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Why do nations trade? A simple guide into the history and theory of international trade.

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Presentation on theme: "Why do nations trade? A simple guide into the history and theory of international trade."— Presentation transcript:

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2 Why do nations trade? A simple guide into the history and theory of international trade

3 What will I talk about? Links between the history and the theories of international trade Most important trade theories and their implications You won’t see: Complex math Complex charts

4 Model of Intl. Trade Relations Country A Country B Goods & Services Production Factors Trade Policy Capital, Labour, Technology Tariffs, Non-Tariff Barriers Currency Exchange Rates International Organisations

5 The major theories Absolute advantage Comparative advantage Factor abundance theory Modern explanations Let’s start, then!

6 Ancient Times First trade: barter exchange between tribes (ca B.C.) Trade centres: China, India, Egypt, Phoenicia, Babylon, Persia, Greece, Rome Inventions: money, wheel, weighing and measuring system, commercial law, sails, commodity exchanges First trade routes established 3rd-4th

7 Ancient Times No intensive international trade Lack of safe and low-cost transportation Dispersed trade centres (from global perspective) Long-distance routes mostly for luxurious goods Stability of the commodity structure, practically until the colonial conquest 3rd-4th

8 Silk Road 3rd-4th

9 Amber Road 3rd-4th

10 Middle Ages 13th-14th Lower importance of cities as trade centres Feudal system- lords, vassals and fiefs (land given to a vassal by their lord) Decreasing intensity of international trade Trade centres: Byzantium, Arabia, Italian cities (Venice, Genoa, Firenze, Pisa), Hansa Banking system, bills of exchange, credits for production Trade – big share of products necessary for sailing (sailcloth, wood, tar, salt) Marco Polo at court of Kubilai Khan c.1280

11 Hansean Trade 13th-14th

12 Age of Discovery Bartholomew Diaz – Cape of Good Hope (1487) Vasco da Gama – new sea route to India (1498) Christopher Columbus – the „discovery” of America (1492) Ferdinand Magellan – expedition around the world ( ) Colonial conquest 15th-16th Take a look at

13 Mercantilism Colonial conquest – the basis Not a theory, rather a set of policy guidelines Positive trade balance Governments as „gold-collectors” High protectionism against import 15th-16th

14 Industrial revolution Significant growth of output Major change in trade volume and commodity structure First trade patterns: 17th-18th (Europe) manufactured goods (Colonies) tropical products

15 Theory of absolute advantage Adam Smith, The Wealth of Nations” 1776 First classical theory Simple analysis of the causes of trade patterns Major assumptions: two countries, two goods, no additional trade costs, labour as the only production factor 18th

16 Theory of absolute advantage 18th Example: Unit costs (hours of labour) HOMEFOREIGN How can Home get oil?

17 Theory of absolute advantage Example (cont.): Unit costs (hours of labour) HOMEFOREIGN ProductionImportProductionImport Countries produce and export goods, which production costs are lower than abroad! 18th

18 Theory of comparative advantage David Ricardo, 1817 The most influencing classical theory Same assumptions: two countries, two goods, no additional trade costs, labour as the only production factor Question: What if a country produces both goods at a lower cost? 19th

19 Theory of comparative advantage Example: Unit costs (hours of labour) HOMEFOREIGN How does it work now? 19th

20 Theory of comparative advantage Why does it work now, either? Compare the opportunity costs! Unit costs (hours of labour) HOMEFOREIGN ProductionImportProductionImport Example (cont.): 19th

21 Theory of comparative advantage Example (cont.): Unit costs (hours of labour) HOMEFOREIGN 1 (0,5)4 (1,33) 2 (2)3 (0,75) Lower opportunity costs decides about „comparative advantage” 19th

22 Transportation revolution Sea and land steam-powered transportation Goods traded in large volumes Diminishing transportation and communication costs – soaring trade New trade patterns (West – developing countries) 19th

23 Factor abundance theory E. Hecksher, B. Ohlin, 1930s Two countries – two goods Two production factors: labour and capital Same technology of production No transportation costs 20th

24 Factor abundance theory Example: Factor resources HOMEFOREIGN Technology Compare „factor abundance” and „factor-consumption” 20th

25 Factor abundance theory Example (cont.): Home is labour – abundant Foreign is capital – abundant Oranges are labour – consuming Cars are capital - consuming Home will export oranges – Foreign will export cars. 20th

26 Leontief paradox Leontief made an empirical research to verify the H-O theory using data on the U.S. trade He surprisingly found that the U.S. – a capital- abundant country – exported more labour- consuming goods Possible explanation: assumptions underlying the H-O theory no longer reflected fast-changing situation in the post-war world economy This inspired economists to look for new explanations to international trade 20th – 50’s

27 New trends in a post-war world Fall of colonial empires led to a growing number of independent states 1935 late 20th 2010 Source: WTO

28 New trends in a post-war world Variety of actors in international trade late 20th Governments Shape the country’s economic policy and attitudes towards foreign trade. DOMESTIC BUSINESSES Run commercial transactions with foreign companies (export, import, foreign direct investments) HOUSEHOLDS, INDIVIDUALS E.g. tourists, private investors, workers INTERNATIONAL ORGANISATIONS Government or Non-Government TRANSNATIONAL CORPORATIONS Run global business operations through foreign subsidiaries REGIONAL INTEGRATION GROUPINGS Groups of neighbouring countries that eliminate trade barriers Domestic level International level

