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ModuleModule -- 33

Trade & Investment TheoriesTrade & Investment Theories

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Major Trade Theories Mercantilism

Absolute Advantage

Natural Advantage Acquired Advantage

Comparative AdvantageComparative Advantage

Country Size

FactorFactor Proportions TheoryProportions Theory PLC Theory

Country Similarity Theory

Degree of Dependence

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Strategic Trade Policy &

Porters Diamond Theory Strategic Trade Policy affecting all Industries,

affecting only Targeted Industry

Why Companies Trade Internationally

- Porters Diamond Theory

Firms Strategy,

Structure,

Rivalry

DemandConditions

Related &

Supporting

Industries

FactorConditions

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Companies Role in Trade

Strategic Advantage of Exports

Strategic Advantage of Imports

Thank youThank you

End of the ModuleEnd of the Module -- 33

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Theory ofComparative Advantage

David Ricardo, 1817Analogous Explanation

Production Possibility

Some Assumptions and Limitations of The

Theories of Specialization Full Employment

Economic Efficiency

Division of Gains

Two Countries, two Commodities

Transport Costs

Mobility

Static and Dynamics

Services

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Production Possibilities

Sri Lanka - U

SA

0 5 10 12 15 17 18 20 25

20

15

10

6

5

Assumptions: 100 units of resources available

Sri Lanka requires 10 units each to produce 1 ton oftea & wheat

USA requires 4 units to produce a ton of wheat & 5 units to

Produce a tone oftea Prodn Tea Wheat

w/o Trade

SL A

US B

05

10

05

12

Total 15 17

w Trade Tea

SL C

US D

10

06

0

17

Total 16 17

W Trade Wt

SL C

US E

10

5

0

18

Total 15 18

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Production Possibilities

India - Pakistan

India (1:1)

10 Days of Labour 100 units of wheat

10 Days of Labour 100 units of cotton

Pakistan(2:1)10 Days of Labour 120 units of Wheat

10 Days of Labour 60 units of cotton

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Theory ofC

ountry

Size

Variety of Resources

TransportCosts

Size of Economy

Production Scales

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Fac

tor-Propor

tions Theory

Eli Heckscher & Bertil OhlinEli Heckscher & Bertil Ohlin

To identify (Production Factors) Product

related advantage which is countryspecific.

Land-Labour Relationship Labour-Capital Relationship

Technological Complexities

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PLC Theory of Trade

Raymond VernonRaymond VernonChanges through the cycle

Introduction GrowthMaturity/

SaturationDecline

ProductionLocation

Market

Location

CompetitiveFactors

Production

Technology

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Graphical Representation of

PLC

Theory

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Limitations of PLC Theory

:Verification

Rapid Innovation Short LC CostReduction !?

Luxury Products CostConcern !? Differentiated products Pricing !?

Products requiring specialized technicallabour for evolving in next generation.

Technology, Demand, Production Costs Simultaneous Introduction of Products

Product Outsourcing.

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Coun

try

Similari

ty Theory

Economic Similarity of Industrial

Countries

Similarity of Location

Cultural Similarity

Similarity in Political & Economic

Interests

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Degree of Dependence

Theory of Interdependence

Dependence

Independence

Interdependence