International

Business
Lecture No,20
By
Dr.Shahzad Ansar

An Overview of Trade
Theory
Free Trade occurs when a
government does not attempt
to influence, through quotas or
duties, what its citizens can
buy from another country or
what they can produce and sell
to another country.

An Overview of Trade
Theory
The Benefits of Trade allow a
country to specialize in the
manufacture and export of
products that can be
produced most efficiently in
that country.

An Overview of Trade
Theory
The Pattern of International
Trade displays patterns that
are easy to understand (Saudi
Arabia/oil or China/crawfish).
Others are not so easy to
understand (Japan and cars).

An Overview of Trade
Theory
The history of Trade Theory and
Government Involvement
presents a mixed case for the
role of government in promoting
exports and limiting imports.
Later theories appear to make a
case for limited involvement.

The pattern of
International Trade
Theory of David Ricardo
provides Intellectual
basis for modern
concept of unrestricted
Free Trade

The Theory of free

Trade
The theory of Ricardo
was further refined by
Eli Heckscher and
Bertil Ohlin,two
Swedish Economists

 Trade & Government

policy

Mercantilism: mid-16th
century
A nations wealth depends
on accumulated treasure
Gold and silver were the
currency of trade.
Theory says you should
have a trade surplus.

Mercantilism
Maximize exports
through
subsidies.
Minimize imports through
tariffs
and
quotas.
Flaw: zero-sum game

Mercantilism
The Mercantilism and
David Hume(1752)
Hume says in the long run
no country could sustain a
surplus in the balance of
trade

A Zero Sum Game

A

Gain by one Country is

Loss by other
or

A positive-Sum Game
A situation in which all
countries can benefit

The Work Of Jarl

Hagelstam
The

developed or
developing countries still
ask for liberalization in
areas where they are
strong

 Absolute Advantage

Absolute Advantage
The case of UK &
France

Ghana Versus Korea

An absolute advantage
justification in growing
rice and cocoa

10

A
Figure 4.1

Cocoa

15

20

The Theory of Absolute

Advantage
G

B
K

G
0

10

Rice

15

20