International Trade - courses.blog.mb.ipb.ac.idcourses.blog.mb.ipb.ac.id/files/2010/06/Wild-IB5e-PPT-Instructor-05.pdf8 Assumptions and Limitations 1. Nations strive only to maximizeNations

1

International TradeInternational Trade

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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 Business 5e Chapter 5 - 2

p pinternational product life cycle theories

• Explain the new trade and national competitive advantage theories

2


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



People have larger selection of productsImportant 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 fasterthan world output

3

World’s Top ExportersWorld’s Top Exporters



Trade PatternsTrade Patterns

Merchandise trade among: W t E

60%

6%

Merchandise trade among: Western European trade is mostly intra-

regional tradeLow- and middle-income nations High-income

nations

North America



34%

High-income and low- and middle-income nations

imports twice as much from Asia as it

exports to Asia

4

Who Trades with Whom?Who Trades with Whom?



Trade and theTrade and theDependent NationDependent Nation

Total TotalTotaldependence

Potential effects of dependence:+ Infuses needed capital+ Creates jobs and raises wages

I t t h l d kill

Totalindependence



+ Imports technology and skills

– Economic problems transferred– Political turmoil can spill over

5

Trade Theory TimelineTrade Theory Timeline



MercantilismMercantilismNations accumulate financial wealth byNations accumulate financial wealth by

encouraging exports and discouraging importsencouraging exports and discouraging imports

Three pillarsThree pillars• Maintain trade

surplus

Inherent flawsInherent flaws• World trade is

zero-sum game• Constrains output



• Governmentintervention

• Exploit colonies

Constrains outputand consumption

• Limits colonies’market potential

6

Absolute AdvantageAbsolute Advantage

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

RicelandRiceland TealandTealand



Specialization and trade allows each to produce and consume more

1 resource unit = 1 ton rice or1/5 ton tea

1 resource unit = 1/6 ton rice or1/3 ton tea

Trade Gains:Trade Gains:Absolute AdvantageAbsolute Advantage



7

Comparative AdvantageComparative Advantage

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

efficiently than it does any other good

RicelandRiceland TealandTealand



Specialization and trade allow each to produce and consume more

1 resource unit = 1 ton rice or1/2 ton tea

1 resource unit = 1/6 ton rice or1/3 ton tea

Trade Gains:Trade Gains:Comparative AdvantageComparative Advantage



8

Assumptions and LimitationsAssumptions and Limitations

1. Nations strive only to maximize1. 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



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 (f t ) i b d d i t dresources (factors) in abundance, and import goods

that require resources in short supply

Land and CapitalLabor



Two factor types

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Leontief ParadoxLeontief Paradox

Research discovered evidence opposite theResearch discovered evidence opposite the prediction of factor proportions theory

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

Possible explanationPossible explanationTheory assumes nation’s production



Theory assumes nation s production factors to be homogeneousTheory is better predictor when expenditures on labor are considered

International Product Life CycleInternational Product Life Cycle

A company begins by exporting its product and later undertakes p y g y p g pforeign direct investment as a product moves through its life cycle



10

New Trade TheoryNew Trade Theory

FundamentalsFundamentals

Gains from specialization and increasing economies of scale

Companies first to market

FirstFirst--mover advantagemover advantage

Economic and strategic advantage of being first to enter an industry

May create a formidable



create barriers to entry

Government may help by assisting home companies

May create a formidable barrier to market entry for potential rivals

National Competitive AdvantageNational Competitive Advantage

Nation’s competitiveness in an industry depends on the industry’s capacity to 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 conditions

Demand conditions



Firm strategy, structure, and rivalry

Related and supporting industries

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Factor ConditionsFactor Conditions

B i f t Ad d f tBasic factors Advanced factors

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

Result of investing in Result of investing in education and innovationeducation and innovation(skill of workforce segments,



surface features)( g ,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

12

Related and Supporting IndustriesRelated 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

Mapping U.S. ClustersMapping U.S. Clusters



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

Highly skilled managers are essential because strategyhas 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



p pinternational product life cycle theories

• Explain the new trade and national competitive advantage theories

14



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International Trade - courses.blog.mb.ipb.ac.idcourses.blog.mb.ipb.ac.id/files/2010/06/Wild-IB5e-PPT-Instructor-05.pdf8 Assumptions and Limitations 1. Nations strive only to maximizeNations