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    Theories PDF

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    Hasnour Moyo

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    © All Rights Reserved
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    of 7
    611672020 Whats International Trade Theory? (© resis section Q@rnwecot contents Next Sectio 2.1 What Is International Trade Theory? LEARNING OBJECTIVES What is International Trade? International wade theories are spy diferent heures to explain international trade, Trae the once of exchanging gods and services between two people or entities. eration trade then ‘to concep ofthis exchange beweon people or entities in tw dleent countries. People rete trade hesause they belee that they beni rom the exchange They may nee oF ‘theory, oly, and busines strategy t nstiutesintsnationl tre, {mn thissction, you eam about the ferent tad theories that have evolved oer the pas century snd which remot relevant today. Adiinslly, yu! explore the factors that imp intenational ‘this interests What Are the Different International Trade Theories? “around 5.200 yeas ago, Uruk in southern Mesopotamia, was probably the ist elt the word ad verses, housing more than 0,000 people wii is six miles of wall Uruk agile made Prospero by sophisticated ieriaton canals, washome to he fit lise of midlemen trade intermediaries. cooperative trade network. the pattern that would endure forthe net 6,000 yoars"Matt Ridley, "Humans: Why They Teumphed” WallStreet Journal, May 22,2010, cessed December 20,2010, nonline wy com/arsie/StiooniszanserabroseortoasrsassssssRinssis8 html tn more recet centuries, enor hve focused on ting to understand and explain these ade putters, Chapters "ntmdcton”, Seton "The Globalization Debate dscosed how Thomas rcdman's lt-world approach segments history int thre stages: Globalization 1.0 from 4920 1809, 2 fom 1800 to 2000, and 3.0 om 2000 tothe present In Clobalization 10, nations omusaed global expansion, ln Glablition 20, multinational companies scene and pushed ‘Roba development. Ty, technology drives Globalization 3.0. “Tobetter understand how modern global ade as evolved, important to understand ow ‘couneies traded with oe another historically. Overtime, economists have developed thoois to ‘plan the machanlat of global tad The aia storia theories are called clasial and are fom shit to explain trade rom afm, rather than a country, perspestive These thoores re eered to as ‘modern sare fn base o® company based. Both of thas categories, dasa and modern, consis sf evra international theore htps:saylordotorg github iftext_inlomatonal-businass/s06-01-whats-intornatonabrade-th himls—texIFA madern%2C fim-based international and... 7 611672020 hitps:saylordotorg github iftex_inloratonal-business/s06-01-whats-intornatonal-rade-th hile Whats International Trade Theory? (© resis section rene cot contents Next Seetio + esc county itary Aerie Advrtsge Product ie ce Comparative haontane ‘Global ste vay Heckcher hie Pot National Competitive average Cassieal or Country Based Trade Theories Mercantilsm Developed inthe sirtonth century mereantilism was oc ofthe caries efors to develop an econo theory. This theory stated theta country’s wealth was determined bythe amount ofits gold sd slver holdings. In fs simplest sense, mereanilsts believed tha county shoud incense is hong of gold and ser by promoting exports and ditenraging impor. Im other word f people in othe eounties buy more fom you (exports than they sll you (imports, thes they have to pay ‘you the difrence in gold and sliver. The objective ofeach country wasto have trade surplus, oF 4 uation wherethe alu of exports ar rate than the ale of imports, and ioavod a trade efit, ora situation where the vale of imports is rete than the vale of exports, ‘Actser look at world history frm the 15008 the te 18005 lps explain why mercantiin, flourished The 1004 marked the ise of ew naiontites, whose ule wanted to strengthen their nation by building lager rms and national insitions. y nesasingexpors and rade, these rulers were able to amass more gold and wealth for Scr countries. One way that many af these new tons promoted expats was to impose restetions on inputs Thisstratgy ial protectionism ind is til ws toy Nations expanded her wealth by using thee colonies round the word in an effort to contol more ‘wade and amass more vibes. The British colonial empire