317 L6 Modern Theories of Trade

1
317 L6 Modern Theories of Trade

• Management School
• Alasdair MacBean

2
Introduction

• The aim is to explain the bases of New Theories
  and why they are relevant and useful

3
Topics of Discussion

• Theories and the real world
• Leontief and other tests
• More recent tests of H-O Theory
• World trends in trade patterns
• Other explanations for trade paterns and welfare
  effects.

4
Traditional theories and the real world

• Tests of H-O Leontief
• Recent trade patterns and trends seem
  inconsistent with predictions of the supply based
  theories
• e.g. Growth of Intra-industry trade
• e.g. Trade among the rich countries

5
Salvaging H-O

• Different demands in different countries ( Fig
  1.)
• Increasing numbers of goods and factors of
  production
• Natural resources and Human Capital etc.
• Tests incorporating such extra variables
  (Trefler, D.AER 1995)

6
New Theories

• Innovation and Technological Change as Source of
  Trade (Posner, Vernon)
• Income levels , Demands and Scale Econs. (Linder)

7
Ray Vernons Theory

• Product cycle model three stages New Product,
  Maturing Product, Standardised Product (Fig 2)
• At different stages the technology suits
  different factor endowments so location shifts
  and trade changes.

8
What This Means

• Vernons theory predicts
• which country will export at which stage
• It seems to fit e.g US- Japan-S. Korea or China.
• It can explain foreign direct investment

9
Demand Linder Hypothesis

• Trade takes place between countries with similar
  or overlapping demands.(Fig 3)
• It is also due to economies of scale(See
  definition of econs. of scale and scope)

10
Predictions of Linder

• Countries will tend to export products for which
  they have a large domestic market
• Trade will tend to be greatest among similar
  economies

11
Recent theories based on differentiation and scale

• Product differentiation and consumers tastes
• Economies of scale and scope
• Both of these concepts borrowed from Industrial
  Economics.
• These can predict intra industry trade and gains
  from trade.

12
Conclusions

• Do these theories pass tests?
• Do they replace or supplement more traditional
  explanations?
• What do they imply about the gains from trade?
• Do they weaken or strengthen the case for free
  trade?