Some Loose

Ends…
Erivan White
 Exemplar 1

New Trade Theory (Krugman, 1979) suggests that in some industries two countries may have no
discernible differences in opportunity cost at a particular point in time. Who is most likely to benefit in
the long run as a consequence of a country choosing to specialise in a particular industry earlier than
others?

a) New global challengers

b) Incumbent firms
c) Least Developed Countries
d) Transition Economies

#universityofsurrey 2
Pivotal questions around internationalisation

From a national perspective:

» Why do nations trade? The following theories address this question:
Mercantilism
Factor Proportions Theory
International Product Life Cycle Theory

» How can countries enhance their competitive advantage? These theories address this question:
New Trade Theory
Porter’s Diamond Model

#universityofsurrey 3
 • The economic theory that trade generates wealth and is stimulated by
the accumulation of profitable balances, which a government should
encourage by means of protectionism. It originated in the 16th century
and was mainly used in Europe until the 18th century.
• Mercantilism, also called "commercialism,” is a system in which a country
attempts to amass wealth through trade with other countries, exporting
more than it imports and increasing stores of gold and precious metals.
It is often considered an outdated system.

What is
Mercantilism?
 Economic Growth

Jobs & Entrepreneurship

Advantages of
Mercantilism

It encourages the complete

development of all natural
resources
 It creates high
levels of
resentment

There is always a
risk of local raw
Disadvantages of
materials and
mercantilism: resources running
out

The system is
ultimately quite
inefficient
 What is factor proportions theory? Heckscher &
Ohlin (1933)
- Factor Proportions Theory is used for international trade when
two countries which could have two different commodity
frameworks have different factors of production.

- Countries with larger populations correlate to having more

labour resources.

- Countries with a large supply of capital will specialise in goods

that involve a capital intensive production

- After trading, both countries will have two types of goods at

the least cost.
Example - China and Uganda
● China - capital intensive
○ Machinery based
○ Top exports: computers, telephones and electrical transformers
○ Using less and less labour as tech advances
○ Cutting costs

● Uganda - labour intensive

○ Lack of resources (technology) - must focus on labour
○ Top exports: gold, coffee, fish and corn
○ Specializes in the production of agriculture, mining and fishing
● If they were to trade - each country would benefit from receiving lowest cost possible due to their specialization in
production

● Don’t forget the Leontief Paradox (1953)

Raymond Vernon
(1966) International Product Lifecycle Theory

● Developed by Raymond Vernon (1966):

What is New Trade
theory? 

• Started to emerge in the 1970’s,

later developed by Paul Krugman
 
• Focuses on increasing returns to
scale and network effects.
• Network effects happen when the
utility of a good or service
depends on the number of users of
compatible products.
Old Trade Theory vs New Trade Theory 

OLD

• Based on comparative advantage 

• Trade because the other country has access to resources which
they don’t. 
• This tends to be geographical location; they simply trade with
them because they don’t have access or cannot source it
themselves.
• For example, climate, a lot of fruits are grown in warmer
climates however the colder climate countries have demand for
these so will trade in order to get them.

NEW
• Based on economies of scale 
• Things can be cheaper due to the scale of the trade compared to
what it used to be. 
• Countries can be similar in abilities to produce however most
countries focus on one item to produce. 
• Brings monopolistic competition 
Returns to Scale New trade theory brings on returns to scale 
(1990)
EXAMPLE: German Car Industry

- Factor Conditions
- Existence of specialist engineering establishments
- Demand Conditions
- Strong home demand
- Autobahn
- Related and supporting industries
- Many related industries e.g. Siemens and SAP
- Firm Strategy, Structure and Rivalry:
- Rivalry between Mercedes, BMW, and VW
- Government
- Invested in education institutions & Infrastructure
16