was one a the more sucessful examples i sought to incest its wealth by using raw materials rom places ranging fam what are now the Americas an Ila France, the Netheands, Portugal an Spain were als secs in build, large colonial empires tht generated extesiv weal fr their governing nations ‘Although mercaniam sone ofthe odes trade there tremaine prt of modern thinking. Coutses such s Japa, China, Singapore, Taiwan, and even Germany il favor expr and lssourage import through a orm ofneo-mercantlsm in whish the entries promote a conbiation of protection polis and resections and domestic industry eubsidis, Neacly every oun atone point or ales, has implemented some form of protectionist pole o guard key indostis ints economy, While export-oriented companies usualy suppor protections polis ‘that favor ther industries o fms oter companies and consumers are hurtby protectionism “Taxpayers pay for government subsidies of sleet export inthe frm of bigher taxes, Inport resets to higher prices for eonsemer, ho pay mone for foreign sade pode services, rc-tade advocates highlight how free trade benefits al members ofthe global community, while ‘mercantlism’'sprotetionst polls only benefit select indus a the expense ofboth consumers dole eurpanies, within anid outside ofthe indaty [Absolute Advantage 15 176, Adam Smith questioned she leading mercantile hoor of hesime a The Wealth of [Nations Adam Sit, An Inquiry into the Natur and Causes ofthe Wealth of Nations (London: W. Strahan snd T Cadel 776), Recent versions bave Been eed by scholars and economies, Smith offered anew rade theory called absolute advantage, which focused onthe ability ofa countey produce «good moe efeenty than another natin. Snith reasoned that rad between countries shouldn't be egsatd o restricted by government pole or intervention. He tate that rade should flow natura ecordng to markt fres. na hypothetical wo-eountry world, f Country A could mader%62C fim-based international. and... 2/7 611672020 Whats International Trade Theory? © resis section Q@rnwecot contents Next Seetio nother good, conld focus on speciation at well By specialization, countries woul pnerate «cienses, becuse thei nbor force would bosom more skilled by dong the sme tasks Prodstion| ‘would alo become mor efficent, bcsuse there would be an incentive to crest faster and beter production methods ta incense the apecalistion, Smith's theory reasoned that wth increased efficiencies, people in both countries would benefit and ‘rade should be encourage, He thoory stated tha nations wealth shouldnt be judged by how such gold an ser it had but eather by the ving standards ft people Comparative Advantage ‘The challengoto the absolut advantage theory was that sme counties maybe beter at producing buh gods and, therefore, ve an advantage in many areas. contrat another county my not hve any sel aboot advantages. To answer this challngs, Davi Ricardo, an Elis esonomit, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country Ahad ‘he absolute advantage inthe production of both product, speciation ad trade oul stil occur ‘between wo countre. Comparative advantage oars when county cannot produce a product more efiienty than the aber county however, it ca produce tht produc better and move efenty thn it does other ss The diffrence betwee thee two theories i eal. Comparative advantage focuses on the relative productivity tfernoes, whereas absolut advantage looks a the aol pode. 1t'sook a sepliled hypothetical example to uta the subuediference betwen these Drincpes Miranda i Wl Set ayes who change $500 perhour fr her egal secs. rns cout that Miranda can also type fster than the administrative assistants ne fie, who ae pad '4o per hour. Bea though Mzanda cleat has the chsolute advantage in bth sles, should she labo ob? No, For every hur Miranda decides Lo ype intend of olga wor, he woul be ving up $460 in income, Her productivity and income wil be highest she specalies in the higher legal services and hires the mst qualified administrative asistant, who can ype fat, lthousha liesower than Mizanda By having uth Miranda and her assistant concentrate on thee respective task, her oerll productivity a eam i higher. Ths comparative advantage. A person oF court wil specie in doing what they do elatvly better. In ey the word economy is more complex and consists of more than two countries and prodvets. rset trade may exist and goods rust be transported