International Marketing (I) 1. Foundations of International Trade

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) 

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"

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. 

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

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

The Theory of Comparative Advantage (Ricardo) 

Example: PCs & Desks 

​

(Another) Driver of International Trade

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

Balance of Trade 

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