The Theory of Trade and Investment
Chapter 5
The Theory of Trade and
Investment
1
Learning Objectives
To understand the traditional arguments of how and why international trade improves the welfare of all countries
To review the history and compare the implications of trade theory from the original work of Adam Smith to the contemporary theories of Michael Porter
To examine the criticisms of classical trade theory and examine alternative viewpoints of which business and economic forces determine trade patterns between countries
To explore the similarities and distinctions between international trade and international investment 2
Evolution of Trade Theory
The Age of Mercantilism
Classical Trade Theory
Factor Proportions Trade
Theory
International Investment and Product Cycle Theory
The New Trade Theory:
Strategic Trade
The Theory of International
Investment
3
The Age of Mercantilism
The evolution of trade into the form we see today reflects three events:
The Collapse of Feudal Society
The Emergence of the Mercantilist Philosophy
The Life Cycle of the Colonial Systems of the
European Nation-States
4
Mercantilism
Mixed exchange through trade with accumulation of wealth
Conducted under authority of government
Demise of mercantilism inevitable 5
Classical Trade Theory
The Theory of Absolute Advantage
The ability of a country to produce a product with fewer inputs than another country The Theory of Comparative
Advantage
The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other
6
Classical Trade Theory Contributions
Adam Smith—Division of Labor
Industrial societies increase output using same labor-hours as pre-industrial society
David Ricardo—Comparative
Advantage
Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce
Gains From Trade
A nation can
The Theory of Trade and
Investment
1
Learning Objectives
To understand the traditional arguments of how and why international trade improves the welfare of all countries
To review the history and compare the implications of trade theory from the original work of Adam Smith to the contemporary theories of Michael Porter
To examine the criticisms of classical trade theory and examine alternative viewpoints of which business and economic forces determine trade patterns between countries
To explore the similarities and distinctions between international trade and international investment 2
Evolution of Trade Theory
The Age of Mercantilism
Classical Trade Theory
Factor Proportions Trade
Theory
International Investment and Product Cycle Theory
The New Trade Theory:
Strategic Trade
The Theory of International
Investment
3
The Age of Mercantilism
The evolution of trade into the form we see today reflects three events:
The Collapse of Feudal Society
The Emergence of the Mercantilist Philosophy
The Life Cycle of the Colonial Systems of the
European Nation-States
4
Mercantilism
Mixed exchange through trade with accumulation of wealth
Conducted under authority of government
Demise of mercantilism inevitable 5
Classical Trade Theory
The Theory of Absolute Advantage
The ability of a country to produce a product with fewer inputs than another country The Theory of Comparative
Advantage
The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other
6
Classical Trade Theory Contributions
Adam Smith—Division of Labor
Industrial societies increase output using same labor-hours as pre-industrial society
David Ricardo—Comparative
Advantage
Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce
Gains From Trade
A nation can