Theories of

International Trade
International Business
Evolution of Trade Theories
Mercantilism
Absolute Cost Advantage
Comparative Cost Advantage
Comparative Cost Advantage with Money
Relative Factor Endowments
Country Similarity Theory
Product Life Cycle
Global Strategic Rivalry
Porters National Competitive Advantage

MERCANTILISM-16
th

century
ABSOLUTE COST
ADVANTAGE-1776
Export more than import
Benefited colonial powers &
caused discontent in the
colonies
Decay of Gold standard
reduced the validity of theory
Neo-mercantilism
Wealth of nations
Flaws:
Restrictions
Impaired growth
Views of Adam Smith
Mercantilism weakens
country
Which to produce & which
to import?
Principle of Division of
labour
Production at low cost
than another countries
then Export it
Examples: brazilian coffee
beans, oil from saudi
Advantages
Skilled labour
Natural resources
Acquired advantages

Example of ABSOLUTE COST ADVANTAGE Theory
COMPATATIVE COST
ADVANTAGE
COMPARAVTIVE
ADVANTAGE WITH MONEY
Flaw of absolute advantage
theory:
1country has absolute
cost advantage in
production of many
product
David Ricardos principles of
political economy
Extends free trade argument
Efficiency of resource
utilization leads to more
productivity
Country should produce &
export relatively more
productive than others
Examples: south korea for
electronics, united states for
movies
Modern economics = money
economics
F.W. Taussings views
Comparative differences in
labour cost of commodities
can be translated into
absolute differences in
prices without affecting the
real exchange relations
between products
Relative factor endowment Country similarity
Heckscher (1919) - Olin (1933)
Theory
How do the countries acquire
comparative advantage?
Factors : land, capital, natural
resources, labour, climate etc
focus on relative advantage,
not absolute advantage
Factor endowments vary
among countries
Land-labour reationship:
Countries where area of land
available is relatively less than
labour, go for multistorey
factories and produce light
weight products.
Labour-capital & vice versa
Leontief paradox: USA exports
labour intensive eventhough
they have abundant capital
Examples: clothing in hong
kong.
Firm based theory
Steffan Linder(1961)-
phenomenon of intra-
industry trade
Takes place among the
countries that are at same
stage of economic
development
Example: Japan exports
Toyota(quality-conscious,
value-oriented buyers from
Germany) cars to Germany
whereas Germany exports
BMW( prestige, performance
seeking buyers from Japan)
cars to Japan.


Product life cycle Global strategic rivalry
R.Vernon (1966)
developed
4 stages:
New product introduction
Growth
Maturity product
Decline
Flaws:
Rapid technological
growth
Not applicable for each
product to go through
each stage
Example: Mobile
phone,PC
Paul Krugman & Kelvin
Lancaster
Example:
Focus on strategic
decisions to acquire &
develop competitive
advantge through
Intellectual property rights
Investment in R&D
Achieving large scale
economies
Experience curve

Porters national competitive
advantage
Also known as Porter
Diamond

Examples :
Firm strategy, structure,
rivalry
Indian garment
manufacturers
US PC manufacturers
Related & supported
Industries
Financial companies
Demand conditions
Japan developed &
exports Camcords, big
screen TV
Factor endowments
USA is rich

Conclusion
Firm-based theories are more helpful than
country based theories.
Strategic Advantages of Exports:
Use of excess capacity
Cost reduction
Greater profitability
Risk spreading in terms of avoid recession in
domestic market
THANK YOU!