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The International Trade Theory
- 2. Introduce Myself Md. ImrulKhan Id: 160050100182 Batch : 5th Faculty of Business Administration Cox’s Bazar International University
- 3. Presentation Topic On: The International Trade Theory Submitted To: A.S.M Saifur Rahman Lecturer, Assistant Professor and Exam controller Faculty Of Business Administration Cox’s Bazar International University
- 4. Abstract • This ispresent an analysis of Classical country-based and modern firm-based theories. Subsequently, further critical analysis is presented based on mercantilism, being the least favorable theory and the national competitive – porter’s diamond theory being the most appealing theory.
- 5. Introduction International trade exposes consumersand countries to the international market that enables of goods and services between countries. Product that is bought from the global market is called an import and product that is sold to the global market is called an export. Simply put, it allows countries to trade globally as well as enable consumers to choose and shop goods and services that suits their own preferences in terms of quality and price which are not available in their own countries.
- 6. Continue… This notion issupported by wood where he mentioned the greatest part of international trade is when some goods can be produced better or cheaper in one country rather in another. In the 1990s the influence of these international trade theories has resulted in significant changes in the global free trade. The theories are 1) Mercantilism 2) Absolute Advantage 3) comparative Advantage 4) Heckscher-ohlin Theory 5) The product life Cycle theory 6) New Trade Theory : Economies of scale & First mover Advantage National Competitive Advantage
- 7. Overview Of TradeTheory Mercantilism is the first classical country-based theory propagated in the sixteenth and seventeenth centuries the theory is about three hundred years old, but it has been one of the most debated theories until today. Mercantilist suggested countries to encourage exports and discourage imports. The next classical theory which was proposed by Adam smith in 1776 is known as absolute advantage theory. The theory explains the benefits of unrestricted free trade. Adam smith highlights that in order to raise richness is to embrace free trade between states. In the 1817 David Richardo refined the theory and suggested comparative advantage theory where he indicates that countries can gain from trade even if one of them is less productive.
- 8. Analysis of classical country-basedand Modern firm-based Trade Theories
- 9. Mercantilism • This theoryemerged in England in the mid-sixteenth century as the first theory of international trade. It suggests that the quantity of metals which refers to gold and silver owned by countries represent the country’s richness. Gold and silver were used as a currency of trade between countries and countries could earn more gold and silver by exporting more and restrict imports transactions. In other words, a country must promote export transactions than its import transactions to improve the country’s balance of payments or economy’s transactions between countries. As a result, the country accumulates more gold and silver, which subsequently increase the country’s richness power and reputation.
- 10. Absolute Advantage As Mercantilistpolicies give a bad impact to a country’s economic growth , Adam smith in 1776 Challenges the zero-sum game by arguing that the policy is only beneficial to the mercantilist country and does not give a positive advantage to consumers. He suggests the notion of a positive- sum game where it is more profitable export transactions if a country imports goods that will also benefit others, including the consumers.
- 11. Comparative Advantage Adam Smith’sabsolute advantage theory, however, does not explain situations where countries which do not have absolute advantage in any of the product or have absolute advantage in any of the product or have the absolute advantage theory. according to Hill et al, Ricardo suggests that countries should specialize in the efficiently from other countries, or, at the same time buying goods from other countries that they could produce more efficiently at home.
- 12. Heckscher-ohlin and Beril-ohlin Kowalskiand Hill et al, discuss the different explanation of comparative advantage developed by Swedish economists Eli Heckscher in 1919 and Beril ohlin 1933. According to Heckscher and ohlin, the comparative advantage arise from differences based on national factor endowments which are land, labor cost and capital. These differences in factor endowments translate to differences in factor costs, it means more favorable a factor lead to a lower cost. as such Heckscher-ohlin predict that countries will export goods that make intensive use of locally abundant factors, and import goods that make intensive use of factors which are locally scare.
- 13. The product Lifecycle Theory The product life cycle theory is the first modern firm-based theories. This theory was developed by Raymond Vernon in the mid-1960s. According to Barot the theory emphasizes on creativity, markets extension, comparative advantages and strategic answer of the global rivals in decisions related to the production trade and international investments. The product life cycle theory consists of three phases, 1) a new product 2) mature product and 3) Standardized product.
- 14. New Trade Theory:Economies of Scale & First Mover Advantage In the 1980s, economists such as Paul Krugman and Kevin Lancaster, develop a theory which is called the New Trade Theory – Economies of Scale and First Mover Advantage. The theory stresses out that any firm that able to achieve better economies of Scale would give a positive impact to international trade by increasing the variety of goods available to consumers and decrease the average cost of those goods
- 15. National Competitive Advantage In1990, Michael porter revealed the results of his research in his book The Competitive Advantage of Nations, why some nations achieve international success and some failed to survive. He emphasizes on company strategy and competition. Competition differ significantly from country to country and from one industry to another. For example, the reason why Japan is doing so well in automobile industry, and Germany and the United States are best in the chemical industry. These questions can’t be answered by previous theories, but porter’s theory tries to provide some explanations to these questions.
- 16. Porter’s Diamond framework firmstrategy structure, and rivalry Diamond Conditions Related and supporting industries Factor endowments
- 17. Factor Endowments These factorscan be either basic natural resources, climate, location, or advanced factors such as skilled labor, Communications infrastructure, research facilities and technological know –how factor endowments are based on Heckscher-ohlin theory which porter did not propose anything new. These factors can provide an initial advantage that is then reinforced and extended by investment in advanced factors According to porter, Advanced factors are the most significant for competitive advantage.
- 18. Demand Conditions In refersto the nature of home demand for an industry’s product or service. Demand conditions influence the development of capabilities for example, sophisticated, knowledgeable and demanding customers pressure firm to be more competitive and to produce high quality and innovative products.
- 19. Relating and supporting industries Thisattribute refers to the presence supplier industries and related industries that are internationally competitive According to porter, investing in these industries can spill over and contribute to success in other industries. The most important findings are that successful industries within a country tend to be grouped into clusters of related industries which then prompt knowledge flow between firms. As a result, it benefits all firms within that cluster.
- 20. Firm strategy, structure,and rivalry The last attribute refers to the nation governing how companies are created, organized and managed, and the nature of rivalry within a nation. The two important points made by porter highlight that different nations are characterized by different management ideologies which influence the ability of firms to build national competitive advantage. Porter’s second point is that there is a strong association between vigorous domestic rivalry and the creation and persistence of competitive advantage in an industry.
- 21. Global Strategic RivalryTheory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market.
- 22. Continue… The barriers toentry that corporations may seek to optimize include: • research and development, • the ownership of intellectual property rights, • economies of scale, unique business processes or methods as well as extensive experience in the industry, and the control of resources or favorable access to raw materials.
- 23. Porter’s National Competitive AdvantageTheory In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
- 24. whose theory iwould like to use and which is Dominant today As a manager I would like to use absolute advantage Theory. What’s the reason are as follows:-The theories covered in this assignment are simply that—theories. While they have helped economists, governments, and businesses better understand international trade and how to promote, regulate, and manage it, these theories are occasionally contradicted by real-world events. Countries don’t have absolute advantages in many areas of production or services and, in fact, the factors of production aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some factors.
- 25. Continue… The United Stateshas ample arable land that can be used for a wide range of agricultural products. It also has extensive access to capital. While it’s labor pool may not be the cheapest, it is among the best educated in the world. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and want—much of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs.
- 26. Continue… As a result,it’s not clear that any one theory is dominant around the world. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. In practice, governments and companies use a combination of these theories to both interpret trends and develop strategy. Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade.