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International Marketing (I) 1. Foundations of International Trade

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Overview of Classical Trade Theories

 

  • Mercantislism (Mun) 
  • Theory of Absolute (Cost) Advantage (Smith) 
  • Theory of Comparative (Cost) Advantage (Ricardo) 
  • Factor Proportions Trade Theory (Heckscher/ Ohlin) 

 

Theory of Comparative (Cost) Advantage (Ricardo) 

  • Foreign trade arises because countries specialize in the production of goods where they have a comparative cost advantage and import goods they can not produce without incurring a cost disadvantage

Mercantilsim (Thomas Mun 16th century) 

  • Foreign trade arises because countries want to increase their wealth at the expense of other countries:
  • "The ordinary means to increase our wealth and treasure is by foreign trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume in theirs in value"

 

The Theory of Comparative Advantage (Ricardo) 

Example: PCs & Desks 

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Factor Proportions Trade Theory (Heckscher/Ohlin) 

  • A country that is relatively abundant in a factor of production should export goods that use a lot of that factor in the production process and import other goods

Balance of Trade 

  • Trade Surplus: Exports > Imports 
  • Trade Deficit: Exports < Imports 

(Another) Driver of International Trade

  • Decreasing Transport Costs 
  • Substantial decrease in transcation costs of internationalization 

 

Theory of Absolute (Cost) Advantage (Smith) 

 

  • Foreign trade arises because countries specialize in the production of goods where they have an absolute cost advantage. 
    • These goods are exported to the countries which import goods they can not produce without incurring a cost disadvantage. 
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