Professional Documents
Culture Documents
International Trade
Mercantilism
Mercantilism
An economic philosophy based on the belief that a
nations wealth depends on the accumulated treasure,
usually gold. To increase wealth, government policies
should promote export and discourage imports.
Nation should regulate its domestic and international
affairs so as to promote its interests.
Solution lies in strong foreign trade and country should
achieve favorable balance of payment.
Gold and silver earn would help increase income,
employment and consumptions.
Tariffs, quota and other commercial policies were
proposed by mercantilists to achieve favorable balance
of payment.
Criticism
Favorable balance of payment is short term
phenomenon and over time price rise would eliminate
advantages due to favorable balance of payment.
It was also static view and assumed world pie (total
output) would remain constant and therefore gains from
trade comes at the expense of trading partner.
International trade permits nation to take advantages of
specialization and division of labor which increases the
general level of output with in the nation and thus raises
world output.
Absolute advantage
Comparative advantages
A nation having absolute disadvantage in
the production two goods with respect to
an other nation has a comparative or
relative advantage in the production of the
good in which its absolute disadvantage is
less.
How does it work.
TABLE 1
Meat
Potatoes
Meat
Potatoes
USA
60 min/oz
15 min/oz
8 oz
32 oz
Brazil
20 min/oz
10min/oz
24 oz
48 oz
FIGURE 1
(a) The USAs Production Possibilities Frontier
The Production
Possibilities
Frontier
16
32
Potatoes (ounces)
24
Panel (b) Shows
the combinations
of meat and
potatoes that the
Brazil can
produce. Both
production
possibilities
frontiers are
derived from Table
1 and the
assumption that
the USA and
Brazil each work 8
hours a day
12
24
48
Potatoes (ounces)
FIGURE 2
(a) The USAs Production and Consumption
Meat (ounces)
USAs
consumption
with trade
USAs
production
and
consumption
without trade
A*
5
4
USAs
Production
with trade
32
16
17
Potatoes (ounces)
How Trade
Expands the Set
of Consumption
Opportunities
The proposed
trade between
the USA and the
Brazil offers each
of them a
combination of
meat and
potatoes that
would be
impossible in the
absence of trade.
In panel (a), the
USA gets to
consume at point
A* rather than
point B. Trade
allows each to
consume more
meat and more
potatoes
Meat (ounces)
24
Brazils
Production with
trade
18
Brazils
consumption
with trade
13
B*
Brazils
production and
consumption
without trade
B
12
12
24
27
27
Potatoes (ounces)
TABLE 2
USA
Meat
Potatoes
Brazil
Meat
Potatoes
Without Trade:
Production and
Consumption
4 oz
16 oz
12 oz
24 oz
Production
0 oz
32 oz
18 oz
12 oz
Trade
Gets 5 oz
Gives 15
oz
Give 5 oz
Gets 15
oz
Consumption
5 oz
17 oz
13 oz
27 oz
+ 1 oz
+1 oz
+ 1 oz
+3 oz
With Trade:
TABLE 3
The Opportunity Cost of Meat and Potatoes
1 Ounce of Potatoes
USA
4 oz potatoes
oz meat
Brazil
2 oz potatoes
oz meat
Consumer
surplus
Equilibrium
Price
Producer
surplus
Domestic
demand
0
Equilibrium
quantity
Quantity of
Steel
FIGURE 4
Price of
Steel
Domestic
supply
Price after
trade
World
price
Price before
trade
Domestic
demand
Exports
0
Domestic
quantity
demanded
Domestic
quantity
supplied
Quantity of Steel
FIGURE 5
Before Trade
After Trade
Change
Consumer Surplus
A+B
-B
Producer Surplus
B+C+D
+(B+D)
A+B+C
A+B+C+D
+D
Total Surplus
The area D shows the increase in total surplus and represent the gains from
Trade.
Price of
Steel
Exports
A
Price after
trade
Price
before
trade
Domestic
supply
World
price
C
Domestic
demand
Quantity of Steel
FIGURE 6
Once trade is allowed, the domestic price falls to equal the world price. The supply curve shows the
amount produced domestically, and the demand curve shows the amount consumed domestically.
Imports equal the difference between quantity demanded and the domestic quantity supplied at the world
price.
Price of
Steel
Domestic
supply
Price
before
trade
World
price
Price
after
trade
Imports
0
Domestic
demand
Quantity of
Steel
FIGURE 7
When the domestic price falls to equal the world price, buyers are better off (consumer surplus rises
from A to A + B + D), and sellers are worse off (producer surplus falls from B + C to C). Total surplus
rises by an amount equal to area D, indicating that trade raises the economic well- being of the
country as a whole.
