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Theories Of International Trade For International Business Mcom Sem 2 Delhi University Complete Notes

Theories Of International Trade For International Business Mcom Sem 2 Delhi University  Complete Notes

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  :  Here website team members provide direct download links for Theories Of International Trade For International Business MCOM Sem 2 Delhi University  Complete notes in pdf format. Download these Theories Of International Trade For International Business MCOM Sem 2 Delhi University  notes in pdf format and read well.

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  Complete Notes

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  :  International Trade takes place because of the variations in productive factors in different countries. The variations of productive factors cause differences in price in different countries and the price differences are the main cause of international trade. There are numerous advantages of international trade accruing to all the participants of such trade. A few of such advantages are mentioned below:

  • Efficient use of productive factors: The biggest advantage of international trade relates to the advantages accruing from territorial division of labour and international specialization. International trade enables a country to specialize in the production of those commodities in which it enjoys special advantages. All countries are not equally endowed with natural resources and other facilities for the production of goods and services of various kinds. Some countries are richly endowed with land and forest resources, which others happen to have abundant capital resources. Some others have abundant supplies of labour power. Without international trade, a country will have to produce all the goods it requires irrespective of the costs involved. But international trade enables a country to produce only those goods in which it has a comparative advantage or an absolute advantage and import the rest from other countries. This leads to international specialisation or division of labour, which, in turn, enables efficient use of the productive factors with minimum wastages. Specialisation would also lead to economies of scale and which, in turn, would lead to reduction of cost of products and services.
  • Equality in commodity and factor prices: International trade leads to an equality of the prices of internationally traded goods and productive factors in all the trading regions of the world. It should, however, be remembered that the gains arising from international trade shall be available to the participating countries only if trade is free and unfettered. If the trade is subjected to tariff and non-tariff restrictions by the trading countries, the gains of international trade get nullified in the process to a large extend.

Download here Theories Of International Trade For International Business MCOM Sem 2 Delhi University  Complete Notes in pdf format 

What is International Trade?

Indians drive cars made in Japan, use VCR�s made in Korea. Americans drive cars made in Germany, use VCR�s made in Japan and wear clothing made in China. Japanese watch American movies, Egyptians drink American cola and Swedes jog in American running shoes. The world economy is more integrated than ever before.

International Trade shapes our everyday lives and the world we live in. Nearly every time we make a purchase or sale, we are participating in the global economy. Products and their components come to our store shelves from all over the world.

Goods and services that a country buys from another country are called imports, and goods and services that are sold to other countries are called exports. Trade mostly takes place between companies. However, governments and individuals frequently buy and sell goods internationally.

Most international trade consists of the purchase and sale of industrial equipment, consumer goods, oil and agricultural products. Services such as banking, insurance, transportation, telecommunications, engineering and tourism account for one-fifth of the world exports.

The cost of international transportation and communication has fallen drastically, resulting in greater integration among the economies of the world. Because of this interdependence, economic trends and conditions in one country can strongly affect prices, wages, employment and production in other countries. Events in Tokyo, London and Mexico City have a direct effect on the everyday life of people in the U.S., just as the impact of events in New York, Washington and Chicago is felt around the globe.

If stocks on the New York Stock Exchange plummet in value, the news is transmitted instantly worldwide, and stock prices all over the world might change. This means that countries have to work together more closely and rely on each other for prosperity.

International trade occurs because individuals, businesses and governments in one country want to buy goods and services produced in another country. Trade provides people with greater selection of goods and services to chose from and often these goods are available at prices lower than those in the domestic economy.

International trade is the system by which countries exchange goods and services. Countries trade with each other to obtain things that are better quality, less expensive or simply different from what is produced at home.

What are the benefits of international trade?

To become wealthier, countries want to use their natural resources � land, labour, capital and entrepreneurship � in the most efficient manner. However, there are differences among countries in the quantity, quality and cost of these resources. The advantages that a country has may vary according to the following.

  • Abundant minerals
  • Climate suited to agriculture
  • Well-trained labour force
  • New innovative ideas
  • Highly developed infrastructure like good roads, telecommunication systems, etc.

Instead of trying to produce everything by themselves, countries often concentrate on producing things that they can produce most efficiently. They then trade those for other goods and services. In doing so, both the country and the world becomes wealthier.

Consider the following example:

Two economies, Cotton Land and Wood Land, have the same resources and produce both cloth and furniture.

