...The theory of international trade: 1. Mercantilism Theory. 2. Absolute Advantage Theory. 3. Comparative Advantage Theory. 4. Heckscher-Ohlin's Theory 5. Porter’s Diamond of Competitive Advantage Theory. Mercantilism The first theory of international trade ,mercantilism, engaged in England in the Mid 16th century holding that a countries wealth is measured by its holdings of treasure which usually means its gold & silver. The principal assertion of mercantilism was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time gold & silver were the currency of trade between countries,a country could earn gold & silver by exploiting goods. Conversely, importing goods from other countries would result in a outflow of gold & silver to those countries.The main tenet of mercantilism was that it was in a country’s best interest to maintain a trade surplus,to export more than it imported.By doing so,a country would accumulate gold and silver and, consequently ,increase its national wealth, prestige & power. Government policies: Consistent with this belief, the mercantilism doctrine advocated government intervention to acieve a surplus in the balance of trade.The mercatelists saw no virtue in a large volume of trade.Rather they recommended policies to maximize exports and minimize imports.To achieve this. import were limited by tarrif and quotas.while exports were subsidized. The concept of Balance of Trade: ...
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...International Trade Theories For starters, international trade theories are theories that explain international trade. Since trade is basically the exchanging of goods and/or services between entities or people, then international trade would be the exchanging of goods or services between countries. International trade happens in an effort to benefit the countries involved, in some way. According to the U.S. Chamber of Commerce, “America cannot have a growing economy or life wages and incomes of our citizens unless we continue to reach beyond our borders and sell products, produce, and services to the 95% of the world’s population that lives outside the United States. More than 38 million Americans jobs depends on trade.” (U.S. Chamber of Commerce). This paper will address different international trade theories, specifically mercantilism, absolute advantage, comparative advantage and balance of trade, to give a better understanding of international trade as well as why the government gets involved, how this may impact our company and why managers of international businesses should know these theories. “Mercantilism is a trade theory holding that a country’s wealth is measured by its holdings of ‘treasure,’ which usually means its gold.” (Daniels, Radebaugh & Sullivan, 2011 pg. 219). This theory states that countries should export (get others to buy from you) more goods and/or services than they import (others selling to you) in order to receive payment (gold) from other...
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...International Trade Theory and Policy Institution Date The aim of this article is to discuss a number of issues associated with the international trade theory and policy. First, the motives, nature and purpose of the original General Agreement on Tariffs and Trade have been discussed in this article. Also, the extent to which this purpose was achieved in the first 6 rounds of negotiations has been discussed. The reasons that drove President Reagan and his administration to propose the eighth round of negotiations are also featured in this article. Lastly, the reasons why there is still a significantly steep “effective” tariff hampering global free trade, despite fairly low tariffs on final goods have also been discussed in this article. The General Agreement on Tariffs and Trade (GATT) was formed in1947. This was after the United Nation conference whose aim was to create the International Trade Organization failed. The GATT came to an end in 1993. In 1995, the (World trade organization WHO) replaced GATT. GATT principal purpose was to boost fair trade by reducing and taking control of the trade tariffs amongst its member countries. In addition, it was responsible solving any trade disputes between the member countries. Before it ended, The GATT had become interested in the intellectual property rights and the effects of global trade on the environment. The General Agreement on Tariffs and Trade had a provision known “as the most favored nation status.” GATT refers...
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...Theories of international trade and investment Classical Theories (Why do nations trade?) Mercantilism and Neomercantilism: Mercantilism - A belief popular in the 16th century that national prosperity results from maximizing exports and minimizing imports Neomercantilism - The idea that the nation should run a trade surplus - Supporters includes: Labor unions (who want to protect domestic jobs) Farmers (who want to keep crop prices high) Some manufacturers (that rely on exports) Free trade - The absence of restrictions to the flow of goods and services among nations Leads to: - More and better choices for consumers and firms - Lower prices of goods for consumers and firms - Higher profits and better worker wages (because imported input goods are usually cheaper) - Higher living standards for consumers (because their costs are lower) - Greater prosperity in poor countries Absolute advantage principle - A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country - i.e. France could employ more of its resources to produce cloth Germany could employ more of its resources to produce wheat Labor cost in days of production for one ton: One ton of: France 30 40 Germany 100 20 Comparative Advantage Principle - Country, location specfic - The foundation concept of international trade that answers of how nations can achieve and sustain economic success...
