International Business Lecture No,20 By Dr.Shahzad Ansar

An Overview of Trade Theory Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country.

An Overview of Trade Theory The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.

An Overview of Trade Theory The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish). Others are not so easy to understand (Japan and cars).

An Overview of Trade Theory The history of Trade Theory and Government Involvement presents a mixed case for the role of government in promoting exports and limiting imports. Later theories appear to make a case for limited involvement.

The pattern of International Trade Theory of David Ricardo provides Intellectual basis for modern concept of unrestricted Free Trade

The Theory of free Trade The theory of Ricardo was further refined by Eli Heckscher and Bertil Ohlin,two Swedish Economists

Trade & Government policy

Mercantilism: mid-16th century A nation’s wealth depends on accumulated treasure Gold and silver were the currency of trade. Theory says you should have a trade surplus.

Mercantilism Maximize exports through subsidies. Minimize imports through tariffs and quotas. Flaw: “zero-sum game

Mercantilism The Mercantilism and David Hume(1752) Hume says “in the long run no country could sustain a surplus in the balance of trade”

“A situation in which all countries can benefit” A Zero Sum Game “ A Gain by one Country is Loss by other” or A positive-Sum Game “A situation in which all countries can benefit”

The Work Of Jarl Hagelstam “The developed or developing countries still ask for liberalization in areas where they are strong”

Absolute Advantage

Absolute Advantage The case of UK & France

Ghana Versus Korea An absolute advantage justification in growing rice and cocoa

The Theory of Absolute Advantage 0 5 10 15 20 5 10 15 20 A B K G K’ The Theory of Absolute Advantage Cocoa Figure 4.1 Rice