5

Download as ppt, pdf, or txt
Download as ppt, pdf, or txt
You are on page 1of 10

Chapter 5 - Theories of

International Trade.

 Theory of Absolute Advantage (Adam


Smith 1776) - Each country should
specialize in the production and export of
that good which it produces most
efficiently, with the fewest labor-hours.
Theory of comparative advantage
(David Ricardo 1819).

 Theory of comparative advantage (David


Ricardo 1819) - Even if one country was
most efficient in the production of two
products, it must be relatively more
efficient in the production of one good. It
should then specialize in the production
and exportation of that good in exchange
for the importation of the other.
Classical trade theory.

 Division of labor.
 Comparative advantage.
 Gains from trade.
Theory of factor proportions.

 A country that is relatively labor (capital)


abundant should specialize in the
production and export of that product
which is relatively labor (capital) intensive.
Other theories.
 Leontief Paradox - the U.S. was exporting more
labor intensive products than it was importing -
Measurement error, domestic equivalents, skilled
and unskilled labor.
 Overlaping product ranges theory - marketers seek
similar markets.
 Product life cycle theory - as the product matures it
becomes more labor intensive and the comparative
advantage shifts to different countries.
Competitive advantage of
nations (Michael Porter).
 A nation’s competitiveness depends on the
capacity of its industry to innovate and upgrade.
Companies gain competitive advantage because of
pressure and challenge. They benefit from
having strong domestic rivals, aggressive home-
based suppliers and demanding local customers.
 Differences in national values, culture, economic
structures, institutions, and histories all contribute
to competitive success.
Competitive advantage of
nations (Michael Porter).
 Factor conditions - Ability to innovate, upgrade,
and deploy its factors.
 Demand conditions - highly competitive and
demanding local markets.
 Related and supporting industries - close
working relationships, proximity, and timeliness.
 Firm, strategy, structure and rivalry - appropriate
and flexible conditions for the situation.
Reasons for Trade Barriers

 Protection of an infant industry.


 Protection of the home market
 Foreign Exchange Requirements.
 Capital accumulation.
 Maintenance of Standard of living and real
wages
 Conservation of Natural Resources.
Reasons for Trade Barriers
(Contd.).
 Industrialization of a Developing Nation.
 Maintenance of employment and reduction
of unemployment.
 National Defense
 Increase of business size.
 Self-reliance
 Retaliation, bargaining, balance of trade etc.
In Most Cases
Protectionism results in:

 Consumers paying a higher cost


 Industries getting stagnant and inefficient
 Lower quality goods for higher prices.
 Inflation.
 Lower standard of living.
 Retaliation by trading partners.

You might also like