Before Trade
After Trade
Change
Consumer Surplus
A+B+D
+(B+D)
Producer Surplus
B+C
-B
A+ B + C
A+ B + C + D
+D
Total Surplus
The area D shows the increase in total surplus and represent the gains from Trade
Price of
Steel
Domestic
supply
Price before
trade
A
B
Price after
trade
World
price
D
Imports
Domestic
demand
Quantity of Steel
FIGURE 8
Price of
Steel
Domestic
supply
Equilibrium
without trade
Price
with tariff
B
C
Price
without
tariff
World
price
Imports with
tariff
s
2
Domestic
demand
D
Q Q
Quantity of
Steel
Before Trade
After
Trade
Change
Consumer Surplus
A+B
- ( C + D + E + F)
Producer Surplus
C+G
+C
None
+E
A+ B + C + D + E + F +
G
A+ B + C
+D
- (D+ F)
Government Revenue
Total Surplus
The area D + F shows the Fall in total surplus and represents the deadweight loss of the tariff.
FIGURE 9
Price of
Steel
Domestic
supply
Domestic
supply +
Import supply
Equilibrium
without trade
Quota
A
Isolandian
price with
quota
E
D
Price
without
quota
Equilibrium
with quota
= world
Word
price
Imports
with quota
price
s
2
Domestic
demand
Q
Imports without
quota
D
2
Quantity
of Steel
Before Quota
After Quota
Change
Consumer Surplus
A + B + C + D + E + E + F
A+ B
- ( C + D + E + E + F)
Producer Surplus
C+G
+C
License- Holder
Surplus
None
E + E
+(E + E)
A + B + C + D + E + E + F + G
A + B + C + E + E + G
- (D+ F)
Total Surplus
The area D + F shows the fall in total surplus and represents the deadweight loss of the quota.
IF C1/L1>C2/L2
WHERE Ci = AMOUNT OF CAPITAL IN COUNTRY i
Li = AMOUNT OF LABOUR IN COUNTRY i
COUNTRY 1 IS RICH IN CAPITAL AND COUNTRY 2 IS RICH IN LABOUR.
SKILLED LABOUR
R&D-ORIENTED INDUSTRIES
NATURAL RESOURCES INDUSTRIES
INTERNAL DEMAND
PRODUCT LIFE CYCLE
INTRA-INDUSTRY TRADE
THEORIES OF STRATEGIC
TRADE
THEORY OF COMPETITIVE
ADVANTAGE
AC0
AC
U.S. Producers
Average Costs
Qus
Annual Production
2.
ECONOMIES OF SCALE IN PRODUCTION--IN INDUSTRIES
CHARACTORISED BY LARGE ECONOMIES OF SCALE IN PRODUCTION
THE GOVERNMENT IN A LARGE MARKET CAN PROVIDE A DOMESTIC
FIRM WITH AN ADVANTAGE OVER FOREIGN PRODUCERS BY CLOSING
THE MARKET.
4.
DONT PRODUCE
-5
Produce w/o
Subsidy
-5
100
American
Firms: Boeing
60
Dont
Produce
Produce w/
Subsidy
Produce w/o
Subsidy
-5
Produce w/o
Subsidy
-5
American Firms:
Boeing
Dont
Produce
0
100
-5
60
Dont Produce
70
0
0
-5
Produce
w/o Subsidy
-5
American
Firms: Boeing
Produce w/
Subsidy
Produce w/subsidy
100
5
-5
0
110
5
60
Dont
Produce
5
-5
Dont Produce
70
0
CRITICS OF STRATEGIC
TRADE THEORIES
COMPETITIVE ADVANTAGE
OF NATIONS
PORTER POSED THREE QUESTIONS:
WHY DOES A NATION SUCCEED
INTERNATIONALLY IN A PARTICULAR
INDUSTRY?
WHAT IS THE INFLUENCE OF THE NATION
ON COMPETITION IN SPECIFIC INDUSTRIES
AND INDUSTRY SEGMENTS?
WHY DO A NATIONS FIRMS SELECT
PARTICULAR STRATEGIES?
FACTOR
CONDITIONS
DEMAND
CONDITIONS
RELATED AND
SUPPORTING
INDUSTRIES
FACTOR CONDITIONS
A NATIONS ENDOWNMENT OF FACTORS PLAY A MORE
COMPLEX ROLE IN DETERMINING NATIONAL COMPETITIVE
ADVANTAGE THAN GENERALLY ACKNOWLEDGED.
FACTOR ENDOWNMENT ARE DYNAMIC, AND COULD BE
UPGRADED, CREATED AND SPECIALISED.
FACTORS ARE DIVIDED INTO:
HUMAN RESOURCES
PHYSICAL RESOURCES
CLIMATIC CONDIITONS
KNOWLEDGE RESOURCES
LOCATIONS
CAPITAL RESOURCES
INFRASTRUCTURE
FACTORS
BASIC
ADVANCED
GENERALISED SPECIALISED
DEMAND CONDITIONS IN
THE HOME MARKET
ELEMENTS OF PORTERS FRAMEWORK ARE:
THE NATURE OF DOMESTIC BUYERS NEEDS
THE SIZE AND PATTERNS OF GROWTH OF
THE DOMESTIC MARKET
THE MECHANISM BY WHICH DOMESTIC
BUYERS NEEDS ARE COMMUNICATED TO
FOREIGN FIRMS