These advantages in the factors of production have helped the United States become the largest and richest economy in the world. While exportoriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Sunday, December 09, 2012 51 Dr. You can use these topics for international trade, International Business Management, foreign trade presentations and seminars. Similarly, country Y also employs same number of laborers 100 laborers in production of each good in manufacturing wheat and wine; however, its production of wheat is more than the wine.
The main concept behind this theory gives the feel of holding factor proportion as well as many other international trade theories in it. The United States has ample arable land that can be used for a wide range of agricultural products. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Differences in the endowments of the factors of production. It uses 50 laborers to produce 10 units of wheat. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher.
The answers of these questions was given by David Ricardo in his theory of comparative advantage, which states that trade can be beneficial for two countries if one country has absolute advantage in all the products and the other country has no absolute advantage in any of the products. Empirical evidence is mixed on the Heckscher-Ohlin model. It typically takes the form of starting a subsidiary, acquiring a stake in an existing firm or starting a joint venture in the foreign country. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade. He stated that trade would be beneficial for both the countries if country A exports the goods, which it can produce with lower cost than country B and import the goods, which country B can produce with lower cost than it.
Sunday, December 09, 2012 63 Dr. Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Today, technology drives Globalization 3. Let us understand this theory with the help of an example. Adam Smith stated that under mercantilism, it was impossible for nations to become rich simultaneously. Jain Implications of trade theories Terms of Trade: Implications of trade theories Terms of Trade The ratio at which a country can trade domestic products for imported products is the terms of trade.
Jain Powerful Suppliers and Buyers: Powerful Suppliers and Buyers The power of each important supplier or buyer group depends on a number of characteristics of its market situation and on the relative importance of its sales or purchases to the industry compared with its overall business. Subsequent literature centered more on firm-specific advantages owing to product superiority or cost advantages, stemming from economies of scale, multi-plants economies and advanced technology, or superior marketing and distribution. A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. Even though the view is old but the roots of modern thinking towards the financials is deeply embedded in it. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: 1 new product, 2 maturing product, and 3 standardized product. People or entities trade because they believe that they benefit from the exchange.
So, export of a country should mainly consist of the product that is abundantly available in it, and imports should count the products that are in high demand. By raising the relative wealth of foreign firms, a depreciation of the real exchange rate could make it easier for those firms to use retained profits to finance investment abroad and to post a collateral in borrowing from domestic lenders in the host country. Country Similarity Theory Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Jain Sunday, December 09, 2012 65 Arguments for Restricting Trade: Arguments for Restricting Trade Arguments for restricting trade cont. The four determinants are 1 local market resources and capabilities, 2 local market demand conditions, 3 local suppliers and complementary industries, and 4 local firm characteristics.
From another point of view, if two countries specialize in entirely different products, then they can quickly increase their influence in their localities by having trade with each other by creating absolute advantages at both ends. The situation of both the countries after trade is shown in Table-6: It can be observed from Table-6 that both the countries have gained from trade. This strategy is calledprotectionism and is still used today. The capacity of one nation to produce more of a good with the same amount of input than another country. What Are the Different International Trade Theories? He perceived these advanced factors as providing a country with a sustainable competitive advantage. Sunday, December 09, 2012 27 Dr. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country.
In contrast, another country may not have any useful absolute advantages. The concept of international trading is not limited to, just sending and receiving products and services and putting all of the profits in the pockets. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. A person or a country will specialize in doing what they do relatively better. Jain Conclusions: Conclusions The key to growth -- even survival -- is to stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyers, suppliers, and substitute goods.
Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade. The theories covered in this chapter are simply that—theories. Several new products are introduced in several developed countries simultaneously 6. This data is represented in Table-5: Now, country X exchanges 14 units of wine with 14 units of wheat produced by country Y. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. An example can be used to prove this theory.