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Influence of Mercantilism on International Trade Theories

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Published: Wed, 04 Oct 2017

QUESTION 1:

Introduction:

A. Explain how the role of Mercantilism practice between 1500 to the late 1700’s century has influence the International Trade Theories in the 19-21 Century.

The Mercantilism is understood as a set of practices, adopted by the absolutist state in modern times, in order to obtain and preserve wealth. The mercantilist doctrine is still noticeable in the modern economy. The main rules of mercantilism are exports as a source of measuring the prosperity of the country and the “bullionism”, saying that the only form of measuring the success of a country was the amount of gold he possessed.

The mercantilist theory influenced many thinkers on the feasibility of concepts mercantins the gold accumulation was thought to be necessary for a strong, powerful state. Keynes defended the importance of the positive balance of payments for the development of a country as well as state intervention as an economic necessity.

Currently we can still find frequent debates about commercialism and its political economic viability. Several Countries rich are still engaged in trade liberalization today. China and Germany are great examples of countries that seek trade surplus in its balance of payments. In America, we have the example of President Barack Obama who has a government program to increase exports as part of its plan to help America “win the future”

B. Examine why countries engage in trade and the benefits of specialization and trade between countries. Since the beginning of the globalization process, countries tend to integrate to another as a way to deepen trade and political-economic relations aimed at greater integration among Countries, either through common external tariffs, free trade areas or blocks .The economic countries establish trade relations in order to achieve differentiated tariff agreements, subsidies for goods and services in relation to other countries.

C. When you sit down for your evening meal try to estimate the number of people and transactions that are required to bring your meal to you- be as lateral, imaginative and as specific as possible.

Taking breakfast every day, I have the conscience that there are a large number of workers and economic relations involved in existing foods in my meal. There is the relationship established between countries for some food reaches my house as fruit, cereal…. There is a hand of agricultural work that contribute to plant, grow and harvest certain foods; some of these foods are directed to the industries for treatment process and transformation into other products. In added that people involved in the sector of goods and services that deliver these products to the industries and residences. There is the administrative section that is responsible for regulating the quantity produced, the total production and the process of regularization of food. There is also the government sector that is responsible for setting the rates, imports and exports of food as well as seek to create solutions for increased production of these goods.

QUESTION 2:

Trade structure of your chosen countries:

a. Analysis

b. Data table

Table 1:

Basic economic indicators and trade structure of Peru and Norway in 2013:

Country

Peru

Norway

Land area (sq.km)

1,279,996 sq km

304,282 sq km

GDP (current USD, millions)

277. 199

512. 580

GNI per capita (current USD)

6,270 USD

102,61 USD

Total trade (X+M) (current USD,millions)

155.862

244.155

Total exports (current USD,millions)

76.684

154.339

Total imports (current USD,millions)

79.178

89.816

Trade to GDP ratio (%) (2011-2013)

68.0%

67.5 %

Share of exports (%)

Agricultural products

27.1 %

7.9 %

Fuels and mining products

58.7 %

71.5 %

Manufactures

13.3 %

16.3 %

Share of imports (%)

Agricultural products

8.5 %

10.5 %

Fuels and mining products

22.2 %

12.5 %

Manufactures

69.4%

75.6 %

Source: 2013, World trade organization.

The free trade agreement between Peru and Norway has existed since 2013 as part of the negotiations have concluded with the European Free Trade Association (EFTA), of which Norway is a member. Peru has trade agreements with the other members of EFTA since 2011 which reached approximately US 6.13 billion.

The EFTA is a trade bloc with the aim of developing economic integration and free trade among member countries.

QUESTION 3.

  • Absolute Advantage
  • a. Explain the Theory;
  • b. Analysis of absolute advantage of Peru and Norway
  • c. Data table

Absolute advantaged Theory means that one country or firm can produce certain goods or services for lower cost than another can.

This situation can be noticed between Peru and Norway where the first one produce more ‘efficiently’ Grapes (USS 325.000) in comparation to the other. Norway is able to produce with efficiency lot of Barley because each country / firm exporting what they have better to offer. This is because they are able to produce and sell more product, having more goods and services than other countries

Table 2:

Production: five selected agricultural products of Peru and Norway in 2013

Peru

Norway

Product

Total production (tone)

Yield (Kg/hectare)

Product

Total production (tone)

Yield (Kg/hectare)

Wheat

231

14,976

Wheat

247.000

15,327

Barley

224.533

14,568

Barley

479.600

27,3

Grapes

325.000

20

Grapes

4.180

1,22

Olives

57.8

3,51

Olives

2.43

0,71

Source: 2013, World Development Indicators

QUESTION 4.

