International

Trade
Theories
Presenter: Abdul Majid
Roll no. 2035101
MBA-36
 International Trade
• International trade theories are simply different theories to explain
international trade.
• Trade is the concept of exchanging goods and services between two
people or entities.
• International trade is the exchange of goods and services between
countries.
• The importance of international trade was recognized early on by political
economists such as Adam Smith and David Ricardo.
 Imports and Exports
• A product that is sold to the global market is called an export.
• A product that is bought from the global market id an import.
• Imports and exports are accounted for in the current account section in a
country’s balance of payments.
• Trading globally gives consumers and countries the opportunity to be
exposed to goods and services not available in their own countries, or
more expensive domestically.
 Theory of Mercantilism
• This is the early thinking theory. A trade theory prevailed during 16th to
19th centuries.
• The wealth of a nation is measured based on its accumulated wealth in
terms of gold and silver.
• Trade theory holding that nations should accumulate financial wealth,
usually in the form of gold (forget things like living standards or human
development) by encouraging exports and discouraging imports.
 Theory of absolute advantage
• Adam Smith: Wealth of Nations (1776) argued:
• Capability of one country to produce more of a product with the same
amount of input than another country . A country should produce only
goods where it is most efficient, and trade for those goods where it is not
efficient.
• Trade between countries is, therefore, beneficial.
• Assumes there is an absolute balance advantage nations.
• Destroys the mercantilist idea since there are gains to be had by both
countries party to an exchange.
• Questions the objective of national governments to acquire wealth through
restrictive trade policies.
• Measures a nation’s wealth by the living standards of its people.
 Theory of comparative advantage
• The most basic concept in the whole of international trade theory is the
principle of comparative advantage, first introduced by David Ricardo in
1817.
• The principle of comparative advantage states that a country should
specialize in producing and exporting those products in which is has a
comparative, or relative cost, advantage compared with other countries
and should those goods in which it has a comparative disadvantage.
 Theory of comparative advantage
• Law of comparative advantage refers to the ability of a country to produce
a particular good or service at a lower opportunity cost than another party.
• Assumptions and limitations
• Driven only by maximization of production and consumption.
• Only 2 countries engaged in production and consumption of just 2 goods.
• Another serious defect is that transportation costs are not considered in
determining comparative cost differences.
 Huckster- Ohlin theory
• This theory developed by the Bertil ohlin: between 1944 and 1967, he was the
leader of the Swedish Liberal Party, and between 1944 and 1945 he was also
the Secretary of trade of the Swedish Govt.
• This model evaluates the equilibrium of trade between two countries that have
varying specialties and natural resources. The model explains how a nation
should operate and trade when resources are imbalanced throughout the world.
• The model isn’t limited to commodities, but also incorporates other
production factors such as labor.
 Product life cycle theory
• Product life cycle theory is an economic theory that was developed by
Raymond in response to the failure of Heckster- ohlin model, to explain
the observed pattern of international trade.
• The theory suggests that early in a product’s life cycle all the parts and
labor associated with product come from the area where it was invented.
After the product becomes adopted and used in the world markets,
production gradually moves away from the point of origin.
 PLCT
• Economist divided products into three categories based on their stage in
the product life cycle and how they behave in the international trade
market:
• New product
• Maturing product
• Standardized product
 PLCT
• There are five stages in a product’s life cycle in respect to the product life
cycle theory:
• Introduction
• Growth
• Maturity
• Saturation
• Decline
 New trade theory
• New trade theory is a collection of economic models in international trade
which focuses on the role of increasing returns to scale and network
effects, which were developed in the late 1970s and early 1980s.
• New trade theory suggests that the ability of firms to gain economies of
scale(unit cost reductions associated with large scale of output) can have
important implications for international trade.
THANK YOU