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TRADE THEORIES

TOPICS TO BE DISCUSSED
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WHAT IS TRADE? WHY WE STUDY TRADE THEORY? DIFFERENT TRADE THEORIES

.WHAT IS TRADE?  Trade is nothing but Voluntary exchange of goods and services between one person/organization & another with intension of gain from such trade.

WHY WE STUDY TRADE THEORIES?    To decide what should be imported and what should be exported i.e. . Government use these theories in designing different policies. Managers use them to identify promising markets. EXIM policies of an Economy.

MERCANTAILISM   It is the first formal theory of trade. and the Country’s Goal should be to enlarge these holdings.” . According to Mercantilist Version. “A country’s wealth is measured by its holding of gold and silver.1.

Exports can be increased by providing subsidies.1. MERCANTAILISM    The Mercantilist advocates Government intervention to achieve surplus balance trade i.e. Imports can be reduced by imposing tariffs and quotas. . exports should be increased and imports should be reduced.

Government imports restrictions are paid by consumers in the form of higher taxes. Government Subsidies of exports of certain industries are paid by taxes payers in form of higher taxes.FLAWS OF MERCANTAILISM    According to Davis Hume. in the Long run. . no country could sustain a surplus on the balance of trade.

He advocates free trade to encourage a country’s wealth. . Adam Smith says that trade is a Zero Sum game.2. ABSOLUTE ADVANTAGE THEORY     This theory is proposed by Adam Smith. the basic argument by Adam smith was Countries differ in their ability to produce goods efficiently.

ABSOLUTE ADVANTAGE THEORY   This Theory answered a Question that. “ What goods and services should be exported and imported?” According to this Theory.” A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.” .2.

” . ABSOLUTE ADVANTAGE THEORY   Therefore Smith says that.” Smith says that. “Global efficiency increases through free trade.2. ”A country should never produce that product at home which it can buy from some other country at comparatively low cost.

The concept of opportunity cost is introduced in this theory.3. This theory explains that what happens when one country has an absolute advantage in the production of all goods? . COMPARATIVE ADVANTAGE THEORY    This theory is given David Ricardo.

A country which have absolute advantage in production of all goods can specialize in the production of those goods that the country produces most efficiently & buy those goods that it produces less efficiently from other countries.3. COMPARATIVE ADVANTAGE THEORY   David Ricardo showed that such a country may still derive benefits from International Trade. .

“What determine the product for which the country will have comparative advantage?” . FACTOR PROPORTION THEORY     This theory is given by Eli Heckscher and Bertil Ohlin. This theory tells that.4. This theory is also known as Factor Endowment Theory. So this theory is also known as HO Theory (Heckscher – Ohlin.

“Factor Endowment (types of resources) varies from country to country. Goods differ according to the types of factors that are used to produce them. Difference in factor endowment leads to difference in factor costs. FACTOR PROPORTION THEORY    According to Heckscher and Ohlin. .4.

abundance of unskilled labour US – abundance of capital China – abundance of labour Australia & Canada – abundance of land      .4. Ex: Saudi Arabia-abundance of crude oil reserves India . FACTOR PROPORTION THEORY  According to HO Theory. “A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance.

PRODUCT LIFE CYCLE THEORY   This theory was developed in 1960s by Raymond Vernon of the Harvard Business School. According to him. Location of the production shifts as products move through their life cycle. .5.

PRODUCT LIFE CYCLE THEORY  There are 4 stages in Product Life cycle:    Introductory Stage Maturing Stage Standardized product Stage Declining Stage .5.

In this stage. Companies may sell a small part of their production in foreign markets – Exports .5. PRODUCT LIFE CYCLE THEORY  INTRODUCTORY STAGE:     Also known as Innovation stage. Early production generally occurs in the domestic market. A firm develops & introduces an innovative product. Better to keep production facilities close to the markets & to the centre of decision making.

Demand of product expands domestically & abroad. Set up production unit in host country to minimize distribution cost – Internationalization of Production. Domestic production reaches its peak Foreign competitors expands productive capacity. . PRODUCT LIFE CYCLE THEORY  MATURING STAGE:    In this stage.5.

Product become more standardized & prices becomes the main competitive weapon. . Domestic production slumps. PRODUCT LIFE CYCLE THEORY  STANDARDIZED PRODUCT STAGE:    In this stage. Stiff competition from home as well as other developed countries. Production techniques are no longer exclusive & innovative.5.

Porter said that. Firm’s strategy. . PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE   This theory was given by Michael Porter in 1990 in Harvard Business School. structure & rivalry. Related & supporting Industry.6. ”Success in International Trade comes from the interaction of four elements:     Factor Conditions. Demand Conditions.

Natural resources. Infrastructure.6.  Advanced Factors: Technology. Labor. Education level of work force.” . Capital. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE  FACTOR CONDITIONS: Porter differentiated between Basic factors & Advanced factors.  Porter said.  Basic Factors: Land. “Favorable Factor conditions leads to favorable competitive conditions in the markets. etc.

6. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE  DEMAND CONDITIONS:   This represents the Consumer Demand. If the consumers are well aware then the firm has to develop high quality product & firm can compete internationally with good quality product & vice versa. .

6. of good quality. then the final product is also of good quality & the firm can compete internationally. If the input produced by supporting Industry is superior i.e. . PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE  RELATED & SUPPORTING INDUSTRY:  These are the industries which gives input to the firms & have spill over effect.

. PORTER’S THEORY OF NATIONAL COMPETITIVE ADVANTAGE  FIRM’S STRATEGY. STRUCTURE & RIVALRY:   Different Countries have different ideologies. the more pressure to produce good product & firm can compete internationally with good quality product. Therefore. Rivalry is important to develop world class product.6. The more is the rivalry.

REFRENCES  International Business  By V. Sharan .