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...------------------------------------------------- The development of the classical theories of international trade between countries March 30, 2016 Danel Louw 17752302 March 30, 2016 Danel Louw 17752302 Contents Introduction 1 1 Mercantilism 2 2 Absolute Advantage 2 3 Comparative Advantage 3 4 Factor Proportions 4 5 Bibliography 6 * * Introduction International trade may seem simple. It is simply the exchange of goods between two people or entities from two different countries. People trade because they get some kind of benefit in the transaction. Sometimes it is something that they need and sometimes it is something that they desire. International trade it is not always that simple. There is a lot of theory, business strategy and policy behind it. International trade can be described in many different ways. There are many different theories, classical and modern, that we use to describe International trade. Mercantilism Mercantilism was developed in the sixteenth century. It was the first effort in developing an economic theory at the time. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings (Anonymous, 2012). Mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words the government would use policies to encourage exports while restricting imports. They would do this by rewarding merchants...
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...Chapter 6 Quick Questions: International Trade Theory 1. What is the major benefit of trade identified in theories of international trade? 2. What do theories of international trade teach us about the patter of trade in the world economy? 3. How do trade theories inform government policy? 4. What are the main differences among mercantilism, Adam Smith’s theory of absolute advantage, and David Ricardo’s Theory of comparative advantage? 5. Why is the theory of comparative advantage so important in today’s world? 6. According to the theory of comparative advantage, what is the relationship between free trade and economic growth? Does the empirical evidence support this prediction? 7. What is the criticism that Paul Samuel made of theories that advocate free trade? 8. How is the Heckscher-Olin theory different from the theory of comparative advantage? 9. What is the Leontief paradox? Why is it important? 10. What are the central predictions of the product lifecycle theory? What are the limitations of this theory? 11. What does new trade theory tell us about the patter of trade in the world economy? 12. What are the implications of new trade theory for government policy? 13. According to Porter/s theory of national competitive advantage, what are the elements explain why different countries achieve international success in certain industries? 14. What are the implications of Porter’s Theory for government policy? 15. What...
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...Globalization What is globalization, and what are some of the traditional international trade theories that support the concept of globalization? Globalization is defined as a shift towards an integrated world economy (Hill, 2009). Globalization can be explained in many ways, one is the globalization of production. For example, computer hardware or software, cell phones, food, and music are all products that are distributed globally. Globalization is the process in which economies of countries all over the globe become integrated over time leading to organizations having access to a larger market base and customers having access to a greater variety of goods and services. Globalization is also a method of communication and integration among the consumers, organizations, and governments of different nations, which is driven by international trade and investment and assisted by information technology. This process has effects on the environment, culture, political systems, economic development, and on human nature in societies around the world. Supporting the concept of globalization are several traditional international trade theories, including Free Trade, New Trade, and Mercantilism. List the major drivers of globalization and give three examples of each. Several drivers underline the continued trend of globalization in today’s popular culture. The first is the decline in barriers to the free flow of goods, services, and capital (Hill, 2009). Companies...
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...International Business, 14e (Daniels et al.) Chapter 6 International Trade and Factor-Mobility Theory 1) Which of the following is NOT a reason that international trade theory is useful for managers to understand? A) Countries use trade theories to help them decide how to improve their competitive positions, such as improving the quantity and quality of production factors. B) Countries' trade policies affect whether imports are allowed to compete against domestic production, thus affecting where companies need to produce to serve given markets. C) Countries use laissez-faire policies to intervene in the free movement of international trade, thus affecting where companies can produce most efficiently. D) Countries wrestle with the questions and set policies on what, with whom, and how much they should import and export, thus affecting companies' abilities to produce given products efficiently and sell them into given markets. Answer: C Diff: 3 Learning Outcome: Compare and contrast theories of international trade Skill: Concept Objective: 1 2) Why should managers in international business understand international trade theories? A) Countries' trade policies, based on trade theories, influence which products companies might export to given countries. B) The understanding helps managers decide whether their companies should follow laissez-faire management practices. C) The theories help managers decide whether to use large-scale versus small-scale technologies...