29 New trends in a post-war world Intra–industry trade – similar products are imported and exported late 20th IIT = | Export i - Import i | Export i + Import i

30 New trends in a post-war world New actors – international organisations late 20th Source: WTO Grzegorz Karpiuk Koordynator projektu „Program rozwoju WSIiZ – Uczelnia Jutra” Source: Wikipedia

31 2004 No.CompanyCountry Market value (USD bln) 1ExxonMobilUSA405,2 2General ElectricUSA372,1 3MicrosoftUSA273,7 4CitigroupUSA247,7 5BPUK231,9 6Royal Dutch/ShellNED/UK221,5 7Wal-Mart StoresUSA218,6 8PfizerUSA198,0 9Johnson&JohnsonUSA194,7 10Bank of AmericaUSA188,8 Żródło: Forbes, New actors – multinational corporations New trends in a post-war world II poł. XXw 2009 CompanyCountry Market value (USD bln) ExxonMobil USA PetroChina CHN Wal-Mart Stores USA China Mobile CHN ICBC CHN Microsoft USA Procter & Gamble USA AT&T USA Johnson & Johnson USA Royal Dutch Shell NED

32 New trends in a post-war world Trade structure late 20th Value 2004 (bn USD) Value 2008 (bn USD) Value 2009 (bn USD) GOODS Agricultural Fuel and minerals Manufactures SERVICES Transport Tourism Other Source: World Trade Report 2010, WTO

33 Source: World Trade Report 2014, WTO late 20th

34 Source: World Trade Report 2014, WTO

35 late 20th Source: World Trade Report 2014, WTO

36 late 20th Source: World Trade Report 2014, WTO continued from the previous slide…

37 late 20th Source: World Trade Report 2014, WTO

38 late 20th Source: World Trade Report 2014, WTO continued from the previous slide…

39 Leading exporters and importers of goods (bn USD) Source: World Trade Report 2014, WTO late 20th

40 Leading exporters and importers of services (bn USD) Source: World Trade Report 2014, WTO late 20th

41 Leading importers (bn USD) Goods Services Source: World Trade Report 2010, WTO late 20th

42 Statistical Data on Trade

43 Globalisation late 20th Global financial market Institutional development of international trade „McDonaldisation” – global convergence of customer preferences towards certain products Increase of FDI flow Dominating position of MNEs Geographical development of value chains (distribution channels) Knowledge-based economy emerged Lower importance of states in the global trade New sector of economy – knowledge management

44 Modern theories Imitation lag theories (Posner, 1961): Technological gap between the Leader and the Rest of World 20th, 60’s lag in demand lag in reaction Leader starts production Demand occurs in the Rest of World TRADE Rest of World starts production

45 Modern theories Theory of overlapping demands (Linder, 1961) Explanation of the intra – industry trade 20th, 60’s Country A high GDP Country B avg. GDP Country C low GDP

46 „New” theories International product life cycle (Vernon, 1966) Uses a marketing concept of product life cycle Explains: international trade; foreign direct investments (FDI), intra-industry trade (IIT). Three actors: Leader Developed countries (DC) Rest of World (RW) Empirical evidence proves the theory can explain the developments in the post-war international trade flows of teletransmission equipment 20th, 60’s

47 Time: T0 Leader starts production of cars. No international trade so far Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net

48 Time: T1 Leader’s domestic market matures. Demand for cars arises in DC Trade is initiated Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6

49 Export net T1T2T3T4T5T6 Time: after T1 Leader is the only exporter of cars. Growing demand in DC causes trade growth. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce T1T2T3T4T5T6

50 Time: T2 Leader is still the only exporter of cars. Demand for cars emerges in RW, which begins import. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6 T1T2T3T4T5T6

51 Time: T2 Technological advancement in DC and Leader’s outward FDIs make it possible to start production in DC. Leader can now import cheaper cars from DC (IIT) Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 Produce

52 Time: after T2 Leader’s exports to DC decreases, RW’s imports Increases as RW starts importing cars from DC. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 Produce T1T2T3T4T5T6

53 Time: T3 DC become the major exporter of cars. The Leader’s market share decreases. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 T1T2T3T4T5T6

54 Time: T4 Leader ceases the domestic production of cars. In pursuit of lower costs the Leader starts outward FDIs to the RW, which becomes a car maker. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 T1T2T3T4T5T6

55 Time: T4 RW starts exports of cars to the Leader and the DCs. The price is competitive due to low labour costs. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6

56 Time: T4 – T5 DCs start to invest in RW (outward FDIs). RW becomes the major producer and exporter of cars Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 T1T2T3T4T5T6

57 Time: T5 – T6 RW becomes the only producer and exporter of cars. Simulation of the int’l product life cycle - cars 20th, 60’s REST OF WORLD LEADER DEVELOPED COUNTRIES Produce Export net T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6T1T2T3T4T5T6 T1T2T3T4T5T6


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