1. International Trade Theories
Lecture 2
International Trade Theories
Hyun-Hoon Lee
Professor
Kangwon National University 1 1

2. Contents
1. What are the reasons for fast expansion of international trade?
2. What are the fundamental reasons for international trade?
3. What are the consequences (i.e. benefits and costs) of international trade?
4. Who are the major trade partners?
5. What are the consequences of (i.e. benefits and costs) of trade policy? 2 2

3. 2. What are the Reasons for Fast Expansion of International Trade?

4. 2. Reasons for Fast Expansion of International Trade
Liberalization of Trade
GATT/WTO
Economic Integration
Development of Transport
Sea Transport
Air Transport
Development of Telecommunication
Telephone
Internet

5. Container shipping dramatically reduced shipping costs making it much easier and cost effective to ship world-wide.

6. 3. What are the Fundamental Reasons for International Trade?

7. 3. Fundamental Reasons for International Trade
Comparative advantage
Difference in technology - David Ricardo
Difference in factor endowments – Heckscher-Ohlin
 Inter-industry trade
Economies of scale and product differentiation
Economies of scale
Product differentiation
 Intra-industry trade

8. Top 10 export items of Korea (%)
3. Fundamental Reasons for International Trade
Top 10 export items of Korea (%)
Source : KOTIS

9. Top 10 import items of Korea (%)
3. Fundamental Reasons for International Trade
Top 10 import items of Korea (%)
Source : KOTIS

10. ■ Costs of International Trade
4. What are the Consequences (Benefits and Costs) of International Trade?
■ Benefits of International Trade
■ Costs of International Trade

11. ■ Benefits of International Trade
4. What are the Consequences (Benefits and Costs) of International Trade?
■ Benefits of International Trade
Individuals
Consumption of better quality products with lower prices
Consumption of diverse products
Firms
Greater business opportunities
Greater profit
Nation
Fast economic growth
Job creation

12. ■ Relation between Growth Rates of GDP and Trade
4. What are the Consequences (Benefits and Costs) of International Trade?
■ Relation between Growth Rates of GDP and Trade

13. ■ Costs of International Trade
4. What are the Consequences (Benefits and Costs) of International Trade?
■ Costs of International Trade
Individuals
Loss of jobs employed in the less competitive industries
Firms
Face stronger competition and may lose competitive edge
Nation
Greater income disparity
Possibility of environmental degradation in developing countries
Greater vulnerability to foreign shocks

14. ■ Net Benefit of International Trade
4. What are the Consequences (Benefits and Costs) of International Trade?
■ Net Benefit of International Trade
Firms
Greater business opportunity but may lose competitive edge
Individuals
As consumers, individuals become better off, but as workers, individuals may become worse off.
Nation
Overall national welfare becomes greater, but the nation may face the problems of income disparity, environmental degradation, etc.

15. Top 10 export markets for Korea
5. Who are the major trade partners
Top 10 export markets for Korea
Rank
1970
1980
1990
2000
2010
2012
Country % 1 2 3 4 5 6 7 8 9 10
U.S.
Japan
Hong Kong
Germany
Canada
Netherlands
U.K.
Vietnam
Singapore
Sweden
47.3
28.1
3.3
2.3
1.6
1.5
1.3
0.9
Saudi Arabia
Iran
Indonesia
26.3
17.4
5.4
5.0
4.7
3.5
2.1
2.0
Hong Kong
Taiwan
France
29.8
19.4
5.8
4.4
2.8
2.7
1.9
1.7
China
Malaysia
21.8
11.9
10.7
6.2
3.1
3.0
India
Mexico
25.1
6.0
3.2
2.5
Russia
24.5
7.1
4.2
2.9
2.2
Total
91.4
71.6
72.9
68.8
62.4
64.8
Source : KOTIS

16. Top 10 import markets for Korea
5. Who are the major trade partners
Top 10 import markets for Korea
Rank
1980
1990
2000
2010
2012
Country % 1 2 3 4 5 6 7 8 9 10
Japan
U.S
Saudi Arabia
Kuwait
Australia
Ira
Germany
Malaysia
Canada
U.K
26.3
21.9
14.8
7.9
3.1
2.9
2.1
1.7
1.4
Japn
China
Indonesia
26.6
24.3
4.7
3.7
3.2
2.5
2.3
1.8
Arab Emirate
Taiwan
19.8
18.2
8.0
6.0
3.3
3.0
Qatar
16.8
15.1
9.5
6.3
4.8
3.4
2.8
2.6
15.5
12.4
8.3
7.6
4.9
4.4
3.5
2.7
Total
84.8
73.4
70.8
67.4
65.8
Source : KOTIS

17. 5. Who are the major trade partners
Gravity Model
Other things equal, the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries’ GDPs, and the greater the distance between the two countries, the smaller is their bilateral trade.
That is, the larger (and more equal in size) and the closer two countries are, the larger the volume of trade between them is expected to be.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.

18. ■ Multilateralism vs. regionalism
6. What are the Consequences (Benefits and Costs) of Trade Policy?
■ Free trade vs. non-free trade
■ Tariff and non-tariff barriers
■ Multilateralism vs. regionalism

19. Hyun-Hoon Lee