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International Trade Theories And Comparative Advantage Economics Essay

International Trade is that the exchanging methodology of products and services across the international border. In 2010, the price of international tread achieved 19 trillion (US) dollars that’s regarding half-hour of the planet value. That’s virtually one third of production of products and services are changed internationally round the world. International trade theories are fully completely different sort of theories that provide rationalization on international trade New Charter University, (2012).
In 1600 and 1700 centuries, mercantilism involved that countries have to be compelled to at an equivalent time encourage exports and discourage imports. Though’ mercantilism is Associate in tending previous theory it echoes in trendy politics and trade policies of the various countries. The classical man of science Smith, world organization agency developed the thought of absolute advantage, was the first to elucidate why unrestricted trade is helpful to a country. Smith argues that the unseen offer of the market mechanism, rather than government policy, have to be compelled to make sure what a country imports and what it exports Bhagwati, J. (1958).
Heckscher-Ohlin theory is principally popular on theoretical grounds, but in real-world international trade pattern it clothed to not be merely transferred, discovered as a result of the Leontief contradiction in terms. Another theory trying to elucidate the dissatisfaction of the Hecksher-Ohlin theory of international trade was the merchandise life cycle theory developed by Raymond Vernon Abedini j. (n.d.).
International Trade theory (A) Mercantilism: According to Wild, 2000, this International trade theory that state that nation need to accumulate cash wealth, usually at intervals the strategy of gold, by encourages exports and discourages imports is termed mercantilism. In line with this theory totally different measures of countries’ well being, like living standards or human development, square measure tangential in the main great United Kingdom, France, Holland, European nation and European country used mercantilism throughout the 1500 to the late 1700 Deraniyagala, S.,

Negative Effects Of Fdi In Host Countries Economics Essay

In last decades the importance of Foreign Direct Investments (FDI) has increased significantly due to globalization process, which offers huge opportunities for mostly developing countries to reach faster economic growth through trade and investment. FDI assists foreign investors in utilizing their assets and resources more efficiently as well as host countries in acquisition of better technologies and getting involved in international production and trade networks (Athukorala, 2003).
Developing countries have started to see FDI as a source of economic development and modernisation, income growth and employment. These nations have liberalised their investment regimes and followed other policies to attract more FDI. They have attempted to find the ways of pursuing those domestic policies that will allow them to drive maximum benefits from multinational enterprise presence in the domestic economy (OECD, 2002).
The aim of this study is to analyze the impact of FDI on the economy of host countries. The first part of the work will be addressed to the relationship between foreign investments and the economic growth of the host nations. The study will answer the question why some countries benefit from FDI more than other countries, and what these governments should realize in order to maximize their benefits from the presence of foreign firms.
The following parts will be devoted to more certain issues, such as positive and negative effects of FDI in the host countries. Since there is a broad literature on the positive impacts of foreign investments, the main focus in this work is emphasized on the negative impacts. The study shows that although MNEs bring many benefits to host countries and the governments are trying to attract more and more investments, the negative effects of FDI in the economy of host countries should not be neglected. Any indifference to these issues may result in negative spillover effects, balance of payment deficits, dual economy, pollution and etc.
Brief information about the negative impacts of FDI, especially, Dutch Disease effects, on the economy of Azerbaijan is also given at the end of the study in order to bring a practical example. This part is also provided with charts for more visual description of the effects.
FDI and Economic Growth Global economic events of past decades driven by technological progresses, regional integration and realignment of economic policies and systems have changed the perception of host country governments of how FDI can contribute to their economic and social purposes. They became more interested in the role of FDI in their countries to understand its benefits and costs, and to reveal what should be done by national administrations to insure that benefits of FDI inflows to their economic and social needs will be maximized (Dunning, 1995).
Theory on FDI and growth relationship In theory there are contradictory views about the growth effects of FDI. The main rationale behind the special incentives to attract FDI is the belief that they produce externalities in the form of technology transfers and spillovers (Carkovic and Levine, 2002). Romer (1993) argues that FDI can ease the transfer of technological and business know-how to less developed countries and enhance the productivity of all firms in the host country.
However, some theories state that foreign investments will damage resource allocation and slow the economic growth due to trade, price, financial and other distortions in less developed countries (Boyd and Smith, 1992). Despite these contradictory theories, some models suggest that FDI will promote the economic development under particular policy conditions (Carkovic and Levine, 2002).
Factors of FDI influence The extent to which the foreign investment can contribute to the economic growth depends on a variety of factors. One of them is the host country characteristics, called “absorptive capacity”, – a capability of the host economy to benefit from technological spillovers from the more industrialized nations and the ability to accumulate and best utilize technology and knowledge (Narula and Portelli, 2005). The main determinant of the “absorptive capacity” is the quality of institutions, particularly, the rule of law and the property rights protection.
Trade openness, which is a measure of the competition level in the local country, also positively influences the level of FDI contribution to growth. Countries with more open trade policy have less market distortions, high level of efficiency and competition which enhance the spillover effects of FDI (Balasubramanyam et al., 1996). A test between FDI and output growth in 24 countries in 1971-1985 years conducted by Nair-Reichert and Weinhold (2001) also reveals that the degree of country’s trade openness had a huge impact on the efficiency of FDI in the host country.
The level of technological sophistication and human capital stock in the host country is also one of the main factors of FDI impact on growth. It has been found that FDI raised the growth in those countries that reached a minimum threshold level of technological sophistication or the stock of human capital (Borensztein et al., 1998; Xu, 2000) The technology gap between MNE and domestic firms in the host countries is the main attribute for the emergence of technology spillovers. A high technology gap along with a low competition reduces the spillover effects to the host country (Kokko et al, 1996).
Other determinants include economic power, industry, type of FDI, and regional integration, industry specialization, market size, R