Determinants of international Trade.
The expansion of global trade is related to supply and demand, institutional and economic factors, and national, regional, and international characteristics. In particular, in combination with changing consumer preferences as incomes rise, advanced technology, and trade agreements have played large roles in allowing access to markets, breaking through old constraints of climate, location, and growing season to encompass what is truly a global market. In turn, globalisation has fomented change in wholesale and retail markets around the world, providing consumers with an expanding collection of resources all year around.
In this essay I will analyse the economic theories, and evaluate whether these theories effectively explain the changing pattern of trade in recent years
The ability to produce a good at a lower cost, in terms of real resources than another country. Absolute Advantage is neither necessary nor sufficient for a country to export a good.
An example of absolute advantage is when Morocco can produce fruit abundantly cheaper than England. Because England will have to use technology and Morocco have natural cheaper real resources to accomplish this.
In terms of Globalisation, the country no longer does the business as mostly production is privatised. As organisations such as GAP, produce goods cheaply using real resources from lesser-developed countries through contractors and other means.
In my own opinion, I believe the theory of absolute advantage it does not explain globalisation as this theory is talking about how to do production at a lower cost than other country. However, I would like to mention that I think indirectly it does relate to globalisation, the reason being it mentions production at the lowest cost possible through real resources. I.e. companies look for the cheapest way of production possible
A person has a comparative advantage in producing a product if he or she can produce that product at a lower opportunity cost than anyone else. A country has a comparative advantage in producing a product if it can produce that product at a lower opportunity cost than any other country.
Comparative advantage is about specialisation and exchange for example,
Adam is good at producing bread and clothes better than Lee
However, Lee is only a little worse than Adam in production of Bread then Adam will specialise in Clothes while lee will only specialise in bread. In addition, they will exchange with each other.
According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations.
In my thoughts I generally think that Ricardos Theory of Comparative advantage relates and explains Globalistion indirectly this is because it talks about speclisation now if you look at it carefully and think of all the fresh fruit the we eat. It is produced in countries such as Morocco, now this country specilises in the production of raw goods such as fruits in exchange for money to build a strong currency.
The reason I say Ricardos Theory of Comparative advantage relates and explains Globalistion indirectly is because its not about the country anymore its about the company, now if a country charges a lot of tax a company will set up elsewhere hence in economic terms and conditions a company rules. is it any wonder USA are always fining Bill Gates as they fell thereanted by his economic power.
One of the major concerns in comparative advanatge is that once all resources finish a war or conflict will occur, for example the recent case in ukraine where they are cutting gas supplies to Russia because of Absoloute resource constraint.
Ukraine cut Russian daily gas transit by 60 Mln cubic meters – minister
Date viewed 20/01/2006
Another example could be the use of raw materials, such as Gas (see above headline)
Regarding Oil governments becoming tough and conflicts such as the petrol protest/strikes.
In 1817, David Ricardo looked at Adam Smith's theory and suggested, "there may still be global efficiency gains from trade if a country specializes in those products that it can produce more efficiently than other products - regardless of whether other countries can produce those same products even more efficiently”
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The Theory of Factor Endowments suggested you should trade in the products, which you can make from the production factors, and resources you naturally possess. Therefore, for Canada this means they should trade in lumber, minerals, and grain since they naturally possess these resources in large quantities. Following this theory it would then make sense for Canada to import citrus fruits since they climate does not naturally give us weather to allow this food to grow without expensive greenhouses. This theory was espoused by Heckscher and Ohlin.
The critical assumption of the model Heckscher-Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same. The relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant country and vice versa.
For example, Indonesia is labour abdunant country hence they will produce labour intensive goods such as clothes, through contactors for companies such as GAP.
UK is capital intensive country hence they will produce capital intensive goods such as aircarft through companies such as BAE systems.
The question now is does Heckscher-Ohlin model explain Globalisation effectively, well it is quite obvious that it does, the reason being is: well if you look at companies such Del Monte and the look at their core product line of fruits and vegetables it runs literally from A to Z, from apricots to zucchini. The Del Monte Company is Based USA they are Labour intensive company that invest in countries where fruit grows.
All I am saying is that rich companies try to get rid of the labour problem hence invest in other countries i.e. lesser-developed countries to get of the problems they have.
Economic theory that stressed governments' promotion of limitation of imports from other nations and internal economies in order to improve tax revenues; popular during 17th and 18th centuries in Europe
A once-prominent economic philosophy that equated national wealth and prowess with the accumulation of gold and other international monetary assets, and hence with running a persistent trade surplus. The mercantilist viewpoint has been discredited by modem economics, which has shown that national economic security and well-being are not necessarily related one way or another with trade surpluses or deficits (see discussion under trade balance
Mercantilism is an economic philosophy of the 16th and 17th centuries that international commerce should primarily serve to increase a country's financial wealth, especially of gold and foreign currency. To that end, exports are viewed as desirable and imports as undesirable unless they lead to even greater exports
Mercantilism is a many-dimensioned economic system, but the most important component of the doctrine is state control over business. European farmers, traders, or textile manufactures had to obtain special government permits, called “charters,” in order to operate their businesses. The charters, that were given out during parliamentary sessions, carried the force of law, and anyone lucky enough to obtain one immediately enjoyed a business monopoly and benefited from a privileged relationship with the government.
The major disadvantage of this system was that it created dreadful economic inefficiency. Instead of focusing on creating quality goods at lowered prices, businesses were forced to spend their money and time courting governmental favours.
An excellent example of 21st century mercantilism is Telmex, the quasi-official Mexican telephone company. The 1990 privatization of Telmex was essentially a state grant of a telephone monopoly to a private individual, just like a business charter of old granted by the crown.
Another example of mercantilism in action is the foreign owned liquefied natural gas companies that are going into operation in Baja California. Even though foreign investment in oil and gas is technically illegal in Mexico, these companies apparently are obtaining all needed approvals and permits from the various Mexican agencies.
Mercantilism explains the changing pattern of trade in china effectively because many organisations are state owned or are becoming state owned. However, mercantilism does not explain the international trade patterns directly as different countries are in different situations, some countries are in the same strategic group when it comes to international trade such as America and England.
Mercantilism relates to inter industry trade because exports are viewed as desirable and imports as undesirable unless they lead to even greater exports.
To conclude I feel the theorist have made some excellent predictions in general, however not all theories give direct effective explanations of the changing pattern of trade i.e. globalisation.
The above-mentioned theories do correctly explain directly what has happened in the past, but all theories that I have mentioned above explain indirectly the recent changing trade pattern i.e. globalisation.
Throughout analysing theories, I have discovered that there will always be a loophole in the theories directly or in directly relating to the changing pattern of trade i.e. globalisation. Through the loophole, some theories effectively explain changing pattern in trade in recent years but not directly and not pinpoint hence creating contradictions leading to inaccurate explanations of Trade patterns.
I feel by combing theory of comparative advantage, Heckscher-Ohlin model they explain the changing patterns of trade in recent years.
References
Websites
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Books
- International Business: Competing in the Global Marketplace ~ Charles W.L. Hill
- The International Business Environment ~ Ian Brooks, et al
- International Business: Environments and Operations (International Edition) ~ John Daniels, et al
- International Economics: Theory and Policy ~ Paul R. Krugman, Maurice Obstfeld
- Economics: The Basics ~ Tony Cleaver
- Economic Interdependence and International Conflict: New Perspectives on an Enduring Debate (Michigan Studies in International Political Economy) ~ Edward D. Mansfield (Editor), Brian M. Pollins