INTERNATIONAL TRADE & INVESTMENT (UNIT-2) A. Mohamed Riyazh Khan Assistant Professor (SE.G), Dept. of Management Studies,

ECONOMIC THEORIES

CLASSICAL THEORIES 1.Adam smith theory. 2. Comparative cost theory.(David Ricardo in 1817). 3. Opportunity theory (Haberler in 1959). 4. Productivity theory(H.Myint ). 5. Vent for Surplus theory. 6. Mills theory of Reciprocal demand (J.S.mill).

ASSUMPTION OF CLASSICAL THEORIES 1.Labour is the only element of cost of production. 2.There is no transport cost. 3.There is full employment. 4.There is perfect competition. 5.There are only two countries & two commodities. 6.There are no trade barriers. 7.Production is subject to the law of constant return.

MODERN THEORY 1.Factor Endowment theory (HO theory) or (2*2*2model) or (two country, two factors, two commodity) 2.Product life cycle theory.

ADAMS SMITH THEORY  Every country should specialize in producing those products which it has absolute advantage in cost of production. CountryRiceJute India3060 Bangladesh5020 Per quintal labour cost (man hour)

COMPARATIVE COST THEORY  David Ricardo suggest the possibility of gainful trade between two countries even if one has absolute advantage in the production of both the commodities and other absolute disadvantage in production of both the commodities.  Per quintal labour cost (man hour) CountryRiceJute India3060 Bangladesh5080  India can produce both the goods more efficiency at a low cost compare to bangladesh.

 But India has comparative disadvantage in jute production because his cost of jute production is twice his cost of rice production. on the other hand, Banagladesh has comparative advantage in jute production.

OPPORTUNITY THEORY  OPPORTUNITY cost is the value of alternative which have to be foregone in order to obtain a particular things. EX: Rs is invested in the equity of the company and earned a dividend of 6% in 2005, the OC of this investment is 10% interest had this amount been deposited in a commercial a bank for one year term.

PRODUCTIVITY THEORY 1.Productivity theory points towards direct and indirect benefit. 2.Process of specialization involves adapting and reshaping the production structure of trading countries to meet the export demand. 3.Countries increases productivity in order to utilize the gain of export. 4.This theory encourage developing countries. LIMITATION 1.Labour productivity did not increase after certain level. 2.Increase in working hours.

SURPLUS THEORY 1.If the countries produce more than domestic requirements they have to export the surplus to other countries. 2. This surplus productive capacity is taken by another country & in turn give the benefit under international trade.

MILLS RECIPROCAL DEMAND Qty of product export by country A EQUILIBRIUM = Qty of another product export by country B

ASSUMPTION OF MODERN THEORIES 1.Productand factor market are characterizes by Perfect competition. 2. Factor of production are perfectly mobile within each country only. 3. Factors of production of equal quality in both the countries. 4. Business between two countries is free from all barriers. 5. There is no transportation cost. 6. This theory assumes there is no govt intervention.

FACTOR ENDOUMENT THEORY Bertil ohlin in is famous book ‘ inter region & international trade at 1933 criticized the classical theory of international trade. It is also known as modern theory of IT. THEORY  Some country have much capital, other have much labour.

The theory says that country that are rich in capital will export capital incentive goods & country that have much labour will export labour incentive goods. Labour abudent capital abudent Country (X) Country (y) labour intensive goods Capital intensive goods

PRODUCT LIFE CYCLE 1.INTRODUCTION Innovation of products in industrial country. 2.GROWTH Mainly in innovating country, with some export, more fore. 3.MATURITY More level of competitors come to starts the business, decline. 4.DECLINE Short production,

Porter Diamond model 1. Factor conditions 2. Demand condition 3. Related & Supporting industries 4. Firm’s strategy, structure & competition 5. Govt.. 6. Change