international trade & investment lec4
TRANSCRIPT
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International Trade and Investment:
International trade theoryMuhammad [email protected]
http://www.slideshare.net/forshaf
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Indian economy
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International Trade Theories
• Mercantilism• Absolute Advantage• Comparative Advantage
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Mercantilism
• Countries should export more than they import
• Theory was famous during 1500 to 1800• Emphasis on benefit rather than
disadvantageous foreing trade• Concept of Balance of payment
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Balance of payment
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Absolute advantage
• Developed by Adam Smith “ different countries produce some goods more efficiently than other countries: hence, global efficiency can increase through free trade
• Citizen should purchase those goods which are cheaper rather than local
• Concept of free trade
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Absolute advantage…
• Smith says that if trade were unrestricted– Labor become more skilled by repetition– Labor would not waste time in switching job– Long production would provide incentive and
development of more effective working methods
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Absolute advantage…
Advantage could either natural or equiredNatural considers climate and natural resources:
Sri Lanka, Bangladesh, PakistanAcquired advantages considers technology and skill development;
Denmark silver tablewareJapan Steel, Jamaica Ice
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Comparative advantage theory(CAT)
• Advancement of Adam Smith Theory absolute advantage by David Ricardo in 1817.
• Gain from trade will occur even in a country that has absolute advantages in all products because the county must give-up less efficient output to produce more efficient output.
• Based on specialization
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CAT:An analogical example
• Example of best doctor in town who is best known for his administrative work
• country must concentrates it recources on producing the commodities it can produce most efficiently
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CAT: production possibility example
• Tea & wheat
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The Principle of Comparative Advantage: Ricardo
Before Specialization (labor hours / unit) Timber Wheat Total Western WA 25 40 65 Eastern WA 30 25 55 (units) 2 2 120 After Specialization (labor hours / unit) Total Savings Western WA 50 0 50 15 Eastern WA 0 50 50 5 (units) 2 2 100 20
Consequences:1. Trade powerfully shapes local production systems2. Specialization lowers total production costs3. And large markets allow exploitation of scale economies: “the division of
labor is governed by the size of the market” – Adam Smith 1776
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But, Transport Costs are Crucial in Determining if Trade will Occur
Before Specialization (labor hours / unit) Timber Wheat Total Western WA 25 40 65 Eastern WA 30 25 55 (units) 2 2 120 After Specialization (labor hours / unit) + Transport Costs
Total Savings
Western WA 55 0 55 10 Eastern WA 0 53 53 2 (units) 2 2 108 12
Trade Feasible in this Case
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But, Transport Costs are Crucial in Determining if Trade will Occur
Trade Not Feasible in this Case
Before Specialization (labor hours / unit) Timber Wheat Total Western WA 25 40 65 Eastern WA 30 25 55 (units) 2 2 120 After Specialization (labor hours / unit) + Transport Costs
Total Savings
Western WA 65 0 65 0 Eastern WA 0 55 55 0 (units) 2 2 120 0
Long-run reduction in transport costs has promoted more trade
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CAT: Assumptions & Limitation
• Full employment• Economic efficiency objective• Division of gain• Two countries, two commodities• Transport costs• Mobility• services
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Theory of country size
• ToAA and TCA do not deal with country -by-country differences in how much and what products will be traded through specialization.
• Difference are there
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Differences country by country
• Variety of resources• Transport costs• Size of economy and production scales
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Factor proportion theoryHeckscher theory
• Factors in relative abundance are cheaper than factors in relative scarcity
• Srilanka, Netherland, and Hong Kong• Three important characteristics:
– Land-labor relationship– Labor capital relationship– Technological complexity
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The product life cycle theory of tradeRemond Vernon
• The production location for many products moves from one country to another depending on the stage in the product’s life cycle– Stage 1: Introduction
• Innovation, production, and sales in same country• Location and importance of technology• Export and labor
– Stage 2 :Growth Stage 3: Maturity– Stage 4: Decline
• Verification and limitation of PLC theory
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Country similarity theory
• Most trade theories emphasize differences among countries in climate, factor endowment, and innovative capability
• Different type of similarities:– Economic similarity of industrial countries– Similarity of location– Cultural similarity– Similarity of political and economic interest
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Strategic Trade policy
• Countries seek to improve their trade capabilities by:– Altering condition for industries in gnernal– Targeting condition for a specific industry
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Why companies trade internationally• The porter diamond
Firm strategy structure and rivalry
Demand conditionFactor condition
Related and supporting industries
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Points and limitations of the porter diamond
• Most trade theories are based on national perspective, but decision to trade are usually made by companies
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Companies role in trade
• Strategic advantages of exports• Use of excess capacity• Cost reduction• Greater profitability• Risk spreading
• Strategic advantages of import• Cheaper supplies• Additions to product line• Reduction of risk of no supply
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Porter’s “Diamond”Factor Conditions – human, physical, capital, knowledge-based, infrastructure
Demand Conditions
Supporting IndustriesFirm Strategy, StructureAnd Competition –The importance ofAgglomerations/clusters
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Porter’s Traded Clusters
VideoRecorded ProductEntertainment EquipmentEntertainment related servicesEntertainment venuesDistribution & wholesalingMarketing & promotionRelated attractionsNews syndicatesAudio & video equipment
? NontradedEntertainment?
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Typical Cluster Representation
Source: A.J. Scott, Regional Studies, Vol. 36, no. 9, p. 966
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Typical Cluster Flow Chart
MusiciansLive PerformancesFor audiences
RecordingNo Audience
Equipment: Purchase, rental, repair, manufacture
Replaying musicAM/FM/TVWebMuzakMobile DJ’s
Training& Education
• Venues• Performance/Recording Support• Business Support• Composers
Distribution of recordings:CD’sTapes/files for broadcastFilm scoresGames, Ring-tonesMusic Heritage Organizations
Royalties & Licensing
Presenters/Producing Orgs.
From Beyers, Bonds & Wenzl study of Seattle Music Industry
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International Trade and Investment
• Explaining the theoretical basis for international trade and factor flows, including comparative and competitive advantage
• Understanding trade barriers (tariffs)• Examining the dynamics of FDI• Understanding the financing of international
trade• To appreciate trade organizations such as
GATT and WTO
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International TradeThe huge national differences in factor endowments;
Long-term shift from barter to money trade
Should be in constant $
Clear shift towardsmore production ofhigher value goods
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