Comparative advantage

a. Explain the Theory;

b. Analysis of comparative advantage of Peru and Norway

c. Data table

We can establish a comparation between the two countries in this search. Two goods are produced; say olive and wheat, using only one input, i.e. price per unit. Peru produces one unit of Olive by the price of USD 3.2 while Norway requires to pay USD 19, 47 of unit, respectively. Since Peru can produce Olive at a lower opportunity cost, its best for it to produce and export. The opposite happen to wheat production where Peru pays USD 6 for unit while Norway spends only, USD 1, 94 of unit produced.

Comparative advantage results from different endowments of the factors of productions (capital, land, labour).

Table 3:

Producer Price: Five selected products of Peru and Norway in 2013

Peru

Norway

Product

Price per unit, USD

Product

Price per unit, USD

Wheat

6

Wheat

1,94

Barley

4,21

Barley

0,975

Grapes

4,32

Grapes

1,12

Olives

3,2

Olives

19,47

Source: 2013, World trade organization.

QUESTION 5.

Factor endowment, trade and income distribution

  1. Hercksher-Ohlin (H-O) model :

a. Explain the Theory;

b. Application and Analysis of H-O model for Peru and Norway

c. Data table

The Heckscher-Ohlin model-Samuelson is the “standard model” of international trade theory Heckscher-Ohlin-Samuelson explains the presence of international trade by differences in allocations for each country of production factors. Through this model, the authors intend to prove the superiority of free trade and the benefits of specialization. Briefly, the exchange ratio between countries is based on the different availability of productive factors Norway exports large amount of Barley, Wheat, oat and potato. Goods that are abundant in the country and imports corn, grapes, raisins and peanuts, goods whose production is dependent on scarce factors locally. The same occurs with Peru whose major exports are Asparagus, Grapes, bananas and beans.

Table 4:

Factor endowment and pattern of trade of Peru and Norway in 2013

Peru

Norway

Factors

Factors

Agricultural Land (million hectares)

676,920.0

Agricultural Land (million hectares)

102,178.0

Agricutural Land (% of land area)

19.0

Agricutural Land (% of land area)

2.7

Labour (million)

16.16 million

Labour (million)

2.707 million

Capital (USD, millions)

 

Capital (USD, millions)

 

Four major exported products

Four major imported products

Four major exported products

Four major imported products

Asparagus

Rice

Barley

Corn

Coffee

Corn

Wheat

Grapes

Valery Cavendish bananas

Soy

Oat

Raisins

Sugar

Common bean

Potato

Peanut

Source: 2013,World Development Indicators.

(b) Stolper-Samuelson (S-S) model

a. Explain the Theory;

b. Application and Analysis of S-S model for Peru and Norway.

According to the Heckscher-Ohlin-Samuelson theorem, free trade leads to increased remuneration of the abundant factor of production and the reduction of the remuneration of scarce factor of production. Thus, in an economy where labor is abundant, increase wages; in an economy where work is scarce, wages are reduced.

In developing countries, there are plenty of hand-intensive non-specialized for the application of the Heckscher-Ohlin-Samuelson theorem, free trade will lead to increased wages of unskilled workers. This is because the non-skilled labor is the abundant factor of production in developing countries. On the other hand, if, in developing countries there is shortage of specialized labor, free trade will lead to reduction in wages of skilled workers. This is because skilled labor is scarce factor of production in developing countries.

QUESTION 6.

(a) Economy of Scale

a. Explain the Theory;

b. Application and Analysis of Economics of scale for Peru and Norway;

c. Data table

Scale economy is one that results from being organize the production process so that it achieves maximum utilization of production factors involved in the process, looking as a result low production costs and the increase of production of goods and services. It occurs when the expansion of a company or industry production capacity causes an increase in the total amount produced without a proportional increase in production cost. As the result, the average cost of the product tends to be smaller with the increase in production.

Specifically, there are economies of scale if we increase when my productive factors (workers, machinery, etc.), production increases more than proportionally, for example if duplicate all productive factors producing more than double! A production function with two inputs’ (labor and capital, L and K respectively)

F (K, L)

I have economies of scale:

F (ak, al)> aF (K, L)

It is ‘a’ constant. Therefore, average costs are decreasing! In companies with large-scale production, usually large companies, investment (fixed cost) is diluted by the growing number of units produced. Thus, these companies possess advantages over smaller ones, with average costs more

Table 5:

Domestic consumption and export: five selected agricultural products of Peru and Norway in 2013.

