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INTERNATIONAL TRADE

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Since independence Sri Lanka has looked to ... A - Mercantilism: mid-16th century, principal assertion was that gold and silver ... Neo-Mercantilism ... – PowerPoint PPT presentation

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Title: INTERNATIONAL TRADE


1
INTERNATIONAL TRADE
2
Case Sri Lankan Trade
  • Since independence Sri Lanka has looked to
    international trade policy as a means of helping
    to solve such problems as
  • a) shortage of foreign exchange
  • b) overdependence on one product and one market
  • c) insufficient growth of output and employment
  • Import Substitution Strategic Trade Policy
  • Development of exports of nontraditional Products
  • Identifying the most likely competitive
    Industries
  • Manufacturing has grown as a portion of total
    Exports

3
  • I - INTRODUCTION
  • Trade theory focuses on three basic questions
  • a) What products to import and export?
  • b) How much to trade?, and
  • c) With whom to trade?
  • Some theories explain trade patterns that exist
    in the absence of governmental interference, and
    some theories explain what governmental actions
    should strive for in trade.

4
  • II - TRADE THEORY AND GOVERNMENT POLICY

A - Mercantilism mid-16th century, principal
assertion was that gold and silver were the
mainstays of national wealth and essential to
vigorous commerce. Main tenant it was
in a countrys best interest to maintain a trade
surplus, a country would increase its national
wealth and prestige Autarky
Trade was viewed as a zero-sum-game
David-Hume Neo-Mercantilism
5
B Absolute Advantage a country has an absolute
advantage in the production of a product when it
is more efficient than any other country in
producing it. Countries should
specialize in the production of goods for which
they have an absolute advantage and then trade
these goods for goods produced by other
countries. Basic Argument you should
never produce goods at home that you can buy at
lower cost form other countries.
Absolute advantage exists potential for gains
in trade Adam Smiths 1776 An
Inquiry Into the Wealth of Nations. Introduced
the concept of specialization Trade
is not a zero-sum game situation
6
1. Natural Advantage a country may have a
natural advantage in producing a product because
of climatic conditions, access to a certain
natural resources, or availability of an abundant
labour force 2. Acquired Advantage industrial
policy
C Comparative Advantage In his 1817 book
Principles of Political Economy, David Ricardo
says that it makes sense for a country to
specialize in the production of those goods that
it produces most efficiently and to buy the goods
that it produces less efficiently from other
countries, even if it could produce them more
efficiently itself. In other words, nations
should produce those goods for which they have
the greatest relative advantage
7
  • According to David Ricardo potential world
    production is greater with unrestricted free
    trade than it is with restricted trade.
  • Consumers in all countries can consume more if
    there are no restrictions to trade.
  • Differences in labour productivity between
    nations underlie the notion of comparative
    advantage
  • C.1. Simple Extensions of the Ricardian Model
  • Diminishing Returns to Specialization not all
    resources are of the same quality, draw upon
    marginal resources whose productivity is not as
    great as those initially employed

8
  • Dynamic Effect and Economic Growth Free trade
    might increase a countrys stock of resources,
    free trade might also increase the efficiency
    with which a country utilizes its resources
  • Dynamic gains in both the stock of a countrys
    resources and the efficiency with which resources
    are utilized will cause a countrys Production
    Possibility Frontiers (PPF) to shift outwards
  • C.2. Theory of Country Size larger countries are
    more self-sufficient
  • C.3. Transportation Costs make it more likely
    that small countries will trade internationally
  • C.4. Scale Economies countries with large
    economies and high per capita income are more
    likely to produce goods that use technologies
    requiring long production runs.

9
  • C.4. Scale Economies countries with large
    economies and high per capita income are more
    likely to produce goods that use technologies
    requiring long production runs.
  • D Heckscher-Ohlin Theory
  • Two swedish economists put forward a different
    explanation of comparative advantage they argued
    that comparative advantage arises from
    differences in national factor endowments.
  • Different nations have different factor
    endowments and different factor endowments
    explain differences in factor costs. The more
    abundant a factor, the lower its cost.

10
This H-Ohlin theory predicts that countries will
export those goods that make intensive use of
those factors that are locally abundant, while
importing goods that make intensive use of
factors that are locally scarce The Leontief
Paradox U.S. produces and exports technology
intensive products that require highly educated
labor. D Product Life Cycle Raymond Vernon
proposed the PLC in the early 1960s. Raymond
argued that the size and the wealthy market gave
American companies a strong motivation to develop
innovative consumer goods. As the market in the
US and other more developed countries matures,
the products becomes more standardized, and price
becomes the main competitive factor.
11
  • Further along, the U.S. switches from being an
    exporter of the product to an importer of the
    product as production becomes concentrated in
    lower cost foreign locations.
  • Ex cellular phones
  • PLC weakness
  • E The New Trade Theory
  • First Mover Advantages the theory suggests that
    a country may predominate in the export of a good
    simply because it was lucky enough to have one or
    more firms among the first to produce that good.
  • This theory generates an argument for government
    intervention, industrial policy, and strategic
    trade policy

12
  • F National Competitive Advantage Porters
    Diamond Model
  • Why a nation achieves international success in a
    particular industry?
  • Porters thesis is that four broad attributes of
    a nation shape the environment in which local
    firms compete, and these attributes promote or
    impede the creation of competitive advantage.
  • a) Factor Endowments skilled labour,
    infrastructure, technology, etc. Advanced factors
    are the most significant for competitive
    advantage.
  • b) Demand Conditions home demand provides the
    impetus for upgrading competitive advantage. A
    nations firm gain competitive advantage if their
    domestic consumers are sophisticated and
    demanding.

13
c) Related and Supporting Industries Presence of
suppliers or related industries that are
internationally supportive. Successful industries
within a country ten to be grouped into clusters
of related industries. d) Firm Strategy,
Structure, and Rivalry Different nations are
characterized by different management ideologies
there is a strong association between vigorous
domestic rivalry and the creation and
persistence of competitive advantage in an
industry. e) Government Business should urge
government to increase its investment in
education, infrastructure, and basic research and
to adopt policies that promote strong competition
within domestic markets.
14
  • G - Country Similarity Theory observations of
    actual trade patterns reveal that most of worlds
    trade occurs among countries that have similar
    characteristics. Thus, overall trade patterns
    seem to be at variance with the traditional
    theories that emphasize country-by-country
    differences.
  • H - Pairs of Trading Relationships How do you
    explain specific pairs of trade relationships?
  • transport costs (natural traders)
  • Cultural Similarity
  • Historic Ties
  • Political Relationships and Economic Agreements

15
  • I - Independence, Interdependence, and
    Dependence
  • J Trade Strategies Among Emerging
  • Countries
  • - Outward-Led-Growth Strategies
  • - Import Substitution Industrialization
  • K Why Companies Trade Internationally?
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