1. International Trade
Chapter 5

2. Trade Theories Mercantilism Theory of Absolute Advantage
Theory of Comparative Advantage
Theory of Country Size
Factor-Proportions Theory
Product Life Cycle Theory
Competitive Advantage Theory

3. Theory of Country size Large countries tend to have
Varied climates and an assortment of natural resources
Higher domestic transportation costs for exports
Economies of scale
Large countries tend to have smaller degree of openness (smaller % of GDP as exports)

4. Factor Proportions Theory (Heckscher-Ohlin Theory)
Each country specializes in products or processes which use factors in relative abundance. (e.g. Labor abundant countries: labor intensive product)
Leontief Paradox: U.S,. exports are more labor intensive than U.S. imports.
Paradox solved: Labor is not homogeneous (U.S. exports are of highly skilled labor contents while U.S. imports are of unskilled labor contents).

5. Product Life Cycle Theory (Raymond Vernon)
Location of production of a product shifts internationally depending on the stage of the product life cycle.
4 stages
Introduction
Growth
Maturity
Decline

6. Competitive Advantage Theory (Michael Porter’s Diamond Theory)
Theory explaining why a particular industry in a country gains global competitiveness.
Four determining factors
Factor endowments
Demand conditions
Supporting industries
Firm’s strategy
First two factors became less important with globalization

7. Trade Patterns
Country difference theory: applicable to trade based on natural advantages
Country similarity theory: applicable to trade based on acquired advantages
Pairs of trading relationships
Distance
Cultural similarity
Political and economic interests

8. Strategic Trading Reasons or incentives of a firm to export
To utilize excess capacity
To take advantage of economies of sale
To spread risk by diversifying markets
To increase markup
Strategic trading policy of a nation
General approach
Specific approach