Professional Documents
Culture Documents
International Trade Theories: The Raison D'etre
International Trade Theories: The Raison D'etre
Not self-sufficient as different resources owned / endowments Higher quality of foreign goods Cheaper product
The basis for international trade is that a nation can import a particular good or service at a lower cost than if it were produced domestically
In other words, if you can buy it cheaper than you can make it you buy it This maxim is true for individuals and nations
MERCANTILISM Mercantilism, which emerged in England in the mid-16th century, asserted that it is in a countrys best interest to maintain a trade surplus, to export more than it imports. Mercantilism advocated government intervention to achieve a surplus in the balance of trade. It viewed trade as a zero-sum game, one in which a gain by one country results in a loss by another As an economic philosophy, mercantilism is problematic and not valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade
The ability to produce a good using fewer resources than another country (same output with less input)
The meaning of absolute advantage is that a country is more productive than another country in producing a good (same input with more output).
Absolute Advantage
Absolute advantage deals with the ability of a country to turn inputs into outputs A country is said to have an absolute advantage if it takes less input to turn out a unit of a good than it does for another country It is possible for one country to have an absolute advantage in everything or nothing
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
8 hours 10 hours
20 cameras 10 cameras
*Assuming countries have 200,000 available hours and split their time evenly between cameras and computers.
Germany
Computers
1,250 1,000
625
Cameras
10,000 20,000 12,500 25,000
Cameras
8 hours 10 hours
20 cameras 10 cameras
*Assuming countries have 200,000 available hours and split their time evenly between cameras and computers.
*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).
Germany
Computers
1,250 1,000
625
Cameras
10,000 20,000 12,500 25,000
Cameras
<
<
If trade occurs on these terms, all the gains from trade flow to Germany
If trade occurs on these terms, gains from trade accrue to both countries
If trade occurs on these terms, all the gains from trade flow to the U.S.
8 hours 10 hours
20 cameras 10 cameras
*Assuming countries have 200,000 available hours and split their time evenly between cameras and computers.
*Assuming that Germany specializes in cameras, and the U.S. specializes in computers, and they trade 11,250 cameras for 750 computers (Trading price: 15 cameras = 1 computer).
If trade occurs on these terms, all the gains from trade flow to Germany
10 cameras @ 80 each 800 1 computer @ $1,000 each $1,000
If trade occurs on these terms, gains from trade accrue to both countries
15 cameras @ 80 each 1,200 1 computer @ $1,000 each $1,000
If trade occurs on these terms, all the gains from trade flow to the U.S.
20 cameras @ 80 each 1,600 1 computer @ $1,000 each $1,000
$/ = 1.250
$/ = 0.833
$/ = 0.625
In the mid-1960s, Raymond Vernon proposed the product life-cycle theory that suggested that as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade. Early in the life cycle of a typical new product, while demand is starting to grow in the U.S., demand in other advanced countries is limited to high-income groups, and so it is not worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the U.S. to those countries
Economies of Scale, First Mover Advantages, and the Pattern of Trade The pattern of trade we observe in the world economy may be the result of first mover advantages and economies of scale
The conditions in the nation governing how companies are created, organized, and managed, and the nature of domestic rivalry impacts firm competitiveness
Being a first mover can have important competitive implications, especially if there are economies of scale and the global industry will only support a few competitors
BREAK TIME