Mind Map Gallery Theories of International Trade and Investment

Theories of International Trade and Investment

Gain a comprehensive understanding of the foundational and progressive theories that shape international trade and investment practices. Our guide delves into the classical economics of mercantilism, absolute advantage, and comparative advantage, as well as modern theoretical frameworks like the Heckscher-Ohlin model. We provide insights into how these theories apply to current global trade patterns, investment strategies, and economic policies. Whether for academics, professionals, or students, this resource is an invaluable tool for anyone looking to deepen their knowledge of international economic operations and the principles that govern global markets.

Edited at 2022-07-13 03:57:38

Cañete, Ore

Theories of International Trade and Investment

Cañete, Ore

Recommended to you
Outline

Theories of International Trade and International Investment

Theories that explains international trade and justifies why a company does international trade.

Classical Theories

Mercantilism

states that country should grow its reserves of gold and silver by encouraging exports and discouraging imports.

Theory of Absolute Advantage

Adam Smith’s theory of absolute advantage appeared in his major work Wealth of Nations in 1776.

focuses on the concept that country should produce an item that it can manufacture more proficiently than other countries.

Trade is not mutually beneficial.

Theory of Comparative Advantage

David Ricardo's most important legacy is the Comparative Advantage Theory written on his book entitled "The Principles of Political Economy and Taxation written in 1817."

says that business can take place even if one nation has an advantage in making both items.

Trade is mutually beneficial.

Heckscher-Ohin Theory

The H-O model was originally developed in the 1920s by two Swedish economists, Eli Heckscher and his student Bertil Ohlin, who received the Nobel Prize in Economics in 1977.

says that countries will export products that use their abundant and cheap factor of production and import products that use the countries' scarce factor.

No country is abundant in everything.

Modern Theories

Country Similarity Theory

Country similarity theory was developed by a Swedish economist named Steffan Linder.

states that people n countries that are in the same level of development have similar preferences.

1. Principles:

If two countries have related require patterns, then their customers would claim the same goods with alike degrees of value and superiority.

Since the majority of products are developed on the required patterns in the domestic market, other countries with related require patterns due to a cultural or economic comparison would be their normal trade partners.

Countries with the proximity of geological locations would also have better trade compared to the far-away ones.

2. Occurence of trade mostly occurs to related countries with:

Same per-capita income.

Comparable communications or allocation systems.

Same language, traditions, belief, and/or tastes.

3. Assumptions:

Developed countries trade more with developed countries.

Countries in similar cultural milieu trade more amongst themselves.

Countries in similar cultural milieu will have related demands as for as cultural products/services like family functions, rituals, entertainments, religious ceremonies and so on.

Intra-industry trade abetted by similarity factor.

Equally placed countries capabilities, as well as needs, occur to be similar.

Types of trade is being traded:

Inter-industry trade

It is the swap of goods produced by one industry in country A for goods produced by a dissimilar industry in country B. It is generally a deal between two industries of two countries.

Intra industry trade

It is the trade between two countries of goods produced by similar industry. It is essentially a lot of similar industries between the two countries.

Product Life Cycle Theory

Raymond Vernon, 1966.

states that there are three stages in every product life cycle - new product, maturing product, and standardized product.

Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster.

focuses on how companies can get competitive advantage when competing against global firms in same industry.

Porter's National Competitive Advantage

Michael Porter’s diamond of national advantage as a contemporary trade theory was developed in the late 1980s.

says that competitiveness business segment depends on innovative items, processes, etc.

International Business