Transcript International Trade

International Trade
Chapter 5
Trade Theories
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Mercantilism
Theory of Absolute Advantage
Theory of Comparative Advantage
Theory of Country Size
Factor-Proportions Theory
Product Life Cycle Theory
Competitive Advantage Theory
Theory of Country size
• Large countries tend to have
– Varied climates and an assortment of natural
resources
– Higher domestic transportation costs for exports
– Economies of scale
• Large countries tend to have smaller degree of
openness (smaller % of GDP as exports)
Factor Proportions Theory
(Heckscher-Ohlin Theory)
• Each country specializes in products or processes
which use factors in relative abundance. (e.g. Labor
abundant countries: labor intensive product)
• Leontief Paradox: U.S,. exports are more labor
intensive than U.S. imports.
• Paradox solved: Labor is not homogeneous (U.S.
exports are of highly skilled labor contents while U.S.
imports are of unskilled labor contents).
Product Life Cycle Theory
(Raymond Vernon)
• Location of production of a product shifts
internationally depending on the stage of the
product life cycle.
• 4 stages
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Introduction
Growth
Maturity
Decline
Competitive Advantage Theory
(Michael Porter’s Diamond Theory)
• Theory explaining why a particular industry in a country
gains global competitiveness.
• Four determining factors
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Factor endowments
Demand conditions
Supporting industries
Firm’s strategy
• First two factors became less important with
globalization
Trade Patterns
• Country difference theory: applicable to trade
based on natural advantages
• Country similarity theory: applicable to trade
based on acquired advantages
• Pairs of trading relationships
– Distance
– Cultural similarity
– Political and economic interests
Strategic Trading
• Reasons or incentives of a firm to export
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To utilize excess capacity
To take advantage of economies of sale
To spread risk by diversifying markets
To increase markup
• Strategic trading policy of a nation
– General approach
– Specific approach