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...UNIT 2 INTERNATIONAL BUSINESS THEORIES International Business (Trade) Theories Objectives After reading this unit, you should be able to : • understand the analytical foundations of international business • be familiar with the international trade theories • explain the FDI approaches to international business. Structure 2.1 Foundations of International Business 2.2 International Trade Theories Theory of Mercantilism Theory of Absolute Cost Advantage Theory of Comparative Cost Advantage Heckscher-Ohlin Model Leonief Paradox 2.3 FDI Theories Market Imperfections Approach Product Life Cycle Approach Transaction Cost Approach The Eclectic Paradigm 2.4 Summary 2.5 Key Words 2.6 Self-assessment Questions 2.7 Further Readings 2.1 FOUNDATIONS OF INTERNATIONAL BUSINESS The analytical framework of international business is build around-the activities of MNEs enunciated by the process of internationalisation. The FDI on the part of an MNE attempts to overcome the obstructions to trade in foreign countries. The strategies relating to the functional areas, such as production, marketing, finance and price policies, are adopted by the MNEs in such a manner that an amicable relationship between home and host nations is created. Foreign direct investment can be distinguished from the other forms of international business, such as exporting, licencing, joint ventures and management contracts. Basically...
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...I. INTRODUCTION The international trade theory experienced several periods of development from Classical to Neoclassical, New Trade Theory, and then the New Classical Trade Theory. The earliest over international trade had its birth in the end of 15th century and initial period of 16th century. That is, during the period of western countries’ primitive accumulation of capital and the main theory is mercantilism. It is claimed of the theory that the only form of wealth is the metal---gold and silver. People can gain them though exchange and for a nation, it is to increase the social wealth. Hereby, the way to gain gold and silver is international trade. II. THE DEVELOPMENT PROCESS OF THE THEORIES: 1. CLASSICAL INTERNATIONAL TRADE THEORY In the late 1790s, the point of mercantilism was challenged by the classical economists. Based on criticizing the mercantilism, Adam Smith proposed the division of labor theory. It has been 41 years from Adam Smith proposed the absolute cost in his the Wealth of Nations in 1976 to David Ricardo proposed the comparative cost in his the Principles of Political Economy and Taxation in 1817. This is the foundation period of international trade theory, that is, the Classical period. The absolute cost of Adam Smith is based on the division of labor theory. Adam introduced the division of labor theory to the field of international trade and established his absolute cost theory, thus demonstrating the fact that a nation can make the sources of each...
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...and Bertil Ohlin (1933) laid the substantial developments on David Ricardo’s theory of comparative advantage by focusing on the relationships between national factor endowments and commodity trade patterns. Though there have been some attempts to use the Heckscher-Ohlin theory, it seems invalidity in most real-world international trade patterns. In order to evaluate the validity of the Heckscher-Ohlin theory in today’s environment, pros and cons of the statement are illustrated as following. In pro terms, this theory is a simple international trade model with only two nations, two products and two factors of production based on the similar technology. Because of its simplified assumption, the Heckscher-Ohlin theory can be easily applied to analyse theoretical patterns. However, some assumptions proposed in this theory such as the similar technology, constant return to scale, the same demand condition limit its range only to some particular regions, therefore, it seems very hard to apply this theory in many practical terms. In summary, today’s international trading environment is various and complicated, thus this over-simplified theory cannot be sufficient as a good predictor. The purpose of this paper is to examine the Heckscher-Ohlin theory to analyse whether it is a good predictor for international trade in today’s environment. In order to do this, I will describe the content of this theory and then ilustrate the arguments both for and against the main topic by using...
