5 International Trade Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

5 InternationalInternationalTradeTrade

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

5 - 2Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

International TradeInternational Trade

Purchase, sale, or exchange of goods and services across national borders

People have larger selection of products Important engine for job creation People have larger selection of products Important engine for job creation


Trade and World OutputTrade and World Output

• World trade• 80% merchandise• 20% services

• World output impacts trade• Growing output = growing trade• Sluggish output = sluggish trade

• World trade grows faster

than world output


World’s Top ExportersWorld’s Top Exporters


Trade PatternsTrade Patterns

60%

34%

6%

Merchandise trade among:

Low- and middle-income nations High-income

nations

High-income and low- and middle-income nations


Who Trades with Whom?Who Trades with Whom?


Trade Dependence and Trade Dependence and IndependenceIndependence

Potential effects of dependence:

+ Infuses needed capital+ Creates jobs and raises wages+ Imports technology and skills

– Economic problems transferred– Political turmoil can spill over

Totaldependence

Totalindependence


Trade Theory TimelineTrade Theory Timeline


Foundations of MercantilismFoundations of Mercantilism

Nations accumulate financial wealth by encouraging exports and discouraging imports

Three pillars:

▪ Maintain trade surplus

▪ Government intervention

▪ Exploit colonies


Flaws of MercantilismFlaws of Mercantilism

‒ World trade is a zero-sum game

‒ Limits colonies’ market potential

‒ Constrains output and consumption


Absolute AdvantageAbsolute Advantage

Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)

Specialization and trade allows each to produce and consume more

1 resource unit = 1 ton rice or

1/5 ton tea

RicelandRiceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

TealandTealand


Trade Gains:Trade Gains:Absolute AdvantageAbsolute Advantage

Specialization and trade:

+ Riceland gets five times more tea than it would have produced itself

+ Tealand gets two times more rice than it would have produced itself


Comparative AdvantageComparative Advantage

Inability of a nation to produce a good more efficiently than other nations, but an ability to produce that good more efficiently than it

does any other good

Specialization and trade allow each to produce and consume more

1 resource unit = 1 ton rice or

1/2 ton tea

RicelandRiceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

TealandTealand


Trade Gains:Trade Gains:Comparative AdvantageComparative Advantage

Specialization and trade:

+ Riceland gets two times more tea than it would have produced itself

+ Tealand gets two times more rice than it would have produced itself


Assumptions and LimitationsAssumptions and Limitations

• Nations strive only to maximize production and consumption

• Only two countries produce and consume just two goods

• No transportation costs of traded goods

• Labor is the only resource used to produce goods

• Ignores efficiency and improvement gains from producing just one good


Discussion QuestionDiscussion Question

When a nation cannot produce a good more efficiently than other nations, but it can produce that good more efficiently than it does any other good, we say this is a case of __________.

a. Absolute advantage

b. Comparative advantage

c. Mercantilism


Answer to Discussion Answer to Discussion QuestionQuestion

When a nation cannot produce a good more efficiently than other nations, but it can produce that good more efficiently than it does any other good, we say this is a case of __________.

a. Absolute advantage

b. Comparative advantage

c. Mercantilism


Factor Proportions TheoryFactor Proportions Theory

Countries produce and export goods that require resources (factors) in abundance, and import goods

that require resources in short supply

Two factor types

Land and Capital Labor


Leontief ParadoxLeontief Paradox

Research found evidence opposite of that predicted by the factor proportions theory:

U.S. exports are more labor-intensive than U.S. imports

Research found evidence opposite of that predicted by the factor proportions theory:

U.S. exports are more labor-intensive than U.S. imports

Possible explanations: Theory assumes nation’s production

factors to be homogeneous

Theory is better predictor when expenditures on labor are considered

Possible explanations: Theory assumes nation’s production

factors to be homogeneous

Theory is better predictor when expenditures on labor are considered


International Product Life International Product Life CycleCycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business , 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.


New Trade TheoryNew Trade Theory

FundamentalsFundamentals

Gains from specialization and economies of scale

Companies first to market create barriers to entry

Government may help by assisting home companies

First-mover advantageFirst-mover advantage

Economic and strategic advantage of being first to enter an industry

May create a formidable barrier to market entry for potential rivals


National Competitive National Competitive

AdvantageAdvantage

Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants

(plus government and chance)

Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants

(plus government and chance)

Factor conditionsFactor conditions

Demand conditionsDemand conditions

Firm strategy, structure, and rivalryFirm strategy, structure, and rivalry

Related and supporting industriesRelated and supporting industries


Factor ConditionsFactor Conditions

Basic Factors

Advanced Factors


Demand ConditionsDemand Conditions

Sophisticated home-market buyers drive companies to

improve existing products and develop entirely new products

and technologies

This should improve the competitiveness of the entire

group of companies in a market


Related and Supporting Related and Supporting

IndustriesIndustriesRelated and Supporting Related and Supporting

IndustriesIndustries

Companies in an internationally competitive industry do not exist in isolation

Supporting industries form “clusters” of economic activity in the geographic area

Each industry reinforces the competitiveness of every other industry in the cluster


Firm Strategy, Structure,Firm Strategy, Structure,and Rivalryand Rivalry

Highly skilled managers are essential because strategy has lasting effects on firm competitiveness

Domestic industry whose structure and rivalry create an intense struggle to survive strengthens competitiveness


Discussion QuestionDiscussion Question

National __________ theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

a. Product life cycle

b. First-mover

c. Competitive advantage


Answer to Discussion Answer to Discussion QuestionQuestion

National __________ theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

a. Product life cycle

b. First-mover

c. Competitive advantage

5 International Trade Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

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