2. Theories of International Trade, Tariff and Non-tariff barriers and Trade Blocks Presentation Transcript

Theories of International Trade,Tariff and Non-tariff barriers andTrade BlocksInternational Business Management Mrs. Charu Rastogi Asst. Prof.

Theories of InternationalAgenda TariffTrade & Trade BlocksNon-tariff Barriers Mrs. Charu Rastogi Asst. Prof.

Adam SmithRicardoOhlin & HeckscherTHEORIES OFINTERNATIONAL TRADE Mrs. Charu Rastogi Asst. Prof.

Evolution Absolute advantage (Classical) Mercantilismof Trade Theories International Product Factor Proportions TradeComparative advantage National competitive advantage New Trade TheoryCycle Mrs. Charu Rastogi Asst. Prof.

Mercantilism: mid-16th century Theory assumes that a nation‟s wealth depends on accumulated treasure ◦ Gold and silver are the currency of trade Therefore, this theory holds that nations should accumulate financial wealth, in the form of gold or silver by encouraging exports and Theory says you should have a tradediscouraging imports surplus. ◦ Maximize export through subsidies. ◦ Minimize imports through tariffs and quotas Flaw: restrictions, impaired growth Mrs. Charu Rastogi Asst. Prof.

Assumptions of 2Absolute Advantageand Comparative AdvantageTheories 2 commodity model countries, Labor as the only input Single currency assumed thereby eliminating effects of exchange rate changes Homogeneous factors of production – All labor units are of same type. They can be freely moved from production of cloth to production of bread and vice versa. i.e. No specialized labor. Units of production are divisible in compact units. All factors of production are fully employed. No government restrictions on freeAsst. Prof. Mrs. Charu Rastogi trade

Theory of absolute advantage Adam Smith: Wealth of Nations (1776) argued: ◦ A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient ◦ 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 is Trade between countries is, therefore, beneficial Assumes there is an absolute balance among nations Mrs. Charu Rastogi Asst. Prof.

Theory of absolute advantage … destroys the mercantilist idea since there are gains to be had by both countries party to an exchange … questions the objective of national governments to acquire wealth through restrictive trade policies … measures a nation‟s wealth by the living standards of its people Mrs. Charu Rastogi Asst. Prof.

Theory of absolute advantage PPF – Production Possibility Frontier Ghan a South Korea Mrs. Charu Rastogi Asst. Prof.

Absolute Advantages and Gainsfrom TradeAssume total amount of resources at 200. In the absence of trade resource is used Mrs. Charu Rastogi Asst. Prof.equally for both products; 100 for cocoa and 100 for Ghana

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Criticism Most of the criticisms from absoluteof Absolute CostAdvantage Theory advantage theory would arise because of the unrealistic nature of its However, an important incompleteness in theassumptions. theory was the fact that it addressed only a situation wherein one country enjoyed an absolute advantage in production of a commodity over another country. It was Quite oftenpointed out that such situations are rare. the advantage is not an absolute advantage but a comparative one as would be clear from the Ricardian Theory of Comparative Cost Advantage. Mrs. Charu Rastogi Asst. Prof.

Theory of comparative advantage David Ricardo: Principles of Political Economy (1817) ◦ Extends free trade argument ◦ Efficiency of resource utilization leads to more productivity ◦ Should import even if country is more efficient in the product‟s production than country from which it is buying. Produce and export those goods and services for which it is relatively more productive than other countries Import those goods and services for which other countries are relatively more productive than it is Makes better use of resourcesrs. Charu Rastogi Asst. Prof. M

Theory of comparativeadvantage PPF – Production Possibility Frontier Ghan a South Korea Mrs. Charu Rastogi Asst. Prof.

Comparative Advantage and Gains from Trade100-100for bothproductsSK:100-100Ghana:150 forCocoaand 50 forRice Assume total amount of resources at 200. In the absenceMrs. Charu Rastogi Asst. Prof.equally for of trade resource is used both products; 100 for cocoa and 100 for Ghana

Limitation of Driven only by maximization of productionComparativeAdvantage Theory and Only 2 countries engaged in production andconsumption Only What about the transportation costs?consumption of just 2 goods? No consideration forresource – labour (that too, non-transferable) „learning theory‟ Mrs. Charu Rastogi Asst. Prof.