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...International Economics, 9e (Krugman et al.) Chapter 1 Introduction 1.1 What Is International Economics About? 1) Historians of economic thought often describe ________ written by ________ and published in ________ as the first real exposition of an economic model. A) "Of the Balance of Trade," David Hume, 1776 B) "Wealth of Nations," David Hume, 1758 C) "Wealth of Nations," Adam Smith, 1758 D) "Wealth of Nations," Adam Smith, 1776 E) "Of the Balance of Trade," David Hume, 1758 Answer: E Page Ref: 1 Difficulty: Easy Question Status: New 2) From 1960 to 2009, A) the U.S. economy roughly tripled in size. B) U.S. imports roughly tripled in size. C) the share of US Trade in the economy roughly tripled in size. D) U.S. Imports roughly tripled as compared to U.S. exports. E) U.S. exports roughly tripled in size. Answer: C Page Ref: 1 Difficulty: Easy Question Status: New AACSB Codes: Dynamics of the Global Economy 3) The United States is less dependent on trade than most other countries because A) the United States is a relatively large country with diverse resources. B) the United States is a "Superpower." C) the military power of the United States makes it less dependent on anything. D) the United States invests in many other countries. E) many countries invest in the United States. Answer: A Page Ref: 2 Difficulty: Easy Question Status: New AACSB Codes: Dynamics of the Global Economy 4) Ancient theories of international...
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...knowledge about cultures in the practice of international management, when the people involved have different cultural identities’ (Mead and Andrews, 2009: 16). This can be compared with the definition given by Laurie Jackson in his book International HRM: A Cross-Cultural Approach (2002). He emphasises the importance of ‘examining the contributions of different cultures in interaction’. This emphasis on the complexities of ‘interaction’ or ‘communication’ between ‘cultures’ (i.e. groups of people or stakeholders) is one shared by Mead and Andrews, and it is developed throughout this course, where we discuss several case studies from the field of human resource management (HRM) and international human resource management or IHRM (cf. Briscoe and Schuler, 2004; Harris, et al., 2003). The text Cross-cultural Marketing, edited by Rugimbana and Nwankwo (2003, from which you’ll be reading in Unit 5) highlights the importance of communicating one’s cultural identity in international and cross-cultural management. The book eschews the traditional practice of asking how far marketing ideas that work in one context may be applied elsewhere. It focuses instead on the realities of marketing to different cultures both externally, from outside its borders, and internally – marketing to different cultural communities at home. Objectives of WTO Important objectives of WTO are mentioned below: (i) to implement the new world trade system as visualised in the Agreement;...
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...Discuss the antecedents of International Business Models. International business models can be classified into two main categories: country-based theories and firm-based theories. Country-based theories view business in a macro perspective from a point a view of a nation and focus on trading phenomenon particularly in exports and imports. While firm-based theories are modern theories that emerged after the Second World War as it views business in a micro perspective from the angle of a firm. Despite the different perspectives of firm-based theories and country-based theories, they are interlinked and complement each other. The firm-based theories were developed from classic country-based theories and supported with empirical research. Country-based theories are international business theories that argue on the evolvement of business since the 16th century. The theories are classical theories that derived from an economic perspective. There are 4 theories involved in country-based theories. They are Mercantilism Theory, Absolute Advantage Theory, Comparative Advantage Theory and Heckscher-Ohlin Theory. Firm-based theories attempt to explain business phenomena related to international trade. Mercantilism theory was the first theory of international business that emerged in England in the mid of 16th century. The principal affirmation of the theory was its gold and silver were the mainstays of national wealth and essential to dynamic business. It was a political economy...
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...The Ecuadorian Rose Industry snowcapped volcanoes that rise to more than 20,000 feet. The bushes are protected by 20-foot-high canopies of plastic sheeting. The combination of intense sunlight, fertile volcanic soil, an equatorial location, and high altitude makes for ideal growing conditions, allowing roses to flower almost year-round. Ecuador apparently has a comparative advantage in the production of roses. Ecuador's rose industry started some 20 years ago and has been expanding rapidly since. Ecuador is noW the world's fourth largest producer of roses. Roses are the nation's fifth largest export, with customers allover the world. Rose farms generate $240 million in sales and support tens of thousands of jobs. In Cayambe, the population has increased in 10 years from 10,000 to 70,000, primarily as a result of the rose industry. The revenues and taxes from rose growers have helped to sophisticated pave roads, build schools, and construct irrigation systems. Maria works Monday to Saturday, and earns $210 a month, which she says is an average wage in Ecuador and substantially above the country's $120 a month It is 6:20 AM, February 7, in the Ecuadorian town of Cayambe, and Maria Pacheco has just been dropped off for work by the company bus. She pulls on thick rubber gloves, wraps an apron over her white, traditional embroidered dress, and grabs her clippers, ready for another long day. Any other time of year, Maria would work until 2 PM, but it's a week before Valentine's...
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