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Theories of International Trade and International Investment - Coggle…
Theories of International Trade and International Investment
International Trade in General and its Importance
International Trade
People
Organizations
Exchange of goods and services.
Countries
Importance
Increases the economic welfare of each country by widening the range of goods and services available for consumption.
Countries are Linked
Activities
Commercial Events
Cultural
Social
Political
Mercantilism
Governments should establish economic policies that promoted exports and discouraged imports.
Monarchs sought to consolidate and extend their own power, and to enhance the power and prestige of their states.
Is an economic and cultural philosophy.
Adam Smith and the Theory of Absolute Advantage
Absolute Advantage
Country’s advantage would be either natural (climate and natural resources) or acquired (technology and skills) in the production of goods.
Each country would specialize in a product for which it was uniquely suited.
A country can produce some goods more efficiently than other countries.
David Ricardo and the Theory of Comparative Advantage
Comparative Advantage
A comparative advantage gives companies the ability to sell goods and services at prices that are lower than their competitors, gaining stronger sales margins and greater profitability.
Trade will take place where cost differences exist.
The Heckscher-Ohlin Model
The H-O Theorem
Capital-abundant countries will export capital-intensive goods while the labor-abundant countries will export labor-intensive goods.
The H-O factor proportions theory of comparative advantage states that international commerce compensates for the uneven geographic distribution of productive resources.
The pattern of trade between countries based on the characteristics of the countries.
Raymond Vernon and the Product Life Cycle Theory of Trade
Product Life Cycle Theory of Trade
Multinational corporations typically develop new products in their home countries, utilizing local resources and technologies to respond to local market needs, and then diffuse the innovations around the world step by step.
Foreign production becomes competitive in exports markets
Foreign production starts
Import competition begin
United States exports strength
Porter’s Diamond
Demand Conditions
Sophisticated domestic market is an important element in producing competitiveness.
Related and Supporting Industries
Important for firms to be competitive. This includes suppliers and related industries.
Factor Conditions
Inputs used as factors of production such as labor, land, natural resources, capital, and infrastructure.
Firm Strategy, Structure, and Rivalry
Structure
Management styles vary among industries.
Rivalry
Intense competition spurs innovation.
Strategy
Capital Markets allow Individuals career choice