Chapter 5 - Theories of International Trade.

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Chapter 5 - Theories of International Trade.

• Theory of Absolute Advantage (Adam Smith 1776) -
  Each country should specialize in the production
  and export of that good which it produces most
  efficiently, with the fewest labor-hours.

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Theory of comparative advantage (David Ricardo
1819).

• Theory of comparative advantage (David Ricardo
  1819) - Even if one country was most efficient in
  the production of two products, it must be
  relatively more efficient in the production of
  one good. It should then specialize in the
  production and exportation of that good in
  exchange for the importation of the other.

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Classical trade theory.

• Division of labor.
• Comparative advantage.
• Gains from trade.

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Theory of factor proportions.

• A country that is relatively labor (capital)
  abundant should specialize in the production and
  export of that product which is relatively labor
  (capital) intensive.

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Other theories.

• Leontief Paradox - the U.S. was exporting more
  labor intensive products than it was importing -
  Measurement error, domestic equivalents, skilled
  and unskilled labor.
• Overlaping product ranges theory - marketers seek
  similar markets.
• Product life cycle theory - as the product
  matures it becomes more labor intensive and the
  comparative advantage shifts to different
  countries.

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Competitive advantage of nations (Michael
Porter).

• A nations competitiveness depends on the
  capacity of its industry to innovate and upgrade.
  Companies gain competitive advantage because of
  pressure and challenge. They benefit from
  having strong domestic rivals, aggressive
  home-based suppliers and demanding local
  customers.
• Differences in national values, culture, economic
  structures, institutions, and histories all
  contribute to competitive success.

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Competitive advantage of nations (Michael
Porter).

• Factor conditions - Ability to innovate, upgrade,
  and deploy its factors.
• Demand conditions - highly competitive and
  demanding local markets.
• Related and supporting industries - close working
  relationships, proximity, and timeliness.
• Firm, strategy, structure and rivalry -
  appropriate and flexible conditions for the
  situation.

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Reasons for Trade Barriers

• Protection of an infant industry.
• Protection of the home market
• Foreign Exchange Requirements.
• Capital accumulation.
• Maintenance of Standard of living and real wages
• Conservation of Natural Resources.

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Reasons for Trade Barriers (Contd.).

• Industrialization of a Developing Nation.
• Maintenance of employment and reduction of
  unemployment.
• National Defense
• Increase of business size.
• Self-reliance
• Retaliation, bargaining, balance of trade etc.

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In Most Cases Protectionism results in

• Consumers paying a higher cost
• Industries getting stagnant and inefficient
• Lower quality goods for higher prices.
• Inflation.
• Lower standard of living.
• Retaliation by trading partners.