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OPENING CASE:
Port of Rotterdam: gateway to the world
Why does trading make the Netherlands one of the richest nations in the world even if intermediaries such as the Port of Rotterdam take a substantial share of the benefits?
International Trade
International trade is a hot topic in politics as the benefits of trade are often unevenly distributed. This lecture starts by outlining the theoretical foundations for international trade. These theories provide a structured way of thinking and analyzing issues that are central to both businesses and government policy. They tell us why trade occurs and the role of governments in facilitating trade
International Trade
Mercantilism
Theory of mercantilism 1600 and 1700s Wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer; international trade is viewed as a zerosum game. Protectionism Idea that governments should actively protect domestic industries from imports and vigorously promote exports.
Mercantilism
Is a trade theory. Mercantilism held the view that a countrys wealth was measured by its holdings of treasure which usually meant its gold. Countries should export more than import. Receive gold in return.
8/21/2013
David Ricardo
19th century English Economist The Theory of Comparative Advantage
Neomercantilism
Attempted to gain favourable balance of trade.
Difference between import costs and export earnings. To achieve some social and political objectives Employment generation Surplus production to export
Absolute Advantage
Free trade (Adam Smith 1776) Buying and selling of goods and services with little or no government intervention Theory of absolute advantage Nation gains by specialising in economic activities in which that nation has an absolute advantage. Absolute advantage To be more efficient than anyone else in the production of any good or service
4,000 cars
40 Aircrafts
Comparative Advantage
Natural
Consists of climate, natural resources, labour force availability
Acquired
Consists of either product or process technology
Comparative Advantage
Nation A has an absolute advantage in production of all goods compared to Nation B. As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specialise in the production of one good in which it has comparative advantage. Comparative advantage Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Opportunity cost Cost of pursuing one activity at the expense of another activity, given the alternatives.
Ricardo in 1817. suggests that even if America has an absolute advantage over Europe in both cars and aircraft, as long as Europe is not equally less efficient in the production of both goods, Europe can still choose to specialise in the production of one good (such as cars) in which it has comparative advantage defined as the relative (not absolute) advantage in one economic activity that one country enjoys in comparison with other country.
Difference
Difference between Two theories is subtle.
Absolute advantage theory looks at absolute
productivity differences.
Comparative advantage theory looks at
Opportunity Costs
Japan uses 0.8 hours to produce 4 clock radios. Japan produces two bottles of wine in 2 hours. Only one hour of labour is needed by France to produce 2 bottles of wine. By producing 4 clock radios, and trading them to France for two bottles of wine, Japan saves 1.2 hours of labour. The saved` labour can be used to produce more clock radios, which the Japanese can then use themselves or trade to France for more wine.
Example
Japan Uses 0.8 hours to produce 4 clock radios 2 hours in producing two bottles of wine France I hour to produce 2 bottles of wine 2 hours to produce 4 Clock radios
Heckscher-Ohlin Theory
Eli Heckscher and Bertil Ohlin (Swedish Economists) Refined the Ricardos theory of Comparative Advantage Developed Factor-Proportion Theory
Relative Factor Endowments Factor endowments (types and quality of resources) vary between countries Goods differ according to the types of factors/resources used in production Factor endowments vary, due to - natural resources
- local and foreign investment - population size - political and social stability
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Examples
Hong Kong & the Netherlands
Land price is `very high Regardless of climate and soil condition Hong Kong and the Netherlands would not go for production of goods that require large amount of land wool & wheat.
Classical Theories
In summary, classical theories, (1) mercantilism, (2) absolute advantage and (3) comparative advantage (which includes resource endowments), evolved from approximately 300 years ago to the beginning of the 20th century. More recently, three modern theories, outlined next, emerged.
Product life cycle Strategic trade theory National competitive advantage of industries
Growth
In innovating and industrial countries Mainly in industrial countries. Shifts production in export markets as foreign production replaces exports Fast growing demand No of competitors increases Competitors begin price cutting Product become standardised Capital input increases Methods more standardized
Maturity
Multiple countries Growth in developing countries. Some decrease in industrial countries
Decline
Mainly in developing countries Mainly in developing countries Some developing country exports
Competitive Factors
Near monopoly position Sales based on price and uniqueness Product characteristics evolve
Production Technology
Short production run Methods evolve High labour input relative to capital
Long production run using high capital inputs Highly standardized Less labour skill needed
How did strategic trade policy contribute to the creation of the Airbus A380?
Government Subsidy
Strategic trade theorists do not advocate a mercantilist policy to promote all industries. They propose to help a few strategically important ones.
Porter argues that the dynamic interaction of these four aspects explains what is behind the competitive advantage of leading industries in different nations.
This is the first multilevel theory to realistically connect firms, industries and nations.
Non-Tariff Barriers Taken together, trade barriers reduce or eliminate international trade. NTBs include (1) subsidies, (2) import quotas, (3) export restraints, (4) local content requirements, (5) administrative practices and (6) antidumping duties. Import quotas are restrictions on the quantity of imports. Import quotas are worse than tariffs because with tariffs, foreign goods can still be imported if tariffs are paid. Import quotas are protectionist and there are political costs that countries have to shoulder in largely pro-free trade environment. Voluntary export restraints (VERs) have been developed to show that on the surface, exporting countries voluntarily agree to restrict their exports. The arsenal of trade warriors also includes antidumping duties levied on imports that have been sold at less than a fair price or dumped and thus harm domestic firms.
Free Trade?
The economic arguments against free trade include: the need to protect domestic industries > At the height of the recession in 2009, British workers at the Lindsey oil refinery went on strike to protest against IREM, an Italian construction company, bringing its Italian and Portuguese workers into the country to conduct expansion work. the necessity to shield infant industries. > If domestic firms are as young as infants, in the absence of government intervention, they stand no chance of surviving and will be crushed by mature foreign rivals. Thus, it is imperative that governments
level the playing field by assisting infant industries.