International trade is the exchange of goods and services between different countries
International trade activities
Internationaltradeoperations
Strategicalliances
Foreigndirectinvestment
Plato
"The Republic"
Benefits of division labour
Xenophon - benefit of expanding the trading system internationally
Aristotle - the rulers must decide which imports and exports are necessary and, not only should they do this, but they should also maintain fairness in these exchanges, possibly by forming some treaties with the countries.
Classical or country-based theories
Mercantilism
Absolute advantage theory
Comparative advantage theory
Heckscher-Ohlin Theory (factor proportions theory)
Mercantilism - accumulation of wealth in the form of gold and silver
Mercantilism - This theory is often called the protectionist theory because it mainly works on the strategy of protecting oneself.
Absolute advantage - economic growth in reference to international trade firmly depends on specialization and division of labour.
Comparative advantage- propounded by David Ricardo
Comparative Advantage - A situation where one nation can produce a good at lower opportunity cost than another.
Comparative advantage - theory suggests that it is better if a country exports goods in which its relative cost advantage is greater than its absolute cost advantage when compared with other countries.
Heckscher-Ohlin theory -countries will import goods whose raw materials are in shorter supply in their own country as compared to the one from which they are Product life cycle theory
Modern or firm-based theory
Country similarity theory
Product life cycle theory
Global strategic rivalry theory
Modern or firmbased theory - address the needs of companies. Emergence after WW2
Country similarity theory - Steffan Linder, a Swedish economist, was the founder of this theory. Linder suggested that countries that are in a similar phase of development will probably have similar preferences. The suggestion proposed by Linder was that companies first produce goods for their domestic consumption and later expand production, thereby exporting those products to other countries where customers have similar preferences.
Product life cycle theory - has three stages, namely, new product, maturing product, and standardized product.
Globalstrategicrivalry - Paul Krugman and Kelvin Lancaster were the founders of this theory. This theory acknowledges the fact that firms will face global competition and prove their superiority. They must surely develop a competitive advantage over each other.
Porter’s national competitive advantage theory:
Local market resources and capabilities (factorconditions). 2. Local market demand conditions.
3. Localsuppliers and complementaryindustries.
4. Localfirmcharacteristics.
Trade agreements occur when two or more nations agree on the terms of trade between them.
Imports are goods and services produced in a foreign country and bought by domestic residents
Exports are goods and services that are made in a country and sold outside its borders.
Tariffs are a form of import taxes, one which governments levy (impose) on imported goods before they are allowed to enter the country.
Economic system can be defined as any method a nation uses to allocate and manage its resources among its population. The three aspects of any economic system involve production, distribution, and consumption.
Political systems are defined as the organized set of laws, common values, and institutions
Multilateral Trade Agreements - These agreements among three countries or more are the most difficult to negotiate. The greater the number of participants, the more difficult the negotiation
Capitalism refers to the private ownership of the means of production
free-market economy is one in which individuals and firms control the means of production through private ownership and minimal government interference.
Command (or planned) economy - is an economic system in which the government or other centralized group determines wages, sets prices, and distributes resources and products to the common group, it also oversees the types of industries it will operate.
Three critical steps:
Deregulation
Privatization
Legal system
Deregulation -Removing the legal restrictions
Privatization – The transfer of ownership of state property to the private sector.
Legal Systems – The creation of laws that protect private property rights and contract enforcement.
Mixed economy - a mash up of a command economy, and free market economy.
Democracy - A system where power is vested in the people, who rule either directly or through elected representatives.
Direct democracy - citizens have the opportunity to participate directly
Indirect democracy -elected representatives.
Dictatorship: A government where power is concentrated in the hands of one individual
Form of government:
Unitary
Presidential
Federal
Parliamentary
Unitary - a system in which the ultimate authority and power reside in the central government.