INTERNATIONAL TRADE THEORIES

PRESENTED BY MAHESH PRADHAN (360)

LAXMI PRIYA (349) MANASA K(363) MANASH RANJAN SAMANTARAY (364) MANISRINIVASAN(365) LAXMI KANTH(348)

INTRODUCTION

WHAT IS INTERTIONAL TRADE ? As its name implies, international trade is the exchange of products, services, and money across national borders; essentially trade between countries.
WHY INTERNATIONAL TRADE OCCURS? To transfer general technology To enable consumers to purchase abroad commodities more cheaply than they can be produced domestically Grow Your Business Diversify Risk Better Margins

INTRODUCTION
Why is an understanding of trade theory important for managers?

International trading has become very important for every country of the world be developing nation or developed nation. The concept of globalization started way back 1980, developed due advancement of technology in areas transport and communication. Types of theories: Classical trade theories: explain national economy conditions--country advantages--that enable such exchange to happen New trade theories: explain links among natural country advantages, government action, and industry characteristics that enable such exchange to happen

Advantages of International Trade

Optimum use of Resources: Foreign trade helps in the optimum use of natural resources and avoid wastage of resources. Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. It tries to equalize the world price. Availability of all types of goods: It enables a country to import those goods which it cannot produce. Increased Standard of living: It ensures more production to meet the demand of the people of different countries. Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market.

Disadvantages of International Trade

It could lead to a more rapid depletion of exhaustible natural resources. It is a long distance trade and as such it becomes difficult to maintain close relationship between the buyer and the seller. Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade. Foreign trade involves preparation of a number of documents which also creates difficulties in the way of foreign trade. Foreign trade involves a great deal of risks because trade takes place over a long distance. Though the risks are covered through insurance, it involves extra cost of production because insurance cost is added to cost.

All nations have no mines of their own,are enriched with Gold and Silver by one and the same means, that is by exporting more goods and importing less goods -Tomas Munn and Writer

16th century as a post medieval doctrine Oldest trading theory in the international field. Also known as colbertism (french),kameralism (germany & austria) ,restrictive system,commercial system etc.

Focuses on Achieving Favorable Balance of Trade by making Exports > Imports. Exports can be improved through subsidizing the taxes related to it Imports can be reduced through increasing related tariffs and duties. Aims at accumulation of precious metals which are not perishable thereby improving nations wealth.

Based on zero-sum game If every country follows the same principle then international trade would come to a standstill Over emphasis on Gold and Silver

Simultaneously Achieving Favourable Balance of Trade not possible One sided theory

THEORY OF ABSOLUTE ADVANTAGE

The Scottish economist Adam Smith developed the trade theory of absolute advantage in 1776. A country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources.

ASSUMPTIONS

The theory of absolute advantage is based on the assumption of laisez - fair that there is freedom to enterprise & freedom to trade and the nation is absolutely better (i.e., more efficient) at production of certain goods than are its trading partners. tariffs and quotas should not restrict international trade; it should be allowed to flow according to market forces.

ORIGIN OF THE THEORY

Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nations import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.

THE PRINCIPLE OF ABSOLUTE ADVANTAGE

A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources.
Example- Zambia

ABSOLUTE ADVANTAGE

A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. Absolute advantage compares industry productivities across countries. In this model we would say the U.S. has an absolute advantage in cheese production relative to France If or if

The first expression means that the US uses fewer labor resources (hours of work) to produce a pound of cheese than does France. In other words the resource cost of production is lower in the US. The second expression means that labor productivity in cheese in the US is greater than in France. Thus the US generates more pounds of cheese per hour of work.

Example 1

You and your friends decided to help with fundraising for a local charity group by printing t-shirts and making birdhouses. Scenario 1: One of your friends, KK, can print 5 t-shirts or build 3 birdhouses an hour. Your other friend, DK, can print 3 t-shirts an hour or build 2 birdhouses an hour. Because your friend KK is more productive at printing t-shirts and building birdhouses compared to DK, he has an absolute advantage in both printing t-shirts and building birdhouses. Scenario 2: Suppose KK wasn't as agile with the hammer and could only make 1 birdhouse an hour, but he took a sewing class and could print 10 tshirts an hour. DK on the other hand takes woodworking and so he can build 5 birdhouses an hour, but he doesn't know the first thing about making t-shirts so he can only print 2 t-shirts an hour. While KK would have the absolute advantage in printing shirts, DK would have an absolute advantage in building birdhouses.

EXAMPLE-2
Two countries A & B are having 200 units of resources with which they can produce cocoa and rice. lets see how they are utilizing these resources to produce optimum output and add to global output. A consumes 10 units of resources to produce 1tonne of cocoa & to produce 1 tonne of rice it consumes 20 units of resources. B consumes 40 units of resources To produce 1 tonne of cocoa & to produce 1 tonne of rice it consumes 10 units of resources.

FINDINGS

There is a potential problem with absolute advantage. If there is one country that does not have an absolute advantage in the production of any product, will there still be benefit to trade, and will trade even occur? The answer may be found in the extension of absolute advantage, the theory of comparative advantage.

THEORY OF COMPARATIVE ADVANTAGE

David Ricardo
Born in 1772 At the age of 21, disinherited from family for marrying outside his familys Jewish faith Became a successful banker in London Made a fortune as a stock broker in London

A Member of the Parliament of United Kingdoms

The most popular economist after Adam Smith

Comparative Advantage
Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces Absolute advantage is really a special case of comparative advantage

Cocoa
G: Ghana K: S. Korea

K K' G'

Rice

Cocoa Ghana uses to produce S.Korea uses Production without trade of 100 units cocoa and 100 units rice Ghana S.Korea Total production of cocoa and rice in both countries Production with specialization ,if 150 units are used by ghana for cocoa and 50 units for rice Production with specialization ,if all 200 units are used by S.Korea for rice only and no coco is required 10 2.5 12.5 15 7.5 5 12.5 3.75 10 units / ton 40 units / ton

Rice 13.33units / ton 20 units /ton

10

Total production of cocoa and rice by two countries with specialization

15

13.75

ASSUMPTIONS

Trade two-by-two model Homogeneous labor

Mobilization of labor
Mass employment Exclusion of transport cost

Government regulations

Perfect competition
Constant cost Factor-Cost of production

Quantity of resources

CONCLUSION