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INTERNATIONAL TRADE & INVESTMENT THEORY, are usetul in describing…
INTERNATIONAL TRADE & INVESTMENT THEORY
3.1 INTERNATIONAL TRADE
Trade may takenplace between individuals, firms,
not-for-profit organizations or other forms of associations
International trade occurs when bothparties to the transactiom who happen to reside in two different countries, believe they benefit from the voluntary exchange
3.2 CLASSICAL COUNTRY-BASED
TRADE THEORIES
Mercantilism
i. A country's wealth is measured by its holdings of
gold and silver
ii. A country's goal should be to enlarge holdings of
gold and silver by promotine exports and discouraging imports
iii. The philosophy was popular to some because it
enabled a country to expand its borders, because export-oriented manufacturers benefited from policies such as subsidies and tax breaks that encouraged exports and because domestic manufacturers were protected from imports.
**
DISADVANTAGES
Confuses the acquisition of treasure
with the acquisition of wealth
Weakens the country because it robs
individuals of the ability to trade freely
and to benefit from voluntary exchanges
Forces countries to produce products it
would otherwise not in order to
minimize imports
Absolute Advantage Theory
Export those goods and services for which a
country is more productive than
other countries
Import those goods and services for which other
countries are more
productive than it
Comparative Advantage
-One is better off specializing in what one does
relatively best
-Produce and export those goods and services one
is relatively best able
produce
-Buy other goods and services from people who are
better at producing
Relative Factor Endowment
-Heckscher-Ohlin Theory
-Factor endowments vary among countries. Goods
differ according to the types
of factors that are used to produce them
-A factor endowment represents how many
resources a country has at its
disposal to be utilized for manufacturing-resources
such as labor, land
money, and entrepreneurship.
3.3 MODERN FIRM-BASED
TRADE THEORY
The firm-based theories developed after World War II
Country Similarity Theory
The concept of intraindustry trade Linder's theory
proposed that consumers in countries that are in the
same, similar stage of development would have similar
preferences.
-Explains the phenomenon of intra-industry trade.
Trade between two countrie of goods produced by the
same industry
International Product Life Cycle
Raymond Vernon, aHarvard Business School
professor developed in the produci
life cycle theory in the 1960s.
-The theory, onginating in the field of markeling
sialed ihat a product life cycle
has three distinct stages:
1) new product
2) maturing product
3) standardized product
3.4 INTERNATIONAL INVESTMENT
THEORY
Ownership Advantage Theory
This theory suggests that a firm owning a valuable
asset that creates a
competitive advantage domestically can use that
advantage to penetrate
foreign markets through FDI
The asset could be a superior technology, a wellknown brand name or
economies of scale
Internalization Theory
-This theory relies on the concept of transaction costs
-Transaction costs are costs of entering into a
transaction, those connected
to negotiating, monitoring and enforcing a contract
-FDI is more likely to occur when transaction costs
with a second firm are high
Electic Theory (Dunning)
This theory combines ownership
advantage, location advantage, and
internalization advantage to form a
unified theory of FDI
are usetul in describing patterns of trade in
differentiated goods those such as automobiles,
consumer electronics, and personal care products,
forwhich brand name is an important component of the
customer's purchase decisio