Peru

Norway

Product

Domestic consumptiom (tone)

Exports (tone)

Product

Domestic consumptiom (tone)

Exports (tone)

Wheat

156

75

Wheat

141

106.4

Barley

128.54

96

Barley

150.4

328.6

Grapes

236

89

Grapes

3.4

0.8

Olives

32

15

Olives

96

34

Souce: 2013,World Development Indicators.

 (b) Imperfect competition and market power:

a. Explain the Theory;

b. Application and Analysis of Imperfect competition and market power for Peru and Norway;

c. Data table.

The Imperfect Competition corresponding to a market structure that does not occur perfect competition

The characteristic market of imperfect competition is one that is characterized by high possibility of sellers influence demand and prices by means of product differentiation, advertising, value-added, brand, etc. in this type of market structure there is at least one business or consumer with sufficient power to influence the market price. Examples of imperfect competition situations are monopolies, oligopolies and monopolistic competition.

Market power – Occurs when a firm has the ability to influence the market price, seeking to adjust it in order to have higher profits.

TABLE 6: One selected agricultural in 2013:

Agricultural product name: Barley

Top four producing/exporting countries

Volume of production (tone)

Share of world production (%)

Russia

15.388.704

10,7

Germany

10.343.600

7,2

France

10.315.900

7,2

Canadá

10.237.100

7,1

Source: 2013, World trade organization.

QUESTION 7.

Conclusion:

Peru is one of the main economies in Latin America. The services sector has a great importance and accounts for 60 percent of GDP. Manufacturing are responsible for creating 16 percent of the wealth and construction and water, gas and electricity distribution 10 percent. The agriculture and fishing sector fuels 9 percent of the GDP and the mining sector accounts for the remaining 5 percent.

The Gross Domestic Product (GDP) in this country was worth 202.30 billion US dollars in 2014. The GDP value of Peru represents 0.33 percent of the world economy and the Gross Domestic Product per capita was last recorded at 4066.27 US dollars in 2014. The GDP per Capita in Peru is equivalent to 32 percent of the world’s average.

The Country recorded a trade deficit of 560.70 USD Million in April of 2014 and the exports in Peru decreased to 2845 USD Million in January of 2015 from 3240.57 USD Million in December of 2014. Coffee and sugar have been traditionally the main agricultural export products, Peru is the leading exporting country in the world of asparagus, bananas and dried paprika. On the other hand, imports in Peru increased to 3163 USD Million in January of 2015 from 3098.75 USD Million in December of 2014

The Gross Domestic Product (GDP) in Norway presented. An increase of 0.90 percent in the three first months of 2014 boosted by exports and private consumption. The Gross Domestic Product per capita in this country was last recorded at 62448.02 US dollars in 2014, when adjusted by purchasing power parity (PPP).

. The main exported products are barley, wheat, potatoes; pork, beef, veal, milk; fish… who represented to this country an increased to 76.522 Million in March of 2014 from 67596 Million in February of 2013, while the imports went up to 55830 Million in Abril of 2014.

There are currently between the two countries a free trade agreement in order to reduce or eliminate customs duties among member countries. The purpose of the creation of this free trade area is to encourage the trade between the participating countries.

REFERENCES:

Helpman, Elhanan, Oleg Itskhoki, Marc-Andreas Muendler, and Stephen Redding (2012), TRADE AND INEQUALITY FROM THEORY TO ESTIMATION, NBER Working Paper 17991; Silvestre, Joaquim (1987). “ECONOMIES AND DISECONOMIES OF SCALE. London: Macmillan. pp.80–84;

Maneschi, Andrea (1998) “COMPARATIVE ADVANTAGE IN INTERNACIONAL TRADE: A Historical Perspective. Cheltenham: Elgar. p.1;

Dixit, Avinash; Norman, Victor (1980). THEORY OF INTERNATIONAL TRADE: A Dual, General Equilibrium Approach. Cambridge: Cambridge University Press. p.2.

World Bank; International Finance Corporation. 2013. DOING BUSINESS: 2014 Economy Profile : Norway. World Bank Group, Washington, DC.

World Bank Group. 2014. DOING BUSINESS: Economy Profile 2015: Peru. Washington, DC

Page 1 of 11

Lecturer: Dr. Jacob Ketoolla


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