Theories Of Global Trade And Investments

Theories of Global Trade and Investments

Major Trade Theories      

Mercantalism Theory of Absolute Advantage Theory of Comparative Advantage Factors Endowments Theory Product Life Cycle Theory National Competitive Advantage

Mercantalism   

Popular in 17th and early 18th century Advocated for Trade Surplus Main Hypothesis… Encourage Exports, Discourage Imports Consolidate through accumulation of Gold/Silver through trade surplus

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Theory of Absolute Advantage Propounded by Adam Smith Country having absolute cost advantage in the production of a product on account of greater efficiency should specialize in its production and export Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for other goods.

Theory of Comparative Advantage 

Nations should specialize in the production and export those goods in which they have greatest relative advantage

Factor Endowments Theory 

A country should produce and export a commodity that primarily involves a factor of production abundantly available within the country.

Product Life Cycle Theory   

International PLC model….Vernon Concerned with stages of life cycle of product Has three stages: New product, Mature product and Standardized product Initially, the comparative advantage will exist in the innovating country, but over time, as the product becomes standardized, the country of comparative advantage will shift to lower factor cost locations. The innovative firm will start out as an exporter and move towards direct investments abroad.

National Competitive Advantage According to Michael Porter, there are 4 factors responsible for making a company/country more competitive in a particular industry. ……Diamond of National Advantage 

These are… Factor Conditions Demand Conditions Related and Supporting industries Firm strategy, structure and rivalry

Firms that are most likely to succeed where diamond is most favourable

Foreign Direct Investment-FDI 

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Foreign/International investment means ownership of long-term assets as well as certain short-term assets in one country by individuals or organizations of another nation. Direct Investment means if an individual or organization in a foreign country gains sufficient interest in an operation to acquire control.

WHY……FDI     

Transportation costs Market Imperfections Competition PLC Theory Location Advantages