The document discusses theories of international trade, trade barriers, and trade blocks. It covers Adam Smith's theory of absolute advantage, Ricardo's theory of comparative advantage, and factor proportions theory. It also explains tariff barriers like import duties as well as non-tariff barriers such as quotas, import licenses, and product standards. Finally, it discusses trade blocks and different levels of economic integration between countries, from free trade areas to political unions.
4. Evolution of Trade Theories
Mercantilism
Absolute advantage (Classical)
Comparative advantage
Factor Proportions Trade
International Product Cycle
New Trade Theory
National competitive advantage
Mrs. Charu Rastogi Asst. Prof.
5. Mercantilism: mid-16th century
Theory assumes that a nation‟s wealth
depends on accumulated treasure
◦ Gold and silver are the currency of trade
Therefore, this theory holds that nations
should accumulate financial wealth, in the
form of gold or silver by encouraging
exports and discouraging imports
Theory says you should have a trade
surplus.
◦ Maximize export through subsidies.
◦ Minimize imports through tariffs and quotas
Flaw: restrictions, impaired growth
Mrs. Charu Rastogi Asst. Prof.
6. Assumptions of Absolute Advantage
and Comparative Advantage
Theories 2 commodity model
2 countries,
Labor as the only input
Single currency assumed thereby eliminating
effects of exchange rate changes
Homogeneous factors of production – All
labor units are of same type. They can be
freely moved from production of cloth to
production of bread and vice versa. i.e. No
specialized labor.
Units of production are divisible in compact
units.
All factors of production are fully employed.
No government restrictions on freeAsst. Prof.
Mrs. Charu Rastogi trade
7. Theory of absolute advantage
Adam Smith: Wealth of Nations (1776) argued:
◦ A country should produce only goods where it is most
efficient, and trade for those goods where it is not efficient
◦ Export those goods and services for which a country is
more productive than other countries
◦ Import those goods and services for which other countries
are more productive than it is
Trade between countries is, therefore, beneficial
Assumes there is an absolute balance among
nations
Mrs. Charu Rastogi Asst. Prof.
8. Theory of absolute advantage
… destroys the mercantilist idea since there are
gains to be had by both countries party to an
exchange
… questions the objective of national governments
to acquire wealth through restrictive trade policies
… measures a nation‟s wealth by the living
standards of its people
Mrs. Charu Rastogi Asst. Prof.
9. Theory of absolute advantage
PPF – Production Possibility
Frontier
Ghan
a
South
Korea
Mrs. Charu Rastogi Asst. Prof.
10. Absolute Advantages and Gains
from Trade
Assume total amount of resources at 200. In the absence of trade resource is used
Mrs. Charu Rastogi Asst. Prof.
equally for both products; 100 for cocoa and 100 for Ghana
14. Criticism of Absolute Cost
Advantage Theory
Most of the criticisms from absolute
advantage theory would arise because of the
unrealistic nature of its assumptions.
However, an important incompleteness in the
theory was the fact that it addressed only a
situation wherein one country enjoyed an
absolute advantage in production of a
commodity over another country. It was
pointed out that such situations are rare.
Quite often the advantage is not an absolute
advantage but a comparative one as would
be clear from the Ricardian Theory of
Comparative Cost Advantage.
Mrs. Charu Rastogi Asst. Prof.
15. Theory of comparative
advantage
David Ricardo: Principles of Political Economy
(1817)
◦ Extends free trade argument
◦ Efficiency of resource utilization leads to more
productivity
◦ Should import even if country is more efficient in
the product‟s production than country from which
it is buying.
Produce and export those goods and services for
which it is relatively more productive than other
countries
Import those goods and services for which other
countries are relatively more productive than it is
Makes better use of resourcesrs. Charu Rastogi Asst. Prof.
M
17. Comparative Advantage and Gains
from Trade
100-100
for both
products
SK:100-
100
Ghana:
150 for
Cocoa
and 50 for
Rice
Assume total amount of resources at 200. In the absenceMrs. Charu Rastogi Asst. Prof.equally for
of trade resource is used
both products; 100 for cocoa and 100 for Ghana
18. Limitation of Comparative
Advantage Theory
Driven only by maximization of production and
consumption
Only 2 countries engaged in production and
consumption of just 2 goods?
What about the transportation costs?
Only resource – labour (that too, non-transferable)
No consideration for „learning theory‟
Mrs. Charu Rastogi Asst. Prof.
23. Factor proportions theory
Heckscher (1919) - Olin (1933) Theory
Export goods that intensively use factor
endowments which are locally abundant
◦ Corollary: import goods made from locally scarce
factors
Note: Factor endowments can be impacted by
government policy - minimum wage
Patterns of trade are determined by differences in
factor endowments - not productivity
Remember, focus on relative advantage, not
absolute advantage
Mrs. Charu Rastogi Asst. Prof.
24. Factor proportions theory
… trade theory holding that countries produce and
export those goods that require resources (factors)
that are abundant (and thus cheapest) and import
those goods that require resources that are in short
supply
Example:
◦ Australia – lot of land and a small population (relative to its
size)
◦ So what should it export and import?
Mrs. Charu Rastogi Asst. Prof.
25. Factor Proportions Trade Theory:
Considers Two Factors of Production
Labor
Capital
Mrs. Charu Rastogi Asst. Prof.
