In this chapter, you will explore global patterns of international trade. You will also: Learn about mercantilism - the earliest theory of international trade, explore the theories of absolute and comparative advantage, and understand more recent trade theories and their implications for international business.
5 International Trade Copyright © 2014 Pearson Education, Inc 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 Copyright â 2014 Pearson Education, Inc 5-2 Walmart Walmart and others import from China • China imports from other countries, too • Causes dramatic growth in global trade Copyright © 2014 Pearson Education, Inc 5-3 International Trade Purchase, sale, or exchange of goods and services across national borders People have larger selection of products Important engine for job creation Copyright © 2014 Pearson Education, Inc 5-4 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 Copyright © 2014 Pearson Education, Inc 5-5 World’s Top Exporters Copyright © 2014 Pearson Education, Inc 5-6 Trade Patterns Merchandise trade among: Low- and middle-income nations 6% High-income nations 60% 34% High-income and low- and middle-income nations Copyright © 2014 Pearson Education, Inc 5-7 Who Trades with Whom? Copyright © 2014 Pearson Education, Inc 5-8 Trade Dependence and Independence Total dependence Total 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 Copyright © 2014 Pearson Education, Inc 5-9 Discussion Question What are the patterns of global and regional trade flows that we see among nations? Copyright © 2014 Pearson Education, Inc - 10 Answer to Discussion Question When a nation cannot produce a good more efficiently than other nations, but it can produce that good more efficiently than it does any other good, we say this is a case of a Absolute advantage b Comparative advantage c Mercantilism Copyright © 2014 Pearson Education, Inc - 21 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 Copyright © 2014 Pearson Education, Inc - 22 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 nation’s production factors to be homogeneous Theory is better predictor when expenditures on labor are considered Copyright © 2014 Pearson Education, Inc - 23 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 Copyright © 2014 Pearson Education, Inc - 24 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 Copyright © 2014 Pearson Education, Inc 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 - 25 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? Copyright © 2014 Pearson Education, Inc - 26 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 nation’s resources, it is in line with the theory of comparative advantage and at odds with factor proportions theory Copyright © 2014 Pearson Education, Inc - 27 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 Copyright © 2014 Pearson Education, Inc - 28 Factor Conditions Basic Factors Advanced Factors Copyright © 2014 Pearson Education, Inc - 29 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 Copyright © 2014 Pearson Education, Inc - 30 Related and Supporting Industries Companies in an internationally competitive industry 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 Copyright © 2014 Pearson Education, Inc - 31 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 Copyright © 2014 Pearson Education, Inc - 32 Discussion Question National theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade a Product life cycle b First-mover c Competitive advantage Copyright © 2014 Pearson Education, Inc - 33 Answer to Discussion Question National theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade a Product life cycle b First-mover c Competitive advantage Copyright © 2014 Pearson Education, Inc - 34 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2014 Pearson Education, Inc - 35 ... 5-5 World’s Top Exporters Copyright © 2014 Pearson Education, Inc 5-6 Trade Patterns Merchandise trade among: Low- and middle-income nations 6% High-income nations 60% 34% High-income and low-... Education, Inc 5-4 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... 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 percent of trade occurs