Theories of International Trade and International Investment
International Trade in General and its Importance
International trade is the exchange of goods and services between people, organizations, and countries.
This exchange takes place because of differences in the costs of production between countries and because it increases the economic welfare of each country by widening the range of goods and services available for consumption.
Mercantilism
An economic and cultural philosophy of the sixteenth and seventeenth centuries, reflecting the emergence of economies based on commerce.
Mercantilist Doctrines: The measures taken by Jean Baptiste Colbert (1619–1683), the greatest of all mercantilist statesmen, as finance minister to Louis XIV of France, are typical
Critics of Mercantilism: Toward the middle of the eighteenth century there developed widespread criticism of mercantilist assumptions and there were attacks on the restrictive policies that stemmed from them
Adam Smith and the Theory of Absolute Advantage
Smith was primarily concerned with the factors that led to increased wealth in a community
and he rejected the physiocrat’s view of the preeminent position of agriculture, recognizing the parallel contribution of the manufacturing industry
David Ricardo and the Theory of Comparative Advantage
David Ricardo took the logic of absolute advantage in production one step further to explain how countries could exploit their own advantages and gain from international trade.
The Heckscher–Ohlin (Factor Proportions) Model
The Main Results of the H-O Model: The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries.
Overall, the H-O factor proportions theory of comparative advantage states that international commerce compensates for the uneven geographic distribution of productive resources, that traded commodities are really bundles of factors (land, labor, and capital), and that the exchange of commodities internationally is therefore indirect arbitrage, transferring the services of otherwise immobile factors of production from locations where these factors are abundant to locations where they are scarce.
Raymond Vernon and the Product Life Cycle
Theory of Trade
He studies the whole life cycle of high-income or labor-saving products through this point of view: the invention of a new product, the maturing product, and the standardized product, each stage implying a different type of trade.
Porter’s Diamond of National Advantage
Product Cycle and Product Life Cycle: The purpose of the following section is to make a distinction between the product cycle and product life cycle concepts, to clarify the relationship between the two, and to redefine the international product life cycle (IPLC).
The IPLC can be defined as market life span stages the product goes through in international markets sequentially, simultaneously, or asynchronously
Factor conditions refer to inputs used as factors of production—such as
labor, land, natural resources, capital, and infrastructure.
Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers
A set of strongly related
and supporting industries is important for firms to be competitive.
Porter’s theory states that if the elements
in the diamond are increasingly present, trade increases.