Cotton LandWood Land
Without trade, produces
8 bales of cloth
4 pieces of furniture
Without trade, produces
4 bales of cloth
8 pieces of furniture
Time taken to produce
1 bale of cloth = 1 hour
1 piece of furniture = 2 hours
Time taken to produce
1 bale of cloth = 2 hours
1 piece of furniture = 1 hour
With trade
16 bales of cloth
0 bales of furniture
With trade
0 bales of cloth
16 pieces of furniture

Since Cotton Land is more efficient in cloth production, it can double its cloth output to 16 bales a day by transferring all its resources to that industry. By doing so Cotton Land will eliminate its furniture industry. However, it can trade the surplus cloth for furniture.

Similarly, Wood Land can direct all its resources to the production of furniture and produce 16 pieces of furniture. Although its cloth industry will suffer it can trade the surplus pieces of furniture for cloth bales.

Through specialization and trade, the supply of goods in both economies increases, which brings the prices down, making them more affordable.

Law of Comparative Advantage: Even if a country can produce everything more efficiently than another country, there is still scope for trade. A country can maximize its wealth by putting its resources into its most competitive industries, regardless of whether other countries are more competitive in those industries. This is called the law of comparative advantage.

Suppose Cotton Land produces both cloth and furniture better than Wood Land.

Cotton LandWood Land
Bales of cloth per day102
Pieces of furniture per day53

Cotton Land has an absolute advantage � is more efficient � in the production of both cloth and furniture. However to achieve greater wealth, each country should specialize in the item in which it enjoys greatest advantage among all the products it produces.

In terms of opportunity cost, or the cost of not transferring resources, Cotton Land is twice efficient in producing cloth as furniture.

Opportunity Cost
Cotton Land1 piece of furniture = 2 bales of cloth.
Wood Land1 piece of furniture = 2/3 bales of cloth.

Since Wood Land�s opportunity cost for furniture is less than Cotton Land�s, it makes economic sense for Wood Land to concentrate on furniture.

Cotton Land should continue producing cloth and trade for Wood Land�s furniture. Whereas, Wood Land should concentrate on furniture and trade it for cloth with Cloth Land. Channeling resources into the most productive enterprise in each country will result in more products to trade.

Benefits of diversification: Even though it makes economic sense to allocate resources to the most productive industries, no country wants to rely on only a few products. This makes the country vulnerable to changes in the world economy, such as recession, new trade laws and treaties, and new technologies.

A country that relies too heavily on one product is especially susceptible to market forces. If demand suddenly drops or if a cheaper alternative becomes available, the economy of that country could be damaged.

Many Middle East countries that are largely dependent on their oil exports see their economic fortunes rise and fall in tandem with the oil market.

The degree to which countries specialize is influenced by that country�s terms of trade � i.e. the relative prices of a country�s imports and exports. It is most advantageous to have declining import prices compared with the prices of exports. Exchange rates and productivity differences affect the terms of trade more than any other factors.

By developing a diversified economy, a country can make sure that even if some industries are suffering, other, more competitive industries will keep the economy relatively healthy.

Competitiveness: Competitiveness is used to describe the relative productivity of companies and industries. If one company can produce better products at lower prices than another, it is said to be more competitive. This is a matter of concern for governments, since it is difficult for uncompetitive industries to survive.

In the long run, competitive depends on:

  • A country�s natural resources
  • Its stock of machinery and equipment, and
  • The skills of its workers in creating goods and services that people want to buy

Natural resources are predetermined and must be used efficiently, but a country�s infrastructure and its workers� skills have to be developed over time. The ability of a society to do this effectively determines whether it can remain competitive in the global economy.

Economies of Scale: The law of comparative advantage says that a country can become more competitive by directing its resources to its most efficient industries. This enables a country to achieve economies of scale � increasing its output in a particular industry so that its costs per unit decrease. Such lower-cost goods are more in demand in international markets.

Certain industries that require heavy research and development or capital expenditures cannot be competitive unless they can spread the costs over many units. If a sophisticated weapons industry knows that it has access to foreign markets and could export, it may increase the scale of its manufacturing operations and become more efficient and competitiveness in the international markets.

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  Complete Notes

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  : International trade is the exchange of capital, goods, and services across international borders or territories. It is the exchange of goods and services among nations of the world.[1] In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, scramble for Africa, Atlantic slave trade, salt roads), its economic, social, and political importance has been on the rise in recent centuries

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  Complete Notes

Theories Of International Trade For International Business MCOM Sem 2 Delhi University  : I’m currently taking International Business as part of my MBA program at Rutgers, and decided to share my outline for what I’m studying at the moment – international trade theory.  These notes are a combination of my own interpretation of the materials presented in “International Business” by Charles W. L. Hill, and direct quotes from that text (which I did not explicitly demarcate).  Assume all thoughts and ideas presented here are Hill’s.

Characteristic of global trade 

Trading globally gives consumers and countries the opportunity to be exposed to new markets and products. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.

Industrialization, advanced technology, including transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.

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