INTERNATIONAL TRADE THEORIES

Under the Guidance of Dr. Ravi Raj Kumar

Presentation By: GROUP-8

Nitesh A M Kausik Apoorva Potluri Dilkash Merani Sameen Mohammed Siddique

PRODUCT LIFE CYCLE THEORY

PROPOSED BY RAYMOND VERNON IN THE

YEAR 1966 FOUR STAGES IN A PRODUCTS LIFE CYCLE NAMELY INTRODUCTION GROWTH MATURITY DECLINE

Heckscher Ohlin's (HO) Modern Theory of International Trade

Advocated by Bertil Ohlin and ideas from

Heckschers General Equilibrium Analysis. Trade arises due to the differences in the relative prices of different goods in different countries. Labour Intensive Goods and Capital Intensive Goods.

Assumptions
Two countries, Two factors, Two commodities
Perfect Competition in both commodity and factor

market. Factors are freely mobile within country but immobile between countries. Two countries differ in factor supply and Each commodity differ in factor intensity

 Production function remains the same in different

countries for the same commodity full employment of resources and demand are identical in both countries. Trade is free and no Transportation cost.

 Capital rich country will export capital

intensive commodity and the labour rich country will export labour intensive commodity. Economists define factor abundance in terms of factor prices.

LIMITATIONS OF HECKSCHER OHLIN'S THEORY

Unrealistic Assumptions: assumes no

qualitative difference in factors of production, identical production function, constant return to scale Restrictive: includes only two commodities, two countries and two factors One-Sided: supply plays a significant role than demand in determining factor prices Static in Nature: given state of economy and with a given production function and does not accept any change

 Wijnholds's Criticism: it is commodity

prices that determine the factor prices Consumers' Demand ignored: commodity prices influenced by consumer demand Leontief Paradox: tested H-O theory under U.S.A conditions Other Factors Neglected: technology, technique of production, natural factors, different qualities of labour which also influence international trade

NATIONAL COMPETITIVE ADVANTAGE: PORTERS DIAMOND

 Home country Demand plays an important role Enables better understanding of the needs and desires of

Shapes the Creates Characteristics attributes of pressure for E.g. 1:of Japans knowledgeable buyers of cameras the Home domestically innovation and stimulated the Japanese camera industry to innovate Demand made products quality

customers It shapes the attributes of domestically made products and creates pressure for innovation and quality

and grow tremendously E.g. 2: Local demand for cellular phones in Scandinavia made Nokia and Ericsson to invest in cellular phone technology in other developing nations. E.g. 3: The French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.

 BASIC FACTORS Natural resources, climate, location and

demographics ADVANCE FACTORS Communication Infrastructure, skilled labor, Research facilities and so on. Basic factors can provide only an initial advantage They must be supported by advanced factors to maintain success
Japan a country which lacks arable land and mineral

deposits. Large pool of engineers - very vital for a manufacturing industry. Japan has high priced land and so its factory space is at a premium.

 Benefits of investment in advanced factors by Suppliers and

related industries can spill over helping in the achievement of competitive position internationally. Creates clusters of supporting industries, thereby achieving a strong competitive position internationally.

E.g.: Switzerlands success in pharmaceutical industry is closely related to its international success in technical dye industry.
Swedish strength in fabricated steel industry is the

reason for development in the Sweden's specialty steel

 Rivalry breeds innovation. Porter argues that domestic rivalry

leads to better products than competition from international markets. Porter supports his argument that international competition is not motivating enough. The reason owes to the fact that in a global scenario, companies operate in separate environments. Countries attract different kinds of industry depending on the economic strategy they follow. Different countries have different organizational structures. Countries will be become more competitive in industries that support such kind of structures.

Government
Government is an influencer to all four determinants Porter states that , Governments proper role is as a catalyst, to encourage and push firms to higher levels of competitive advantage. Government investment in education can change factor endowment. Regulation can alter home demand conditions

Chance
Chance Events such as major innovations, can reshape industry structure.

CONCLUSION
Product life cycle theory Planning and proactive approach are the advantages of product life cycle theory. Unreliability and assumptions are the limitations of this theory Comparative advantage theory The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.

Heckscher Ohlin theory

A country has a comparative advantage in

producing products that intensively use factors of production (resources) it has in abundance

References
Akrani, Gaurav. "Heckscher Ohlin's (HO) Modern

Theory of International Trade." Heckscher Ohlin's (HO) Modern Theory of International Trade. N.p., 21 Mar. 2011. Web. 11 Aug. 2013. <http://kalyancity.blogspot.com/2011/03/heckscher-ohlin-ho-moderntheory-of.html>. Valuebasedmanagement.net Info.sms.uni.edu/blog Ebrahim mohamed porters diamond of national advantage8/88