Why Germany is no longer #1 in Finnish foreign trade? Seppo Suominen lecturer, economics HH Malmi Campus

Why Germany is no longer #1 in Finnish foreign trade?

Seppo Suominenlecturer, economicsHH Malmi Campus

Why international business?

to expand sales to acquire resources to diversify sources of sales and supplies to minimize competitive risk

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HAAGA-HELIA University of Applied Sciences

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Why international trade theory?

to understand what products should a company import and export

to understand how much trade is reasonable to understand with whom should a company

trade

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Why countries exchange goods and services? it is useful David Ricardo (1817): comparative advantage Note: at that time, exchange rates were fixed,

i.e. gold standard or silver standard In Finland (in 1809-1917, part of Russia, as

Grand Duchy) during 1865-1877 1 FIM (Finnish markka = ¼ Russian ruble = 4,45 gm of silver = 0,00445 kg

During 1878-1915 1 FIM = 0,290 gm of gold

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Copyright © 2009 Pearson

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publishing as Prentice

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Laissez-Faire versus Interventionist Approaches to Exports & Imports Interventionist:

Mercantilism Neomercantilism

Free-trade theories: Absolute advantage Comparative advantage

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Theories of Trade Patterns

Explaining trade patterns: Country size Factor proportions Country similarity

Trade competitiveness: Product life cycle theory Porter diamond

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Mercantilist Theory

Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports)

Neomercantilist policy also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective

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Theory of Absolute Advantage

Suggests specialization through free trade because consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic ones

A country may produce goods more efficiently because of a natural advantage or because of an acquired advantage

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Theory of Comparative Advantage Also proposes specialization through free trade

because it says that total global output can increase even if one country has an absolute advantage in the production of all products

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Theory Of Country Size

Countries with large land areas are apt to have varied climates and natural resources

They are generally more self-sufficient than smaller countries are

Large countries’ production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade

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Factor-Proportions Theory

A country’s relative endowments of land, labor, and capital will determine the relative costs of these factors

Factor costs will determine which goods the country can produce most efficiently

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Country-similarity Theory

Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies

Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them

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Product Life Cycle (PLC) Theory

Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries

Over the product’s life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline

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The Porter Diamond

Four conditions as important for competitive superiority: demand conditions factor conditions related and supporting industries firm strategy, structure, and rivalry

http://www.stat.fi/tup/suoluk/suoluk_kansantalous_en.html#Nationalbalance

http://www.tulli.fi/en/03_Foreign_trade_statistics/06_statistics/01_timeseries/index.jsp

http://www.wto.org/english/res_e/statis_e/its2006_e/its06_longterm_e.pdf

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Trade is important or vital for Finland Export/production = 82,2/179,9 = 45 % Export/supply = export/(production + import) =

33 %

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There are large changes in export or import numbers

Sometimes + 42%, sometimes – 8 % But on average: + 6 % p.a. while production + 3

%

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“Newton’s gravity theory”

trade = C•m1•m2/d2

where C = some constant, parameter, m1 and m2 are “masses” of the trading countries and d is distance between the countries

hence trade is large when a) the countries are close b) the countries are large, big (population, gdp), and c) the standard of living is high (gdp/capita)

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See: Trade statistics, pocket2007 p. 10-13 and 20-21

http://www.tulli.fi/fi/05_Ulkomaankauppatilastot/05_Tilastokatsaukset/pdf/2008/pocket2007.pdf

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http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/text.pdf

Pages 240- http://maps.google.ru/

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Why Germany is no longer #1 in Finnish foreign trade? Seppo Suominen lecturer, economics HH Malmi Campus