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International
Marketing MKT630
VU
Lesson
# 6
INTERNATIONAL
TRADE & INVESTMENT
THEORIES
Classical
Country Based
Theories
International
merchandise trade in goods in 2006
was $8 tr. & in services 3
tr. (20% of the world
GDP).
Exports
spark additional economic activity in domestic economy
as companies of country can
expand
their
sales and profits by selling to
foreign markets.
Imports
can pressure domestic economy as foreign
products flood domestic markets and
result in
closing
down of non-competitive local
businesses.
Some
countries in the world are successful in
exporting manufactured and non-manufactured
goods as
well
as services to other countries and have
become prosperous. While there
are other countries
that
have
ton been so successful and
hence have remained poor. Due to
international trade's significance
to
businesses,
consumers & workers, scholars have
attempted to develop theories to explain &
predict the
forces
that motivate such
trade.
Mercantilism:
This
is an old 16th century economic
philosophy that attempted to explain
how countries may
become
prosperous
and strong. Salient points of
this philosophy are in the
following;
·
Country's
wealth is measured by its
holdings of gold & silver
(reserves of modern era)
·
Country's
goal should be to enlarge those
holdings
·
To
do this a country should
maximize difference between its exports
& imports
·
A
country should then promote
exports & discourage imports - if exports are more
than imports
foreigners
have to pay the difference in gold &
silver
·
Today's
"unfavourable balance of trade"
when exports of any country
are less than its exports,
is the
extension
of the same idea
·
With larger
holdings of gold and silver
kings could have more wealth and
hence could afford
larger
armies
to expand kingdoms
·
This approach
would make exporters happy and domestic
manufacturers of export products
would
also
be happy as their businesses
grow
Arguments
against `Mercantilism'
Approach:
By
following this philosophy in a
country more members of society
are at loss as export subsidy
is
·
paid
by taxpayers and import restriction
leads to higher domestic
prices
In
the age of imperialism the burden of the
subsidy was shifted to colonies
and colonies were
made
·
producers
of raw materials and markets for
empire's manufactured products
Mercantilism
actually weakens a country as the
subsidized and protected export sector
fails to
·
become
efficient and the domestic economy suffers to provide
support to the exports.
Country's
true wealth is in fact
measured by the wealth of all
its citizens not just that
of its king or
·
only
the exporters
Country's
real wealth is dependent on production of
goods & services rather than
accumulation of
·
gold
reserves
More
wealth of more citizens will provide more
tax base & hence a
wealthy king
·
Mercantilism
causes inefficiencies, some special
interest groups may benefit, reduces
wealth of
·
country
as a whole
Free
trade among countries enlarges a country's
wealth (specialize in production of some
goods &
·
services
while import others) (unrest in britain's
american colonies and their
subsequent
independence
was due to the "mercantilist" policies of
uk )
18
International
Marketing MKT630
VU
Theory
of Absolute Advantage:
This
theory was forwarded in 1776
by Adam Smith. Salient
features of this theory are
in the following;
·
It advocates
free trade among world countries to
maximize citizens'
wealth
·
Free trade
enables a country to expand the amount of
goods and services available to it
by
specializing
in production of some goods and
services and trading of
others
·
A country can
have certain advantages over
other countries
Natural advantage:
climatic conditions, natural
resources, abundant cheap labor-force
etc
Acquired advantage:
development of product or process,
skills development
etc
·
A country
should export those goods
& services for which it is more
productive than
others
·
Import those
goods & services for
which other countries are more
productive
What
if a country has absolute advantage in
all products? Large countries
like USA and China can
have
absolute
advantages in manufacturing many types of
products. Extent of value addition and
profits on
various
products vary. Some types of products
allow better return on
resources deployed than
others
products.
Should these countries then produce and
export all such products in
which they have
advantage?
Or concentrate more on such products where they
may earn comparatively
better profits?
Theory
of Comparative Advantage:
Forwarded
in early 19th century, the
theory of Comparative Advantage
resolves the above issue. A
country
should produce and export such products
where it has comparatively more advantage
and hence
can
earn better margins. Salient
features of this theory are
in the following;
·
A country
should produce & export those
goods & services for
which it is relatively more
productive
than
other countries
·
Implement
concept of opportunity cost
(what a country gives up to get / produce
a certain good) in
determining
which goods a country should
produce
·
Factor
Proportions concept (identifies
which products may offer
comparative advantage to a
country)
Factor (resources)
vary among countries i.e. Oil
cheaper in Saudi Arabia,
china has cheaper
labor,
Singapore
has capital and funds
A country will
have comparative advantage in producing products
that intensively use
resources
it
has in abundance
Country
Similarity Theory:
Most
trade today occurs among apparently
similar countries
Same per-capita
income
Similar
infrastructure / distribution
systems
Same language /
culture / religion / tastes
etc.
Similarity
among countries on the above aspects allows
their products and services to be
sold easily in
each
others markets.
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