International Trade theory Essay

UNDER THE GUIDENCE OF

Prof. Hanan Elzainy

University of Alexandria - Faculty of Commerce

Prepared By

WAEL BARAKAT
Executive MBA Program Cohort (9)

INTRODUCTION
International trade is the exchange of capital, goods, and services across international borders or
territories, which could involve the activities of the government and individual. In most
countries, such trade represents a significant share of gross domestic product (GDP). While
international trade has been present throughout history (for example Silk Road, Amber Road, salt
road), its economic, social, and political importance has been on the rise in recent centuries.
Trading globally gives consumers and countries the opportunity to be exposed to new markets
and products. Almost every kind of product can be found on the international market: food,
clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded:
tourism, banking, consulting and transportation. A product that is sold to the global market is an
export, and a product that is bought from the global market is an import. Imports and exports are
accounted for in a country's current account in the balance of payments.
The trade pass through many changes and theories but all about the same concept managing
resources and maximize profit and reduce cost and consumers needs.
1. Mercantilism
1630, Thomas to increase our wealthsell more to strangers yearly than we consume of theirs
in value
This the first theory for trading in simplest form only concern on increase export and reduce
import to increase welfare of community (WIN-LOSE process) not concerning the other side.
2. Absolute Advantage
1776, Adam Smith. A country has an absolute advantage in the production of a product when it
is more efficient than any other country in producing it
If two countries specialize in production of different products (in which each has an absolute
advantage) and trade with each other, both countries will have more of both products available to
them for consumption
3. Comparative Advantage
Even if one country has an absolute advantage in producing two products over another country,
trading with that other country will still yield more output for both countries than if the more
efficient producer did everything for themselves.
The country with the absolute advantage in producing both products would still produce both
products, but less of the one they would trade for, allowing them to essentially allocate more
resources to producing the product that theyre comparatively most efficient at producing
Assumes many things:
-Only 2 countries and 2 goods

-No transportation costs

-No price differences for resources in both countries
-Resources can move freely from producing one product to producing another product
-Free trade does not affect production efficiency
4. Proportion factors theory
Country produce and export goods or service that have long tern availability of it resources and
import goods or services that required resources which country have short of its resources.
5. The Product Life-Cycle Theory
1960s, Raymond Vernon attempts to explain global trade patterns. First, new products are
introduced in the United States. Then, as demand grows in the U.S., it also appears in other
developed nations, to which the U.S. exports. Then, other developed nations begin to produce
the product as well, thus causing U.S. companies to set up production in those countries as well,
and limiting exports from the U.S. Then, it all happens again, but this time production comes
online in developed nations. Ultimately, the U.S. becomes an importer of the product that was
initially introduced within its borders.
6. New Trade Theory
1970s Via the achievement of economies of scale, trade can increase the variety of goods
available to consumers and decrease the average cost of those goods. Further, the ability to
capture economies of scale before anyone else is an important first-mover advantage.
Nations may benefit from trade even when they do not differ in resource endowments or
technology
Example If two nations both want sports cars and minivans, but neither can produce them at a
low enough price within their own national markets, trade can allow each to focus on one
product, allowing for the achievement of economies of scale that will increase the variety of
products in both countries at low enough prices
7. National Competitive Advantage
990, Michael Porter seeks to answer the question of why a nation achieves international
success in a particular industry. Based on four attributes:
-Factor endowments
Basic factors natural resources, climate, location, demographics
Advanced factors communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how
-Demand conditions

 If customers at home are sophisticated and demanding, companies will have to produce
innovative, high quality products early, which leads to competitive advantage
Relating and supporting industries
If suppliers or related industries exist in the home country that are themselves internationally
competitive, this can result in competitive advantage in the new industry.
-Firm strategy, structure, and rivalry
Different nations are characterized by different management ideologies, which can either help or
hurt them in building competitive advantage
If there is a strong domestic rivalry, it helps to create improved efficiency, making those firms
better international competitors
Implications for Managers
-Location productive activities should be done in the location in which it is most efficient
-First-mover implications the idea is to preempt the available demand, gain cost advantages
related to volume, build an enduring brand ahead of later competitors, and, consequently,
establish a long-term sustainable competitive advantage
-Policy implications lobbying for or against free trade or government restrictions.
-Its in a firms best interest to invest in upgrading advanced factors of production; for example,
to invest in better training for its employees and to increase its commitment to R&D
-Businesses should lobby for investment in education, infrastructure, and basic research and any
policy promoting strong domestic competition
Example:
International Business still work which developed countries can use all the previous theories to
get more profit for example:
-High developed countries exploit poor and developing countries with have high natural
resources to build industry which is forbidden in the developed countries for its environmental
pollution like Oil and Gas, Cement, Petrochemical and fertilizer and also with low wages and
low cost of raw material and low production cost (out sourcing ).
-High developed countries like USA and Europe invent new product but make the industry in
county like China(out sourcing) which have mass labors and low wages with low production cost
(best example I Phone invented in USA and produced in China).
-High developed countries consuming the natural resources of poor and developing countries and
make the regulation which allow the international trade and the profit for its own benefit and to
make smooth and low cost product but still have the copy right and patent and franchising of the
brand.

-All high technology industry invented with copy rights in developed countries and sell the idea
and the licenses to the other developing countries (low labors and low production cost) and high
developed countries keep dominating the market to get high profit.
-From the other side developing country benefit from trading theories that opening new market
and increase economic growth and reduce employment and attract new investment and increase
welfare of community and get new technology.
-Some countries make trading agreement like Europe countries, Latin America, Arabic gulf
countries that make easy of trading. Some go farther using one currency like euro which
facilitate the international trading business.
References:
WIKIPEDIA.
globalnews.ca/tag/international-trade.
articles.economictimes.indiatimes.com