Why Is Free Trade Beneficial ?

 Free trade – a situation where a goverment does not attempt to influence

through qotas or dutizens can buy from another country or what they can
produce and sell to another country
 Trade theory shows why it is beneficial for a country to engage in
internasional trade even for products it is to produce for itself
 Internasional trade allows a country :
 To specialize in the manufacture and export of products that it can
produce efficiently
 Import products that can be produced more efficiently in other
countries

What Is Mercantilism ?
 Mercantilism suggests that it is in a coutry’s best interest to maintain a
trade surplus- to export more that it imports
 Advocates government intervention to achieve a surplus in the
balance of trade
 Mercantilism views trade as a zero-sum game- one in which a gain by
one country results a loss by another

How Does The Theory of Comparative Advantege Work?

Assume :
 Ghana is more efficient in the production of both cocoa and rice.
 In ghana,it takes 10 resources to produce one ton of cocoa,and
131/3 resources to produce one ton of rice
 So,Ghana could produce 20 tons of cocoa and no rice,15 tons of
rice and no cocoa,or some combination of the two
 In south korea,it take 40 resources to produce one ton of cocoa
and 20 resources to produce one ton of rice
 So,south korea could produce 5 tons of cocoa and no rice,10
tons of rice and no cocoa,or some combination of the two
 Does the Heckscher-Ohlin Thory Hold?

 Wassily Lontief theorized that since the US was relatively

abundant in capitalcompared to other nation,the US would be an
exporter of capital intensive goods and an importer of labor –
intensive goods.
 However,he found that US exports were less capital intentive
that US imports
 Since this result was at variance with the predictions of trade
theory,it became known as the Leontief Paradox

What Is the Product Life Cycle Theory?

 The product life-cycle throry (raymond vernom) – as products

mature both the location of sales and the optimal production
laction will change affecting the flow and direction of trade
 The size and wealth of the US market gave US firm a
strong incentive to develop new products
 Initiallt,the product would be produced and sold in the US
 As demand grew in other developed countries US firms
would begin to export
 Demand for the new product would grow in other
advanced countries over time making it worthwhile for
foreign producers to begin producing for their home
markets

The product life – cycle theory is an economic theory that was developed by Raymond
Vernon in response to the failure of the Heckscher-Ohlin model to explain the oserved pattern
of internasional trade.the theory suggests that early in product’s life-cycle all the parts and
labor associanted with that product come from the area in which it was inveted.After the
product becomes adopted and used in world markets,production gradually moves away from
the poin of origin.In some situations,the product becomes an item that is imported by its
original country of invention.A commonly used example of this is invention,growth and
production of the personal computer with respect to the united states.
The different Stages in a product life cycle are:

Stage 1 : Market introduction stage

1. Cost are high

2. Slow sales volumes to start
3. Little or no competition–competitive manufactures watch for
acceptance/segment growt losses
4. Demand has to be created
5. Customers have to be prompted to try the product
6. Makes no money at this stage

Stage 2 : Growth stage

1. Costs reduced due to economies of scale

2. Sales volume increases significantly
3. Profitability begins to rise
4. Public awareness increases
5. Competition begin to increase with a few new player monopsoni
establishing market
6. Increased competition leads to price decreases

Stage 3 : Mature stage

1. Costs are lowered as a result of production volumes increasing

and experience curve effects
2. Sales volume peaks and maket saturation is reached
3. Increase in competitors entering the market
4. Prices tend to drop due to the proliferation of competing
products
5. Brand differentiation and feature diversificatin is emphasized to
maintain or increase market share
6. Industrial profits go down
Stage 4 : Saturation and decline stage

1. Costs become counter-optimal

2. Sales valume decline or stabilize
3. Prices,profitability diminish
4. Profit become more a challenge of prouction/distribution
efficiency that increased sales

Akamatsu “Fundemental”Flying Geese Pattern of Economic

Development
 What Is the Product Life Cycle Theory?
 US firms might set up production facilities in advanced
countrieswith growing demand,limiting exports from US
 As the market in the US and other advanced nations matured,the
product would become more standardized,and price the main
competitive weapon
 Producers based in advanced countries where laor costs were
lower than the United States might now be able to export to the
Unition States
 If cost pressures were intense,devoloping countries would
acquire a production advantage over advanced countries
 Production became concentrated in lowe-cost foreign
locatio,and the United States became an importer of product
 Does The Product Life Cycle Theory Hold?
 The product life cycle theory accurately explains what has
happened for products like photocopiers and a number of other
high technology products developed in the United States in the
1960s and 1970s
 But,the globalization and integration of the world economy has
made this theory less valid today
 The theory is ethnocentric
 Production today is dispersed globally
 Products today are introced in multiple markets
simultaneously