fundamental of business enviroment

5 International Trade

Copyright 2014 Pearson Education

5 - 2 Copyright 2014 Pearson Education

Chapter Objectives

Describe the relationship between international trade

volume and world output, and identify overall trade patterns

Describe mercantilism and explain its impact on world

powers and their colonies

Explain the theories of absolute advantage and comparative

advantage

Explain the factor proportions and international product life

cycle theories

Explain the new trade and national competitive advantage

theories

China-Caribbean Trade

Dramatic growth since 2008 Mainly building materials from the Caribbean Textiles and food products from China



International Trade

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 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


Worlds Top Exporters

5 - 7 Copyright 2014 Pearson Education, Inc.

Trade 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?


Trade Dependence and Independence

Potential effects of dependence:

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

Economic problems transferred Political turmoil can spill over

Total

dependence

Total

independence


Discussion Question

What are the

patterns of global

and regional trade

flows that we see

among nations?


Answer to Discussion Question

60 percent of world merchandise trade

occurs among high-income countries. 34

percent of world merchandise trade occurs

among high-income countries and low- and

middle-income nations. About 6 percent of

trade occurs only among low- and middle-

income nations.

Intra-regional trade accounts for 71 percent

of Europes exports, 52 percent of Asias exports, and around 48 percent of North

Americas exports.

This century is called the Pacific century due to expected growth in Asia and a shift in

trade from the Atlantic to the Pacific Ocean.


Trade Theory Timeline


Foundations of Mercantilism

Nations accumulate financial wealth by encouraging

exports and discouraging imports

Three pillars:

Maintain trade surplus

Government intervention

Exploit colonies

European sea-faring nations practiced mercantilism

from around 1500 to the late 1700s.

These countries acquired colonies in Africa, Asia,

and the Americas as sources of inexpensive raw

materials and as markets for higher-priced finished

goods.

Mercantilist nations used profits from this trade to

create armies and navies to control colonies and

protect their shipping.

5 - 14 Copyright 2014 Pearson Educationpublishing as Prentice Hall

Foundations of Mercantilism


Flaws of Mercantilism

World trade is a zero-sum game - idea that a nation benefits from trade only at the expense of other nations

Limits colonies market potential - people there received higher prices for their resources

Constrains output and consumption - mercantilist policies


Absolute 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

Riceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

Tealand


Trade Gains: Absolute 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



Assume that Riceland and Tealand expend additional

resource units to produce extra rice and tea, respectively, and

then trade additional output with the other nation on a one-to-

one basis.

This means that Riceland expends an additional resource unit to produce one extra ton of rice that it then trades with

Tealand to obtain one ton of tea. Riceland gets four-fifths of

a ton more tea than the one-fifth of a ton it would have

produced itself with one additional resource unit.



Tealand expends an additional resource unit to produce an extra one-third of a ton of tea that it then trades with

Riceland to obtain one-third of a ton of rice. Tealand gets

one-sixth of a ton more rice than the one-sixth of a ton it

would have produced itself with one additional resource

unit.

Specialization and trade gives Riceland five times more tea

than it would have produced itself, and gives Tealand two

times more rice than it would have produced itself.

This means that if each country specializes in the area in

which it has an absolute advantage, world output (and

consumption) of both goods increases. In other words, each

nation benefits from specialization and trade.



Comparative 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

Riceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

Tealand


Trade Gains: Comparative Advantage

Specialization and trade:

+ Riceland gets two times more tea than it would


+ Tealand gets two times more rice than it would



Assumptions 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 and it cannot cross borders

Specialization does not create efficiency and improvement gains


Factor 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 Paradox

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 nations production factors to be homogeneous

Theory is better predictor when expenditures on labor are considered


International Product Life Cycle

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 Theory

Fundamentals

Gains from specialization

and economies of scale

Companies first to market

create barriers to entry

Government may help by

assisting home companies

First-mover advantage

Economic and strategic

advantage of being first to

enter an industry

May create a formidable

barrier to market entry for

potential rivals


Discussion Question

Briefly describe the

new trade theory. Does

its focus on productivity

put it at odds with the

theory of comparative

advantage and factor

proportions theory?


Answer to Discussion Question

New trade theory says that there are

gains from specialization and

economies of scale, companies first to

market create barriers to entry, and

government is helpful if it assists its

home-based companies.

Because new trade theory emphasizes

productivity rather than a nations resources, it is in line with the theory of

comparative advantage and at odds

with factor proportions theory.


National Competitive Advantage

Nations competitiveness in an industry depends on the industrys capacity to innovate and upgrade, which in turn depends on four main determinants

(plus government and chance)

Factor conditions

Demand conditions

Firm strategy, structure, and rivalry

Related and supporting industries


Factor Conditions

Basic Factors

Advanced Factors


Demand 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 Industries

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, and 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

fundamental of business enviroment

Documents