International Trade

• Mankind has traded for thousands of years

• International trade creates jobs, business
opportunities for entrepreneurs
• Greatest volumes of trade occur among
economically advanced nations
• Dangers of trade dependency
Trade terminology
• Government intervention
• Protectionism
• Self-sufficiency
• Trade disputes, wars
• Retaliation
International Trade Theories
• Mercantilism: The oldest trade theory(1500s)
• Accumulation of national wealth (gold) by
encouraging exports, and discouraging
imports
• Three pillars:
– Government intervention
– Trade surplus
– Colonialism
Flaws of Mercantilism
• Doomed to fail (at least in the long run):
• Restricting imports would lead to poverty of
trading partners, eventually crippling their
economy, and making them unable to
participate fully in trade
• Also accumulation of wealth at home would
lead to inflation, raising prices
• Eventual elimination of trade surplus
Zero-Sum, and Positive-sum game
• Mercantilism based on Zero-Sum game:
limited wealth, one’s gain only possible at the
expense of another
• Competing theory, Positive-Sum game: Trade
can be beneficial for both parties
• Today most economists dismiss Mercantilism,
and zero-sum game
Absolute and comparative advantage

• Absolute advantage: Ability of a nation to

produce a good more efficiently than any
other (By Adam Smith, 1770s)
• Every nation should focus on industries they
are most efficient/productive at.
• Trade goods and services with other nations
(who have absolute advantage in other fields)
Absolute and comparative advantage
• Comparative advantage: Inability of a nation to
produce a good more efficiently than other
nations but an ability to produce that good
more efficiently than it does any other good (By
British economist, David Ricardo, 1817)
• An expansion on the Absolute advantage theory
• Both theories recommend specialization and,
trade
Factor Proportions Theory
• By Swedish economists Heckscher, and Ohlin,
early 1900s:
• Nations produce and export goods that
require resources (factors) that are abundant
• Shifting the focus from labor productivity, (as
in the case of absolute, and comparative
advantage), to all factors of production
(labor, capital, natural resources)
International Life Cycle Theory
• By Raymond Vernon (1960s)
• Studies and explains stages in the life of various
products (New, mature, and standardized product
stages)
• First: Local production for local consumption
• Then: Exports as foreign demand develops
• Next: Foreign investment to cut costs
• Finally: Exporting back to country of origin!
• Example: Nike shoes, Iphone, etc.
New Trade Theory
• 1970s, and 1980s by Paul Krugman
• Government should intervene to support
promising (especially infant) industries that
can become strong international players
• Economies of scale
• First-mover advantage
• Specialization
National Competitive Advantage
• Theory addresses the question why certain
countries develop competitive advantage
over others in certain fields
• The ability of a nation’s industries to
innovate, and upgrade
• Government playing a critical role
• Four elements forming the basis of national
competitiveness (The diamond)
National Competitive Advantage
(Porter’s diamond)
1. Factor conditions:
- Basic factors: labor, capital, resources,
geography, etc.
- Advanced factors: Infrastructure, education,
R&D, Skilled labor, etc.
2. Demand conditions:
- Local demand necessitates growth of certain
industries (ex: Hockey equipment in Canada)
National Competitive Advantage
(Porter’s diamond)
3. Related and supporting industries:
- Presence of suppliers, similar industries
4. Firm strategy, structure, and rivalry:
- Healthy competition among industry firms
- Competence of management
- Structure of the industry