International Trade Theories

Presented by

N.Keerthi (128936)
Narahari Sai G (128937)
Nishanth Singh (128938)
Valliappan (128939)
 What is international trade?

• International trade is the exchange of capital,

goods, and services across international
borders or territories.
• Trade mainly have two components EXPORTS
and IMPORTS.
 Why trade theories?

 The first purpose of trade theory is to explain observed

trade. That is, we would like to be able to start with
information about the characteristics of trading
countries, and from those characteristics deduce what
they actually trade, and be right. That’s why we have
a variety of models that postulate different kinds of
characteristics as the reasons for trade.

 Secondly, to know about the effects of trade on the

domestic economy.

 A third purpose is to evaluate different kinds of policy.

 Types of trade theories

 Interventionist
Mercantilism
Neo mercantilism
 Free- trade theories
Theory of Absolute advantage
Comparative Advantage
Theory of trade patterns

 Porter Diamond theory

 Specialization theory

 Theory of country Size

 Factor proportion theory

 Country similarity theory

What the major trade theories Do
and Don’t discuss
 Mercantilist Theory

Mercantilist theory proposed that a country

should try to achieve a favorable balance of trade
(export more than it imports)
Mercantilism was at its height in the 17th and
18th centuries. The term Merchantilism was
coined by the Marquis de Mirabeau in 1763, and
was popularised by Adam Smith in 1776.
Neomercantilist policy also seeks a favorable
balance of trade, but its purpose is to achieve
some social or political objective
Mercantilism: mid-16th century
 A nation’s wealth depends on accumulated
treasure
 Gold and silver are the currency of
trade
 Theory says you should have a trade surplus.
 Maximize export through subsidies.
 Minimize imports through tariffs and quotas
 Flaw: restrictions, impaired growth
 Theory of Absolute Advantage

 Suggests specialization through free trade

because consumers will be better off if they can
buy foreign-made products that are priced more
cheaply than domestic ones

 A country may produce goods more efficiently

because of a natural advantage or because of an
acquired advantage
 Adam Smith: Wealth of Nations (1776) argued:
 Capability of one country to produce more of a
product with the same amount of input than another
country
 A country should produce only goods where it is most
efficient, and trade for those goods where it is not
efficient
 Trade between countries is, therefore, beneficial
 Assumes there is an absolute balance among nations
Theory of Comparative Advantage

 Also proposes specialization through free trade

because it says that total global output can
increase even if one country has an absolute
advantage in the production of all products
Theories of Specialization

Both absolute and comparative advantage

theories are based on specialization
 Product Life Cycle (PLC) Theory

I. Companies will manufacture products first in

the countries in which they were researched
and developed, almost always developed
countries
II. Over the product’s life cycle, production will
shift to foreign locations, especially to
developing economies as the product reaches
the stages of maturity and decline
Life Cycle of the International Product
 The Porter Diamond theory

Four conditions as important for competitive

superiority:
1) demand conditions
2) factor conditions
3) related and supporting industries
4) firm strategy, structure, and rivalry
 Limitations of the Porter Diamond
Theory

 Capital and labor move internationally to gain

more income and flee adverse political situations
 Although international mobility of production
factors may be a substitute for trade, the mobility
may stimulate trade through sales of
components, equipment, and complementary
products
 Trade Pattern Theories

 How much a country will depend on trade if it

follows a free trade policy
 What types of products countries will export and
import
 With which partners countries will primarily trade
 Theory Of Country Size
 Countries with large land areas are apt to have
varied climates and natural resources.

 They are generally more self-sufficient than

smaller countries.

 Large countries’ production and market centers

are more likely to be located at a greater distance
from other countries, raising the transport costs
of foreign trade
 Factor-Proportions Theory
 A country’s relative endowments of land, labor,
and capital will determine the relative costs of
these factors

 Factor costs will determine which goods the

country can produce most efficiently
Composition of Worldwide trade
 Country-similarity Theory

 Most trade today occurs among high-income

countries because they share similar market
segments and because they produce and
consume so much more than emerging
economies
 Much of the pattern of two-way trading partners
may be explained by cultural similarity between
the countries, political and economic agreements,
and by the distance between them
The Relationship between Trade and
Factor Mobility
 Capital and labor move internationally to gain more
income and flee adverse political situations

 Although international mobility of production factors

may be a substitute for trade, the mobility may stimulate
trade through sales of components, equipment, and
complementary products
References:

1) www.cis01.central.ucv.ro/iba/files/int_ec3.pdf
2)www.worldbank.org
3)www.uwf.edu/rsjoland/WEBPOSTEDFILES/6International
TradeTheory2004.pdf
4)www.en.wikipedia.org/wiki/International_trade
Thank You