IBM & Theories of international trade : IBM & Theories of international trade Kalpita Chakrabortty
Definition : Definition A field of study and practice that encompasses public and private business activity affecting the persons or institutions of more than one national state, territory or colony
- Robinson 1978
Problems in IB : Problems in IB Transaction in foreign language, under foreign law, custom and regulation
Information regarding foreign business practices
Foreign currency and exchange rate
Cultural differences
Control and communication
Risk level
Internationally standard Managerial skill
Involvement of intermediaries
Monitoring in foreign land
Why go global? : Why go global? To expand sales
To acquire resources
To diversify sources of sales and supplies
To minimize competitive risk
Rapid expansion in technology
To support international trade
To remain in global competition
Theories of international trade : Theories of international trade Theory of comparative costs:
Established by Adam Smith and developed by David Ricardo
Modern theory of international trade:
Developed by economists Heckscher and Bertil Ohlin
Theory of comparative costs : Theory of comparative costs Assumptions
Production costs are measures in terms of labor cost only
Labor is mobile within nation but immobile between nations
Average cost of production does not change as output change
There are no change in technology or methods of production
There are no restriction on the movement of goods and services between nations
Trade is carries by a barter
Two country two commodity model
Statement of the theory : Statement of the theory Portugal has comparative advantage on wine
England has comparative advantage on cloth
Thus two countries needs to specialized
Benefits of specialization of trade : Benefits of specialization of trade Portugal makes one unit of wine against 0.88 unit of cloth
England makes one unit of wine against 1.20 units of cloth
After specialization of trade 1unit of wine will fetch 1 unit of cloth
Criticisms : Criticisms Unrealistic as it depend on labor theory of value
“labor is immobile between countries” – is not true
Cost cannot be constant
Technology cannot be constant
There is practicality of free trade
Barter exchange is rare
Two country two product model is impractical
There is no obligation that a nation must produce those goods where it has cost advantage
Complete specialization is not true
It may leads exploitation of under develop nation (Socialist view)
One sided theory (price difference cannot be on cost difference)
Modern theory of international trade-1 : Modern theory of international trade-1 Hecksvher-Ohlin theory provides an explanation for international cost differences and discuss specialization and trade.
Statement of the theory:
Countries differ in factor endowments
Capital intense
Labor intense
Products differ in factor requirements
Amount of labor require
Amount of capital require
Statement : Statement International trade is necessary as there is difference in the relative price of commodities in different countries
Price difference is due to difference on factor of production
Difference in factor of production is due to factor endowment
Thus a capital affluent nation can produce capital intensive good and a labor affluent nation can do well with labor intensive goods.
Assumptions : Assumptions Factor endowments of a country is known, fixed and measurable
Factor of production are completely immobile between nations
Free trade is not a reality
Constant cost and technology
There are two factor of production capital and labor
Criticism of Modern theory : Criticism of Modern theory Factor endowment is not know or fixed
Factor of production are not completely immobile between nations
There is no constant cost or technology
Production function is not same among nations
“international trade should take place among nations with dissimilar factor of endowment’- is unrealistic
Leontiff’s paradox proves that capital abundant nation can export labor intense goods.
Theory ignores factors like demand, tastes and preferences, transport cost, technological gap, economies of scale etc.
Theory emphasis on cost and price difference also for trading internationally