37626273 International Trade Theories

7/28/2019 37626273 International Trade Theories

1/41

International Trade Theories

- The raison detre


2/41

International

Trade Theory

AN OVERVIEW OF TRADE THEORY

Free trade refers to a situation where agovernment does not attempt to

influence through quotas or duties whatits citizens can buy from another countryor what they can produce and sell to

another country.


3/41

Reasons for international

trade Not self-sufficient as different

resources owned /

endowments

Higher quality of foreign goods

Cheaper product


4/41

The Basis for International

Trade

The basis for international trade isthat a nation can import aparticular good or service at alower cost than if it were produceddomestically

In other words, if you can buy it

cheaper than you can make it you buyit

This maxim is true for individuals and

nations


5/41

International

Trade TheoriesThe Benefits of Trade

The theories of Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country toengage in international trade even for products itis able to produce for itself.

International trade allows a country to specializein the manufacture and export of products thatcan be produced most efficiently in that country,and import products that can be produced more

efficiently in other countries


6/41

International

Trade TheoriesThe Pattern of International TradeSome patterns of trade are fairly easy to

explain - it is obvious why Saudi Arabiaexports oil, Ghana exports cocoa, and Brazilexports coffee

But, why does Switzerland exportchemicals, pharmaceuticals, watches, andjewelry? Why does Japan exportautomobiles, consumer electronics, and

machine tools?


7/41


Trade Theory and Government PolicyTrade theories lack agreement in theirrecommendations for government policy.

Mercantilism makes a crude case for government

involvement in promoting exports and limitingimports

The theories of Smith, Ricardo, and Heckscher-

Ohlin promote unrestricted free tradeNew trade theory and Porters theory of nationalcompetitive advantage justify limited and selectivegovernment intervention to support the

development of certain export-oriented industries


8/41

International Trade TheoriesMERCANTILISM

Mercantilism, which emerged in England in themid-16thcentury, asserted that it is in a countrysbest interest to maintain a trade surplus, to exportmore than it imports.

Mercantilism advocated government interventionto achieve a surplus in the balance of trade. Itviewed trade as a zero-sum game, one in whicha gain by one country results in a loss by another

As an economic philosophy, mercantilism isproblematic and not valid, yet many political viewstoday have the goal of boosting exports whilelimiting imports by seeking only selective

liberalization of trade


9/41


COMPARATIVE ADVANTAGEIn 1817, David Ricardo took Adam Smiths theoryone step further by exploring what might happenwhen one country has an absolute advantage in

the production of all goodsAccording to Ricardos theory ofcomparativeadvantage, it makes sense for a country tospecialize in the production of those goods that it

produces most efficiently and to buy the goodsthat it produces less efficiently from othercountries, even if this means buying goods fromother countries that it could produce more

efficiently itself


10/41

International Trade TheoriesABSOLUTE ADVANTAGE

In 1776, Adam Smith attacked the mercantilistassumption that trade is a zero-sum game andargued that countries differ in their ability toproduce goods efficiently, and that a country hasan absolute advantage in the production of aproduct when it is more efficient than any othercountry in producing it

According to Smith, countries should specialize inthe production of goods for which they have anabsolute advantage and then trade these goodsfor the goods produced by other countries


11/41

What is Absolute Advantage?

The ability to produce a good usingfewer resources than another country(same output with less input)

The meaning of absoluteadvantage is that a country ismore productive than anothercountry in producing a good (sameinput with more output).


12/41

Absolute AdvantageAbsolute advantage deals with the

ability of a country to turn inputsinto outputs

A country is said to have anabsolute advantage if it takes lessinput to turn out a unit of a goodthan it does for another country

It is possible for one country tohave an absoluteadvantage ineverything or nothing


13/41

The Model of Comparative Advantage

Trade is still possible and mutuallybeneficial even if one country has an

absolute advantage over another in

producing both goods,provided that each country enjoys a

comparative advantage in the

production of one good.


14/41

Comparative Advantage Comparative advantage means that a

country has a lower opportunity cost of

producing a good than another country Every country must have a comparative

advantage in something


15/41

Technology and Opportunity Cost:

Germany

United States

Camera Computer

8 hours

10 hours

160 hours

100 hours

Production Requirements

1 Camera 1 Computer

1/20 computer

1/10 computer

20 cameras

10 cameras

Opportunity Cost

Without Specialization and Trade:

Germany

United States

Cameras Computers

25,000

20,000

1,250

2,000

Maximum ProductionCameras Computers

12,500

10,000

625

1,000

Diversified Production*

*Assuming countries have 200,000 available hours and split their time evenly between cameras and computers.

or

orand

and



16/41

Cameras

Computers

10,000 20,000

2,000

1,000

Cameras

Computers

12,500 25,000

1,250

625

United States Germany

U.S. opportunity cost:

1 computer = 10 cameras

German opportunity cost:




17/41

Technology and Opportunity Cost:

Germany

United States

Camera Computer

8 hours

10 hours

160 hours

100 hours

Production Requirements

1 Camera 1 Computer

1/20 computer

1/10 computer

20 cameras

10 cameras

Opportunity Cost

Without Specialization and Trade:

Germany

United States

Cameras Computers

25,000

20,000

1,250

2,000

Maximum ProductionCameras Computers

12,500

10,000

625

1,000

Diversified Production*

*Assuming countries have 200,000 available hours and split their time evenly between cameras and computers.

or

orand

and

With Specialization and Trade:

Germany

United States

Cameras Computers

25,000

--

--

2,000

Specialized Production

Cameras Computers

12,500

12,500625

1,375

Consumption

*Assuming that Germany specializes in cameras, and the U.S. specializes in computers, and they trade 12,500 cameras

for 625 computers (Trading price: 20 cameras = 1 computer).

and

and



18/41

Potential

Gains

From

Trade

Potential

Gains

From

Trade

Cameras

Computers

10,000 20,000

2,000

1,000

Cameras

Computers

12,500 25,000

1,250

625

United States Germany

U.S. opportunity cost:


German opportunity cost:


Mutually

Beneficial

Terms of

Trade

37626273 International Trade Theories

Documents

Transcript of 37626273 International Trade Theories