International

Trade Theory
An Overview of Trade
Theory
 What is Trade?
- refers to the voluntary exchange of goods or
services between economic factors. Since
transactions are consensual, trade is
generally considered to benefit both parties. In
finance, trading refers to purchasing and
selling securities or other assets.
 What is International
Trade?
- refers to the trade that places across
national borders. It is the means through
which countries exchange goods with each
other and is served as an important means of
survival for many countries. Various countries
that have limited resources depend on other
countries to fulfilling their needs.
 What is International
Trade Theories?
International trade theories are various
theories that analyze and explain the
patterns of international trade. These
theories explain the mechanism of
international trade that is how countries
exchange goods and services with each
other.
What is International Trade
Theories?
It helps countries in
deciding what should
be imported and what
should be exported,
in what quantity and
with whom trade
should be done
internationally.
 What is Free Trade?
- refers to a situation where a government
does not attempt to influence through quotas
or duties what its citizen can buy from another
country or what they can produce and sell to
another country.
The Benefits of Trade
• More Job Opportunities
 The Benefits of Trade
• Expanding Target Markets & Increasing
Revenues
The Benefits of Trade
• Greater Variety of Goods Available
The Benefits of Trade
• Better Relations Between Countries
The Benefits of Trade
• Enhanced Company Reputation
 Mercantilism
It is one of the oldest international trade
theory which was developed in 1630.
 Mercantilism

Mercantilism is an economic theory that

holds that a nation's wealth can increase
when the government regulates the
nation's wealth by maximizing exports
and reducing imports.
 Mercantilism
An example of mercantilism was the
Sugar Act of 1764 which made colonists
in America had to pay higher tariffs and
duties on imports of foreign-made
refined sugar products.
 Absolute Advantage
This theory says that countries should
focus on producing such products that
they can produce efficiently at a lower
cost as compared to other countries.
 Absolute Advantage
Every country has an absolute advantage
in production of a specific product more
efficiently than other countries.
 Absolute Advantage
One country should specialize in the
production of the said product to have an
absolute advantage and trade it for goods
produced by other countries.
 Absolute Advantage
Manufacturing a product in which a
particular country specializes is quite
advantageous for them. Countries
should produce and export such
products which can produce efficiently
and import those goods that they
produce relatively less efficiently. This
kind of trade will be beneficial for both
countries.
Absolute Advantage
A clear example of a
nation with an absolute
advantage is Saudi
Arabia, a country with
abundant oil supplies
that provide it with an
absolute advantage
over other nations.
Comparative Advantage
• David Ricardo in 1817 has given the
comparative advantage theory.
Comparative Advantage
• Comparative advantage is an economy's
ability to produce a particular good or
service at a lower opportunity cost than
its trading partners.

• When used to describe international

trade, comparative advantage refers to
the products that a country can produce
more cheaply or easily than other
countries.
Comparative Advantage
For example, if a country is skilled at making
both cheese and chocolate, they may
determine how much labor goes into
producing each good. If it takes one hour of
labor to produce 10 units of cheese and one
of labor to produce 20 units of chocolate,
then this country has a comparative
advantage in making chocolate.
The Samuelson Critique
• Paul Samuelson argues that dynamic
gains from trade may not always be
beneficial.
The Samuelson Critique

Samuelson Critique describes the

relationship between relative prices of
output and relative factor rewards-
specifically, real wages and real returns to
capital.
The Samuelson Critique
Now, suppose there is an increase in the
price of one of the goods. Say the price of
steel rises. Thus, when the price of steel
rises, the payment to the factor used
intensively in steel production (capital)
rises, while the payment to the other
factor (labor) falls.
Heckscher- Ohlin Theory
Heckscher- Ohlin Theory
• Heckscher-Ohlin theory of international
trade was given by Eli Heckscher and
Bertil Ohlin.

