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TRADE THEORIES

PGDIB - I


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TOPICS TO BE DISCUSSED WHAT IS TRADE?

WHY WE STUDY TRADE THEORY?

DIFFERENT TRADE THEORIES


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WHAT IS TRADE? Trade is nothing but Voluntary

exchange of goods and services

between one person/organization &another with intension of gain fromsuch trade.


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WHY WE STUDY TRADE

THEORIES? To decide what should be imported and

what should be exported i.e. EXIM

policies of an Economy.

Government use these theories indesigning different policies.

Managers use them to identifypromising markets.


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1. MERCANTAILISM It is the first formal theory of trade.

According to Mercantilist Version, Acountrys wealth is measured by itsholding of gold and silver, and theCountrys Goal should be to enlarge

these holdings.


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1. MERCANTAILISM The Mercantilist advocates Government

intervention to achieve surplus balance

trade i.e. exports should be increasedand imports should be reduced.

Imports can be reduced by imposingtariffs and quotas.

Exports can be increased by providingsubsidies.


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FLAWS OF MERCANTAILISMAccording to Davis Hume, in the Long

run, no country could sustain a surplus

on the balance of trade. Government imports restrictions are

paid by consumers in the form of highertaxes.

Government Subsidies of exports ofcertain industries are paid by taxespayers in form of higher taxes.


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2. ABSOLUTE ADVANTAGE THEORY This theory is proposed by Adam Smith.

Adam Smith says that trade is a Zero

Sum game. He advocates free trade to encourage a

countrys wealth.

the basic argument by Adam smith wasCountries differ in their ability toproduce goods efficiently.


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2. ABSOLUTE ADVANTAGE THEORY This Theory answered a Question that, What goods and services should be

exported and imported?

According to this Theory, A countryhas an absolute advantage in the

production of a product when it is moreefficient than any other country inproducing it.


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2. ABSOLUTE ADVANTAGE THEORY Therefore Smith says that, A country

should never produce that product at

home which it can buy from some othercountry at comparatively low cost.

Smith says that, Global efficiency

increases through free trade.


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3. COMPARATIVE ADVANTAGE

THEORY This theory is given David Ricardo.

The concept of opportunity cost isintroduced in this theory.

This theory explains that what happenswhen one country has an absolute

advantage in the production of allgoods?


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3. COMPARATIVE ADVANTAGE

THEORY David Ricardo showed that such a

country may still derive benefits fromInternational Trade.

A country which have absoluteadvantage in production of all goodscan specialize in the production of those

goods that the country produces mostefficiently & buy those goods that itproduces less efficiently from othercountries.


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4. FACTOR PROPORTION THEORY This theory is given by Eli Heckscher

and Bertil Ohlin.

So this theory is also known as HOTheory (Heckscher Ohlin.

This theory is also known as Factor

Endowment Theory. This theory tells that, What determine

the product for which the country willhave comparative advantage?


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4. FACTOR PROPORTION THEORY

According to Heckscher and Ohlin,Factor Endowment (types of

resources) varies from country tocountry.

Goods differ according to the types of

factors that are used to produce them. Difference in factor endowment leads to

difference in factor costs.


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4. FACTOR PROPORTION THEORYAccording to HO Theory, A country will

have a comparative advantage in

producing products that intensively useresources (factors of production) it hasin abundance.

Ex: Saudi Arabia-abundance of crude oil reserves

India - abundance of unskilled labour US abundance of capital

China abundance of labour

Australia & Canada abundance of land


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5. PRODUCT LIFE CYCLE THEORY

This theory was developed in 1960s byRaymond Vernon of the Harvard

Business School.According to him, Location of the

production shifts as products move

through their life cycle.


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There are 4 stages in Product Lifecycle:-

Introductory Stage

Maturing Stage

Standardized product Stage

Declining Stage


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INTRODUCTORY STAGE:-

Also known as Innovation stage.

In this stage, A firm develops & introduces aninnovative product.

Early production generally occurs in thedomestic market.

Better to keep production facilities close to themarkets & to the centre of decision making.

Companies may sell a small part of theirproduction in foreign markets Exports


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MATURING STAGE:-

In this stage, Demand of product

expands domestically & abroad. Domestic production reaches its peak

Foreign competitors expands productivecapacity.

Set up production unit in host country tominimize distribution costInternationalization of Production.


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STANDARDIZED PRODUCT STAGE:- In this stage, Product become more

standardized & prices becomes the maincompetitive weapon.

Production techniques are no longerexclusive & innovative.

Stiff competition from home as well asother developed countries.

Domestic production slumps.


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6. PORTERS THEORY OF NATIONALCOMPETITIVE ADVANTAGE

This theory was given by Michael Porterin 1990 in Harvard Business School.

Porter said that, Success inInternational Trade comes from theinteraction of four elements: Factor Conditions.

Demand Conditions.

Related & supporting Industry.

Firms strategy, structure & rivalry.


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FACTOR CONDITIONS:- Porter differentiated between Basic factors

& Advanced factors. Basic Factors: Land, Labor, Capital, Natural

resources, etc.Advanced Factors: Technology,

Infrastructure, Education level of work

force. Porter said, Favorable Factor conditions

leads to favorable competitive conditions inthe markets.


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DEMAND CONDITIONS:

This represents the Consumer Demand,

If the consumers are well aware then thefirm has to develop high quality product &firm can compete internationally with goodquality product & vice versa.


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RELATED & SUPPORTING INDUSTRY:-

These are the industries which gives input

to the firms & have spill over effect. If the input produced by supporting

Industry is superior i.e. of good quality,then the final product is also of goodquality & the firm can competeinternationally.


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FIRMS STRATEGY, STRUCTURE &RIVALRY:-

Different Countries have differentideologies.

The more is the rivalry, the more pressureto produce good product & firm can

compete internationally with good qualityproduct.

Therefore, Rivalry is important to developworld class product.


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REFRENCES

International Business

By V. Sharan

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