INTERNATIONAL

BUSINESS

Sachin Kumar (Ph.D.)

 Learning Outcome

• Comprehend various international

trade theories
 OBJECTIVES

STRATEGY

MEANS OF OPERATIONS
• Importing & exporting goods and
services (trade)
• Transferring production factors,
such as labor and capital
internationally

Country A Connected economically Country B

International Operations & Economic Connections

Why do managers & policy makers rely on international trade
theories?
 Trade Theories

Trade theory helps managers and government

policymakers focus on these questions:
What products should we import and export?
How much should we trade?
With whom should we trade?
 Trade Theories (Interventionist)
Some trade theories prescribe that government should
influence trade patterns. It includes theories like

Mercantilism

Neomercantilism
 Free Trade Theories
Some trade theories prescribe approach of no
governmental intervention. It includes theories like

Absolute advantage
Comparative advantage
 Mercantilism
• According to mercantilism, countries should export
more than they import (run a trade surplus).

• It happens with the help of government policies and

the concept of balance of trade.
 Neomercantilism

A country that practices neomercantilism attempts to run

an export surplus to achieve a social or political objective.
 Theory of Absolute Advantage
• Absolute advantage holds that different countries
produce different things more efficiently than others
and that consumers should not have to buy
domestically produced goods when they can buy them
more cheaply from abroad.

• It can be either natural advantage or acquired

advantage.
 Theory of Absolute Advantage
Specialization increases efficiency because:

• Labor skills improve,

• Less time is lost by not switching production,

• It incentivizes better working methods.

 Theory of Comparative Advantage

It suggest that global efficiency gains may still result

from trade if a country specializes in what it can produce
most efficiently- regardless of other countries’ absolute
advantage.

https://www.youtube.com/watch?v=PP5ceCLTEpg&list=P
LLy_2iUCG87AV6gOQl5-GtZJlfLoCBGHb&index=8
 Theory od Specialization: Assumptions and Limitations

• Full Employment
• Only Two Countries and Two Goods
• Economic Efficiency (Sole Motive)
• Equitable Division of Gains and Specialization
• No Transportation Cost
• Same Price
• Mobility
• Constant Cost or Returns
THANK YOU

Sachin Kumar (Ph.D.)