wild ib5e ppt instructor 05

International TradeInternational Trade

International Business 5e Chapter 5 - 2

Chapter PreviewChapter Preview

• Discuss the volume and patterns of world trade

• Identify the inherent flaws of mercantilism

• Explain the absolute and comparative advantage theories

• Describe the factor proportions and international product life cycle theories

• Explain the new trade and national competitive advantage theories

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

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

Merchandise trade among: Western European trade is mostly intra-

regional tradeLow- and middle-income nations High-income

nations

High-income and low- and middle-income nations

North America imports twice as

much from Asia as it exports to Asia

Who Trades with Whom?Who Trades with Whom?

Trade and theTrade and theDependent NationDependent Nation

Totaldependence

Potential effects of dependence:

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

– Economic problems transferred– Political turmoil can spill over

Totalindependence

Trade Theory TimelineTrade Theory Timeline

MercantilismMercantilismNations accumulate financial wealth byNations accumulate financial wealth byencouraging exports and discouraging encouraging exports and discouraging

importsimports

Three pillarsThree pillars• Maintain trade

surplus

• Governmentintervention

• Exploit colonies

Inherent flawsInherent flaws• World trade is zero-sum game• Constrains output and consumption• Limits colonies’ market potential

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

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

Assumptions and LimitationsAssumptions and Limitations

1. Nations strive only to maximize production and consumption

2. Only two countries produce and consume just two goods

3. No transportation costs of trading goods

4. Labor is the only resource used to produce goods

5. Ignores efficiency and improvement gains from producing just one good

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 discovered evidence opposite the prediction of factor proportions theoryU.S. exports are more labor-intensive than U.S. imports

Possible explanationPossible explanation Theory assumes nation’s production

factors to be homogeneous

Theory is better predictor when expenditures on labor are considered

Possible explanationPossible explanation 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

New Trade TheoryNew Trade Theory

FundamentalsFundamentals

Gains from specialization and increasing 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

AdvantageAdvantageNation’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

Nation’s resourcesNation’s resources(large workforce, natural resources, climate, and

surface features)

Nation’s resourcesNation’s resources(large workforce, natural resources, climate, and

surface features)

Result of investing in Result of investing in education and innovationeducation and innovation

(skill of workforce segments, technological infrastructure)

Basic factors can spark initial production, but advanced factors account for sustained

competitive advantage

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

Mapping U.S. ClustersMapping U.S. Clusters

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 its competitiveness

Chapter ReviewChapter Review

• Discuss the volume and patterns of world trade

• Identify the inherent flaws of mercantilism

• Explain the absolute and comparative advantage theories

• Describe the factor proportions and international product life cycle theories

• Explain the new trade and national competitive advantage theories

means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.

Printed in the United States of America.

wild ib5e ppt instructor 05

sluggish trade world

trade gains

world output world trade

patterns of world trade

trade theory timeline

international trade

growing trade sluggish

western european trade

Business

innovation in the wild, wild web

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