BMS933

INTERNATIONAL
BUSINESS
Week 2
Trade Theories

Bochra (Boushra) Idris

BSc. MSc. MSc. MRes. PhD.
1
Overall Learning Objectives – Week 2

■ Understanding Trade Theories

■ Develop a knowledge why countries trade.

■ Understand trade patterns.

2
Outline
■ Mercantilism
Interventionist Theories
■ Neo-Mercantilism

■ Absolute Advantage
Free-Trade Theories
■ Comparative Advantage

■ Hechscher-Ohlin Theory

■ Leontief Paradox theory

■ Vernon’s Product Life Cycle Theory (PLC)

■ The Diamond of National Competitive Advantage (Porter’s Diamond)

Dynamic
Theories
■ New Trade Theory (NTT).
3
International Trade Theories
■ Help to explain:

– Why countries Trade?

– What explains Trade patterns?

– What are the gains from Trade?

– What is the role of Government?

– Where to locate your firm?

4
Interventionist Theories
■ Mercantilism:

– It is the oldest trade theory (1500 to 1800).

– The wealth of a country was measured in terms of its Gold holdings.

– Export more than import.

– Trade is a zero sum game.

– Government intervention to achieve Trade Surplus.

5
Interventionist Theories
■ Mercantilism

6
Interventionist Theories
■ Neo-Mercantilism:
– A term started to emerge

– Refers to economist or people who believe that Trade Surplus is very good.

In the old days, when we won a war, to the

victor belonged the spoils.”
7
Interventionist Theories - Criticism
■ Gains from trade?

– Do countries gain from international trade?

– Where the gains come from?

■ Structure of trade?

– Which goods are exported and which are imported by each trading country?

– Laws that govern flow of trade?

■ Terms of trade?

– What prices are the exported and imported goods exchanged?