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International trade theories - An overview from Mercantilism to Porter’s Diamond

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ING Group Greece - Sidma SA - Telesis Securities

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  1. Abstract
  2. Mercantilism
  3. Theory of absolute advantage
  4. Theory of comparative advantage
  5. Heckscher and the ohlin theory
  6. Product life cycle theory
  7. New trade theory
  8. Factor endowments
  9. Related / supporting industries
  10. Firm strategy: Structure and rivalry
  11. References

International trade among nations is an old practice that can be traced back to early Assyrian, Babylonian, Egyptian, and Phoenician civilizations. These and other ancient civilizations acknowledged that trade can be tied directly to a superior quality of life for the citizens of all the partners. Today, the practice of trade among nations is growing by extraordinary rapidity, letting hardly a person on earth unaffected in some way by the growing trade among nations.The exchange of goods and services across international borders is a significant share of GDP. In today's competitive market environment, globalization, industrialization, mergers and acquisitions and outsourcing are major reasons for the increasing international trade.

[...] So, developed countries switch from being exporters to importers as production becomes concentrated in lower-cost foreign locations and products are standardized. At this stage the factor for competition is the cost. The stages of the Product Life-Cycle are Market Introduction stage, Growth stage, Mature stage and Decline stage. In the Market Introduction stage, costs are high and sales volume is low because customers need to be prompted to try the product in order to create demand and possible competitive advantage. [...]

[...] Unskilled labor force producing traded goods in a high- skill country is worse off as international trade increases, because, relative to the world market in the good they produce, an unskilled technologically advanced production-line worker is a less abundant factor of production than capital (Stolper & Samuelson, 1941). On the other hand, Leontief disputes that nations with abundant natural resources generally have a comparative advantage in products using those resources. Leontief suggests that since US is a K-abundant economy it should be an exporter of K-intensive goods and an importer of L-intensive goods. [...]

[...] New Trade Theory (1970) New Trade Theory suggests that trade allows a nation to specialize in the production of certain goods attaining economies of scale and lowering the costs of production, while buying goods that it does not produce from other nations that are similarly specialized. By this mechanism the variety of goods available to consumers in each nation increases, while the average cost of those goods declines. A typical example of free trade is what occurred in Eastern Europe since the collapse of Communism in the early 90s. [...]

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