International Trade

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Inc. publishing as Prentice Hall
 Chapter 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
Copyright © 2010 Pearson Education, International Business 5e Chapter 5 - 2
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 International Trade

Purchase, sale, or exchange of goods and

services across national borders

✓ People have larger selection of products

✓ Important engine for job creation

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 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

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 World’s Top Exporters

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 Trade Patterns

Merchandise trade among:

Western European
Low- and trade is mostly intra-
middle-income regional trade
nations High-income
6% nations
60%

North America
34% imports twice as
High-income and low- and much from Asia as it
middle-income nations exports to Asia

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 Who Trades with Whom?

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 Trade and the
Dependent Nation
Total Total
dependence 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

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 Trade Theory Timeline

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 Mercantilism
Nations accumulate financial wealth by
encouraging exports and discouraging imports

Three pillars Inherent flaws

• Maintain trade • World trade is
surplus zero-sum game
• Constrains output
• Government
and consumption
intervention
• Limits colonies’
• Exploit colonies market potential

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 Absolute Advantage

Ability of a nation to produce a good more efficiently than any

other nation (greater output using same or fewer resources)

Riceland Tealand

1 resource unit = 1 ton rice or 1 resource unit = 1/6 ton rice or

1/5 ton tea 1/3 ton tea

Specialization and trade allows each to

produce and consume more
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 Trade Gains:
Absolute Advantage

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 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

Riceland Tealand

1 resource unit = 1 ton rice or 1 resource unit = 1/6 ton rice or

1/2 ton tea 1/3 ton tea

Specialization and trade allow each to

produce and consume more
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 Trade Gains:
Comparative Advantage

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 Assumptions 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

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 Factor Proportions Theory
Countries produce and export goods that require
resources (factors) in abundance, and import goods
that require resources in short supply

Labor Land and Capital

Two factor types

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 Leontief Paradox

Research discovered evidence opposite the

prediction of factor proportions theory
✓ U.S. exports are more labor-intensive than U.S. imports

Possible explanation
✓ Theory assumes nation’s production
factors to be homogeneous
✓ Theory is better predictor when
expenditures on labor are considered

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 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

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 New Trade Theory

Fundamentals First-mover advantage

➢ Gains from specialization

➢ Economic and strategic
and increasing economies
of scale advantage of being first to
enter an industry
➢ Companies first to market
➢ May create a formidable
create barriers to entry
barrier to market entry for
➢ Government may help by potential rivals
assisting home
companies

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 National Competitive Advantage

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

Related and supporting industries

Firm strategy, structure, and rivalry

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 Factor Conditions

Basic factors Advanced factors

Nation’s resources Result of investing in

(large workforce, natural education and innovation
resources, climate, and (skill of workforce segments,
surface features) technological infrastructure)

Basic factors can spark initial production, but advanced

factors account for sustained competitive advantage
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 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

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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

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 Mapping U.S. Clusters

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 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 its
competitiveness

Copyright © 2010 Pearson Education, International Business 5e Chapter 5 - 25

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 Chapter 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
Copyright © 2010 Pearson Education, International Business 5e Chapter 5 - 26
Inc. publishing as Prentice Hall
 International Trade

Copyright © 2010 Pearson Education,

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

publishing as Prentice Hall