Lecture 6 PART 2 different theories

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International Trade Theory:

3- 1 International Trade Theory Mercantilism Economic philosophy based on belief that (1) a nation’s wealth depends on accumulated treasure, usually gold, and (2) to increase wealth, government policies should promote exports and discourage imports

Theory of Absolute Advantage:

3- 2 Theory of Absolute Advantage Absolute advantage Theory that a nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or When it can produce the same amount of a good or service using fewer inputs than could another country

Theory of Comparative Advantage:

3- 3 Theory of Comparative Advantage Comparative Advantage A nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less

Heckscher-Ohlin Theory of Factor Endowment:

3- 4 Heckscher-Ohlin Theory of Factor Endowment Factor Endowment Heckscher-Ohlin theory that countries export products requiring large amounts of their abundant production factors and import products requiring large amounts of their scarce production factors

Heckscher-Ohlin Theory of Factor Endowment:

3- 5 Heckscher-Ohlin Theory of Factor Endowment Leontief Paradox The United States, one of the most capital-intensive countries in the world, was exporting relatively labor-intensive products in exchange for relatively capital-intensive products Differences in Taste A demand-side construct that is always difficult to deal with in economic theory

Some Newer Explanations For The Direction Of Trade:

3- 6 Some Newer Explanations For The Direction Of Trade Linder Theory of Overlapping Demand Customers’ tastes are strongly affected by income levels; therefore a nation’s income per capita level determines the kinds of goods they will demand

Some Newer Explanations For The Direction Of Trade:

3- 7 Some Newer Explanations For The Direction Of Trade International Product Life Cycle (IPLC) Explains why a product that begins as export eventually becomes import U.S. exports Foreign production begins Foreign competition in export market Import competition in the United States

Figure 3.2 International Product Life Cycle:

3- 8 Figure 3.2 International Product Life Cycle

Some Newer Explanations For The Direction Of Trade:

3- 9 Some Newer Explanations For The Direction Of Trade Technology Life Cycle Production technology application of IPLC Economies of Scale and Experience Curve As a plant gets larger and output increase, the average cost of producing each unit of output decreases As firms produce more products, they learn ways to improve production efficiency

Some Newer Explanations For The Direction Of Trade:

3- 10 Some Newer Explanations For The Direction Of Trade Imperfect Competition Economies of scale with the existence of differentiated products--Paul Krugman First-Mover Theory Pattern of trade in goods subject to scale economies may be determined by historical factors

Some Newer Explanations For The Direction Of Trade:

3- 11 Some Newer Explanations For The Direction Of Trade National Competitive Advantage from Regional Clusters: Porter’s Diamond Model (figure 3.3) National Competitiveness: a nation’s relative ability to design, produce, distribute, or service products while earning increasing returns on resources Demand conditions Factor Conditions Related and supporting industries Firm strategy, structure, and rivalry

Figure 3.3 Variable Impacting Competitive Advantage: Porter’s Diamond:

3- 12 Figure 3.3 Variable Impacting Competitive Advantage: Porter’s Diamond Source: Reprinted by permission of the Harvard Business Review . “The Competitive Advantage of Nations” by Michael E. Porter, March–April 1990, p. 77. Copyright © 1990 by The President and Fellows of Harvard College; all rights reserved.

International Investment Theories:

3- 13 International Investment Theories Dynamic Capabilities Theory that for a firm to successfully invest overseas, it must have ownership of unique knowledge or resources and the ability to dynamically create and exploit these capabilities Dunning’s Eclectic Theory Of International Production Theory that for a firm to invest overseas, it must have three kinds of advantages: ownership-specific, internalization, and location-specific