A system of political and economic policy, evolving with the modern national state and seeking to secure a nation’s political and economic supremacy in it’s rivalry with other states. According to this system, money was regarded as the store of wealth, and the goal of a state was the accumulation of precious metals (gold & silver) by exporting the largest possible quantity of its products and importing as little as possible, thus establishing a favorable balance of trade.Export>ImportMercantilism is one of the oldest trade theories, developed in mid of 16th century. Country such as Singapore, Japan, Taiwan and China still favor exports and discourage import through protectionist policies, restrictions and domestic industry subsidies.a. Absolute AdvantageThe Scottish economist Adam Smith developed the trade theory of absolute advantage in 1776. A country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources.
Tariffs and quotas should not restrict international trade.A country has an absolute advantage when it can produce more goods and services than countries with same levels of inputs (lower cost/unit). The nations will exports goods that have absolute cost advantage and imports goods that have absolute cost disadvantage.b. Comparative AdvantageRicardo’s Law of Comparative Advantage improved upon the earlier law of absolute advantage.
How? If A is more productive than B in every productive activity, would both countries benefit from trade? The law of absolute advantage has no answer to the question. Comparative advantage theory showed that the answer is yes.Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.c.
The Heckscher –Ohlin Theory (factor proportion/endowment theory)The combine theory of Eli Heckscher (which deals with and predicts the pattern of trade) and Berlin Ohlin (which deals with the effect of international trade on factor prices) is H-O theorem. Comparative advantage reflects differences in national factor endowments (the extent to which a country is endowed with resource such as land, labor, and capital) A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.In short, the relatively labor – rich nation exports the relatively labor intensive commodity and imports the relatively capital-intensive commodity.1. Modern Firm Based Theories Country Similarity TheoryWhen a firm develops a new product in response to observed conditions in its home market, it is likely to turn to those foreign markets that are most similar to its domestic market that are most similar to its domestic market when commencing its initial international expansion activities. This tendency is reflective of: The cultural similarity of nation, The similarity of national political Economic interests and the economic similarity of industrialized countries. Product life cycle theory (Vernon (mid 1960s) the product life cycle theory)The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: New product, Maturing product, and Standardized product.As the products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade.
Global Strategic Rivalry TheoryInternational trade takes place among companies based on relative competitive advantage but not countries competitive advantage. Companies acquire and develop competitive advantage through a number of means. Owing intellectual property right Investing in research and development Achieving large scale economies Exploiting the experience curve Porter’s National competitive theoryMichel porter tried to explain why a nation achieves international success in a particular industry and indentified four attributes that promote or impede the creation of competitive advantage.The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. Factor endowments: A nation’s position in factors of production necessary to compete in a given industry.Demand conditions: The nature of home demand for the industry’s product or service.Malaysia is a big exporter of electrical and electronic components and China of footwear.Malaysia is a big exporter of electrical and electronic components like semiconductor devices, passive components, printed circuit, connectors, LED television receivers, digital theater, digital cameras etc.
Manufacturing of electrical and electronic component is a labor intensive process that doesn’t need much technology skill.China is big exporter of footwear (footwear, textiles, etc) in the world because china has skill human resource, manufacturing expert, and highly trained man force to produce footwear. China has biggest population in the world so it’ has abundance of low cost labor.
China has benefit in labor intensive manufacture industry. So, china has manufacturing product like footwear, textile at lower cost. That’s why china is the biggest exporter of these things.Malaysia is a big exporter of electrical and electronic components and China of footwear.The Heckscher–Ohlin Trade Theory (factor proportion/endowment Trade theory) explains it.
“Relative differences in countries’ resource endowments are key to the standard version of the Huckster-Ohlin theory of international trade. This states that a country will export the good which requires the intensive use of the country’s relatively abundant (and therefore cheap) factor for its production”.In the above case Malaysia has relative abundant/cheap factor (low labor cost) for production of electrical; and electronic components and China has also relative abundant/cheap factor (low labor wage) for production of Footwear..The Heckscher-Ohlin theory has been modified and extended by introducing other factors also besides resource endowments, such as transportation costs, economies of scale and government policy, which also influence comparative advantage. For example, distance from world markets can be a decisive factor when the natural resource in question is bulky, such as natural gas, and when transportation costs are high. Complementary inputs, such as technology, capital and skilled labor, are also significant when a natural resource sector is characterized by difficult or technically complex extraction processes.