International Trade

Dr. Shereen Ahmed Abdallah

 Chapter 1
part 2
International Trade Theories
MAIN POINTS :
1. Overview
2. Mercantilism
3. Absolute Advantage
4. Comparative Advantage
5. Heckscher-Olin Theory
6. New Trade Theory: Porter's diamond
 New Classical theory: Heckscher-Ohlin theory
Swedish economists Heckscher and Bertil Ohlin put
forward a different explanation of comparative
advantage. They argued that:

(1)comparative advantage arises from

differences in national factor endowments. By
factor endowments they mean the extent to
which a country is endowed with such
resources as land, labor, and capital.
 (2)Nations have varying factor
endowments, and different factor
endowments explain differences in
factor costs. The more abundant a
factor, the lower its cost.
 (3)countries will export those goods
that make intensive use of factors
that are locally abundant, while
importing goods that make intensive
use of factors that are locally
scarce. Thus, this theory attempts to
explain the pattern of international
trade that we observe in the world
economy.
(4)Like Ricardo's theory, Heckscher-Ohlin
theory argues that free trade is beneficial.

(5) Unlike Ricardo's theory, however, the

Heckscher-Ohlin theory argues that the
pattern of international trade is determined
by differences in factor endowments,
rather than differences in productivity.
3-New Trade Theory: National competitive advantage: Porter's
diamond
Michael Porter published the results of an
intensive research effort that attempted to
determine why some nations succeed and others
fail in international competition.

(1) Porter's work was driven by a belief that

existing theories of international trade told only
part of the story.
 (2)ForPorter, the essential
task was to explain why a
nation achieves international
success in a particular industry?
 (3)Related questions cannot be
answered easily by the Heckcher-
Olin theory. The theory of
comparative advantage would say
that a country excels in the
production and export of certain
industry because it uses its resources
very productively in these industries.
 (4)Porter
theorizes that four
broad attributes of a nation
shape the environment in
which local firms compete,
advantage (Figure 1-3).
 and these attributes promote or impede the creation of
competitive advantage (Figure 1-3).
Figure 1-3: Determinants of national competitive advantage: Porter diamond
These attributes are:
 (a)Factor endowments, a nation's position in
factors of production such as skilled labor or
the infrastructure necessary to compete in a
given industry;
 (b)Demand conditions, the nature of home
demand for the industry's product or service;
 (c)Relating and supporting industries, the
presence or absence of supplier industries and
related industries that are internationally
competitive;
 (d)Firm strategy, structure, and rivalry, the
conditions gover-ning how companies are
created, Porter speaks of these attri-butes as
constituting the diamond.
 (5)He argues that firms are most likely
to succeed in industries or industry
segments where the diamond is most
favorable.
 (6)The diamond is a mutually
reinforcing system. The effect of one
attribute is contingent on the state of
others.
 (7) Porter argues favorable demand
conditions will not result in competitive
advantage unless the state of rivalry is
sufficient to cause firms to res-pond to
them.
 (8) Two additional variables can influence
the national diamond in important ways:
chance and government. Chances events,
such as major innovations, can reshape
industry structure and provide the
opportunity for nation's firms to supplant
another's. Government, by its choice of
policies, can detract from or improve
national advantage.