26. Factor Proportions Trade Theory
A country that is relatively labor abundant should
specialize in the production and export of that
product which is relatively labor intensive
A country that is relatively capital abundant should
specialize in the production and export of that
product which is relatively capital intensive
A country will have a comparative advantage in
producing products that intensively use resources
(factors of production) it has in abundance
◦ China: labor
◦ Saudi Arabia: oil
◦ Argentina: wheat
Mrs. Charu Rastogi Asst. Prof.
27. Tariff and Non-Tariff Barriers, Trade Blocks
TRADE BARRIERS
Mrs. Charu Rastogi Asst. Prof.
28. Trade Barriers
Countries use protectionist measures to shield a
country‟s markets from intrusion by foreign competition
and imports
Protectionism is implemented through the imposition of
trade barriers, which include tariff barriers and non-tariff
barriers
Reasons for protectionism:
◦ Maintain employment and reduce unemployment
◦ Increase of business size
◦ Retaliation and bargaining
◦ Protection of the home market
◦ Need to keep money at home
◦ Encouragement of capital accumulation
◦ Maintenance of the standard of living and real wages
◦ Conservation of natural resources
◦ Protection of an infant industry
◦ Industrialization of a low-wage nation
◦ National defense
Mrs. Charu Rastogi Asst. Prof.
29. Tariff
Tariff in international trade refers to the duties or
taxes imposed on the import traded goods when
they cross the national borders.
Different rate of duty for different goods
Customs Tariff Structure for 2012-13:
http://www.cbec.gov.in/customs/cst2012-
13/cst1213-idx.htm
Example: There is a 100% duty on importing
private cars/vehicles
Mrs. Charu Rastogi Asst. Prof.
30. Non-Tariff Barriers
A form of restrictive trade where barriers to trade are set
up and take a form other than a tariff. Forms of NTBs
Specific Limitations on Trade:
◦ Quotas
sets a physical limit on the quantity of a good that can be imported into a
country in a given period of time
Example: Russia has quotas on the number of tons of beef (315,000) and
chicken (1.05 million) that can be imported each year. If the quotas are
reached, the state then charges an additional 60-80% tax.
◦ Import Licensing requirements
Each license specifies the volume of imports allowed, and the total volume
allowed should not exceed the quota. Licenses can be sold to importing
companies at a competitive price, or simply a fee.
◦ Proportion restrictions of foreign to domestic goods (local
content requirements)
◦ Minimum import price limits
◦ Embargoes
An embargo is the partial or complete prohibition of commerce and trade
with a particular country, in order to isolate it.
Mrs. Charu Rastogi Asst. Prof.
31. Non-Tariff Barriers
Customs and Administrative Entry Procedures:
◦ Valuation systems
◦ Antidumping practices
◦ Tariff classifications
◦ a classification assigned by government officials that affects the size of a
tariff and the imposition of import quotas.
◦ Example: The U.S. Customs Service only charges an 8.5% tariff on
imported leather or “non rubber” shoes, while it charges anywhere from
20-67% for imported rubber shoes like athletic footwear or waterproof
shoes
◦ Documentation requirements
◦ Fees
Standards:
◦ Standard disparities
◦ Intergovernmental acceptances of testing methods and
standards
◦ Packaging, labeling, and marking
Mrs. Charu Rastogi Asst. Prof.
32. Non-Tariff Barriers
Government Participation in Trade:
◦ Government procurement policies
◦ Export subsidies
◦ Countervailing duties
A duty placed on imported goods that are being subsidized by the
importing government
◦ Domestic assistance programs
Charges on imports:
◦ Prior import deposit subsidies
◦ Administrative fees
◦ Special supplementary duties
◦ Import credit discriminations
◦ Variable levies
◦ Border taxes
Others:
◦ Voluntary export restraints
◦ Orderly marketing agreements
Mrs. Charu Rastogi Asst. Prof.
33. Trade Blocks
A trade block is a type of intergovernmental
agreement, often part of a regional
intergovernmental organization, where regional
barriers to trade, (tariffs and non-tariff barriers) are
reduced or eliminated among the participating
states
Criteria for formation of Regional Trade Blocks –
◦ Neighboring countries
◦ Similar resource endowments and production structures – and
hence possibility of cartelization in International market for buying
/ selling
OR
◦ High degree of mutual dependence – hence large gains through
mutual free trade
◦ Political will Mrs. Charu Rastogi Asst. Prof.
34. Major Trade Blocks
European Union (EU)
North American Free Trade Agreement (NAFTA)
Singapore American Free Trade Agreement
(SAFTA)
Organization of Petroleum Exporting Countries
(OPEC)
Association of South East Asian Nations (ASEAN)
South Asian Association of Regional Co-operation
(SAARC)
Mrs. Charu Rastogi Asst. Prof.
35. Levels of integration
• Special Tariffs
Trade Concessions • Relaxation in NTBs
• Only for select commodities and services
• Complete removal of restrictions on movement of
Free Trade Area goods
• Quite often leading to Customs Union
• Adoption of common standards – environment,
Common Market labor, etc.
• Common external trade policy
• Common Economic Policy
Economic Union • Common Currency and Monetary Policy
• Free movement of factors
• Common Governing Body
Political Union • Common Laws
Mrs. Charu Rastogi Asst. Prof.
36. Possible Questions
Theories of International Trade
Explain Adam Smith‟s theory of absolute
advantage. How does Ricardo‟s theory of
comparative advantage differ from theory of
absolute advantage ?
Explain the concept of trade barriers. What are
different types of tariff and nontariff barriers?
Explain the term Globalisation. Discuss various
stages in Globalisation.
What are the barriers to international trade ? List
and explain all the types of barriers to international
trade.
Mrs. Charu Rastogi Asst. Prof.