• The Heckscher-Ohlin model is an

economic theory that proposes that
countries export what they can most
efficiently and plentifully produce.
Heckscher- Ohlin Theory

For example, the Netherlands exported

almost $577 million in U.S. dollars in 2019,
compared to imports that year of
approximately $515 million. Its top import-
export partner was Germany.
Heckscher- Ohlin Theory
For example, OPEC countries are the largest
exporters of oil, this does not mean they do
not have other natural resources such as
coal, metal, and others, but they have oil
reserves in abundance, wherein lies their
strength. The Heckscher-Ohlin model also
amplifies the benefits of international and how
exporting resources that are naturally
abundant in some countries help other
countries.
The Leontief Paradox
Leontief's paradox in economics is that a
country with a higher capital per worker
has a lower capital/labor ratio in exports
than in imports.
The Leontief Paradox
For instance, both the United States and
Germany are developed countries with a
significant demand for cars, so both have
large automotive industries. Rather than
one country dominating the industry with
a comparative advantage, both countries
trade different brands of cars between
them.
 The Product Life Cycle
Theory
• Product life cycle theory was
developed in 1970 by
Raymond Vernon.

• A product life cycle is the

length of time from a product
first being introduced to
consumers until it is removed
from the market.
The Product Life Cycle
Theory
 The Product Life Cycle
Theory
Here are a few product life cycle examples:
The home entertainment industry is filled with
examples at every stage of the product life
cycle. For example, videocassettes are gone
from the shelves. DVDs are in the decline
stage, and flat-screen smart TVs are in the
mature phase.
 National Competitive
Advantage: Porter’s Diamond
Michael Porter tried to explain why a
nation achieves international success in a
particular industry and identified four
attributes that promote or impede the
creation of competitive advantage:
 National Competitive
Advantage: Porter’s Diamond
Michael Porter’s Diamond Model is a
diamond-shaped framework that focuses on
explaining why certain industries within a
particular nation are competitive
internationally, whereas others might not.
 National Competitive
Advantage: Porter’s Diamond
 National Competitive
Advantage: Porter’s Diamond
Four attributes that promote or impede the creation of
competitive advantage:

1. Factor conditions
2. Demand conditions
3. Relating and supporting industries
4. Firm strategy, structure, and rivalry
 National Competitive
Advantage: Porter’s Diamond
Four attributes that promote or impede the creation of
competitive advantage:

1. Factor conditions - a nation's position in

factors of production such as skilled labor
or the infrastructure necessary to compete
in a given industry.
 National Competitive
Advantage: Porter’s Diamond
Four attributes that promote or impede the creation of
competitive advantage:

2. Demand conditions - the nature of

home demand for the industry's product
or service.
 National Competitive
Advantage: Porter’s Diamond
Four attributes that promote or impede the creation of
competitive advantage:

3. Relating and supporting industries -

the presence or absence of supplier
industries and related industries that are
internationally competitive.
 National Competitive
Advantage: Porter’s Diamond
Four attributes that promote or impede the creation of
competitive advantage:

4. Firm strategy, structure, and rivalry -

the conditions governing how companies
are created, organized, and managed and
the nature of domestic rivalry.
Reference/s
Webpage:
1. International trade theory. (n.d.). PPT.
https://www.slideshare.net/JubayerAlamShoikat/internation
al-trade-theory-176314854

2. International Trade Theory. (n.d.). Ppt Download.

https://slideplayer.com/slide/4783502/

Book:
1. Refers to a situation where a government
does not attempt to influence through quotas
or duties what its citizen can buy from
another country or what they can produce
and sell to another country.

2. The presence or absence of supplier

industries and related industries that are
internationally competitive.
3. The conditions governing how companies
are created, organized, and managed and the
nature of domestic rivalry.

4. This theory says that countries should

focus on producing such products that they
can produce efficiently at a lower cost as
compared to other countries.
5-6. What are the full names of Heckscher
and Ohlin?

7. Refers to the voluntary exchange of goods

or services between economic factors.

8. Who developed the Product life cycle

theory in 1970?
9. Economic theory that holds that a nation's
wealth can increase when the government
regulates the nation's wealth by maximizing
exports and reducing imports.

10. A nation's position in factors of

production such as skilled labor or the
infrastructure necessary to compete in a
given industry.
1. Free Trade
2. Related and Supporting Industries
3. Firms Strategy, Structure, and Rivalry
4. Absolute Advantage
5. Eli Heckscher
6. Bertil Ohlin
7. Trade
8. Raymond Vernon
9. Mercantilism
10. Factor conditions