stored, and dstbuted However, this spite example demonstrates the ass ofthe comparative advantage theory. Heckscher-Ohlin Theory {Factor Proportions Theory) “The theories of Sth and Ricardo did't help counties determine whi product woud gle ‘ouncyan advantage oth theories aeumed that fee and open markets would lend counties and producesto determine whic goods they ould produce more efficnty Inthe est 29005, to Swedish economists, Bl Meekicher and Hetil Olin, focsod thei atetion on haw acount could ln comparative advantage by producing product that aed (gtr that were abundance inthe country. Their theory is based on a eaunty’sprdtionfctors—Iand labor, nd capt, whieh provide the funds or investment in plants and equipment. They determined thatthe cost of ny factor or esouee was a function of supply and demand. Factors that were in get supply eelaive to demand would be cheaper; factors ingest demand relative to supply woul be more expensive. The ‘hor, ls calle the factor proportions theory, sisted thit countries woul! proce and export pods hat quired resources or ators that were in great supply an, therefore, cheaper production factors. contast, counties would impor goods that reglredresourees that were short supey, but higher demand, or example, Chins and India are home to cheap, large pool flor. Hence these countres bave become the optnal lesion for labor intensive industries ke ete and garents, hitps:saylordotorg github iftex_inloratonal-business/s06-01-whats-intornatonal-rade-th hile madern%62C fim-based international and... 317 611672020 Whats International Trade Theory? (© resis section Q@rnwect contents Next Seetio Inthe eat 19508, Rusian-born American economist Waly W. Tenatie staid the US economy elosly and noted thatthe Unite Sates was abundant in capital an therefore, sould export more capita-ntensive goods, However, hs research using actual data showed the opposite the United Sates was importing moe cpita-intensive goods Aesording tothe ator proportions theory, the United Sates should have boea porting abo ‘thom. His analysis becme knowa asthe Leontief Paradox because it was the reverse of what was expected by the factor proprsons theory. In subsequent ears, cxonomist ave noted historically at that plo nie, aor in the Und tater was both valle in tad supply and more produtve intensive goods, bu insted it was actualy exporting than in many other counties ene made sense to export aborntensive goods. Over the decades, ‘many economists hve used theories an data to explain and minimize the impact ofthe paredox. However, what ems cere hat international trade complex and impacted by numerous and sfearchanging factors. Trade cant be explained neatlyby one single theory, and more importantly our understanding of nterational trade theories coninves to evolve ‘Modern or Firm-Based Trade Theories {contest to sie, countn-basd rade theories the atpory of modern, Rra-ased theories emerged afer Wold War Hand was developed in are party busines choo professors not economists. The frm based theories evolved with he growth ofthe multinational eompany (MNO). “The count-ased thors coulda adequately des the expansion of ether MNCs ot Intrsinduaty trade, which refesto trade between ta counriet f gods produced inthe sume indosry. For example Japan exports Toyota vehicles to Germany and imports Mercedes-Benz sutomobiles fram Germany. Unlike the eounty-bated theories, frn-Sased theories incorporate ther product and service actors, inching brand ané customer loyal, technology, and quality, into the understanding of trade ows Country Simiarty Theory ‘swish economist ttn Linder developed the country similarity theory 96, ste tried to explain the concept ofntuindusty trade Linders theory proposed tht consumers in ountis that sein the same or similar stage of development would hav sina preferences. I this em-ased ‘ory, Under suggested that companies rt produee fr domestic consumplon. Whea they expare sporting the companies often find that markets tht looksimilr to their domestic one in terms of castomer preferences ofr the most potential for success. Linders country simarity theory then states that most ade in manufactured gods willbe between eountis wih sir por egpta incomes and iteindustry trade lb comion This they fen meet wef ia ncestanding trade in goods wherebrand names nd prot epotatione ae fmportant factors nthe buyer

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