Chapter 5 - 1International Business 4e© Prentice Hall, 2008
Chapter 5 Chapter 5 International TradeInternational Trade
© Prentice Hall, 2008 International Business 4e Chapter 5 - 2
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 product life cycle theories
• Explain the new trade and national competitive advantage theories
© Prentice Hall, 2008 International Business 4e Chapter 5 - 3
International TradeInternational Trade
Purchase, sale, or exchange of goods and services across national borders
People have larger selection of products Important engine for job creation
People have larger selection of products Important engine for job creation
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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 faster
than world output
© Prentice Hall, 2008 International Business 4e Chapter 5 - 5
World’s Top ExportersWorld’s Top Exporters
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Trade PatternsTrade Patterns
60%
34%
6%
Merchandise trade among: Western European trade is mostly intra-
regional tradeLow- and middle-income nations High-income
nations
High-income and low- and middle-income nations
North America imports twice as
much from Asia as it exports to Asia
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Who Trades with Whom?Who Trades with Whom?
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Trade and theTrade and theDependent NationDependent Nation
Totaldependence
Potential effects of dependence:
+ Infuses needed capital+ Creates jobs and raises wages+ Imports technology and skills
– Economic problems transferred– Political turmoil can spill over
Totalindependence
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Trade Theory TimelineTrade Theory Timeline
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MercantilismMercantilismNations accumulate financial wealth byNations accumulate financial wealth byencouraging exports and discouraging encouraging exports and discouraging
importsimports
Three pillarsThree pillars• Maintain trade
surplus
• Governmentintervention
• Exploit colonies
Inherent flawsInherent flaws• World trade is zero-sum game• Constrains output and consumption• Limits colonies’ market potential
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Absolute AdvantageAbsolute 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
RicelandRiceland
1 resource unit = 1/6 ton rice or
1/3 ton tea
TealandTealand
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Trade Gains:Trade Gains:Absolute AdvantageAbsolute Advantage
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Comparative AdvantageComparative 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 allows each to produce and consume more
1 resource unit = 1 ton rice or
1/2 ton tea
RicelandRiceland
1 resource unit = 1/6 ton rice or
1/3 ton tea
TealandTealand
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Trade Gains:Trade Gains:Comparative AdvantageComparative Advantage
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Assumptions and LimitationsAssumptions 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 TheoryFactor 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
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Leontief ParadoxLeontief Paradox
Research discovered evidence opposite the prediction of factor proportions theoryU.S. exports are more labor-intensive than U.S. imports
Research discovered evidence opposite the prediction of factor proportions theoryU.S. exports are more labor-intensive than U.S. imports
Possible explanationPossible explanation Theory assumes nation’s production
factors to be homogeneous
Theory is better predictor when expenditures on labor are considered
Possible explanationPossible 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 International Product Life CycleCycle
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 TheoryNew Trade Theory
FundamentalsFundamentals
Gains from specialization and increasing economies of scale
Companies first to market create barriers to entry
Government may help by assisting home companies
First-mover advantageFirst-mover advantage
Economic and strategic advantage of being first to enter an industry
May create a formidable barrier to market entry for potential rivals
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National Competitive National Competitive
AdvantageAdvantageNation’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)
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 conditionsFactor conditions
Demand conditionsDemand conditions
Firm strategy, structure, and rivalryFirm strategy, structure, and rivalry
Related and supporting industriesRelated and supporting industries
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Factor ConditionsFactor Conditions
Basic factors Advanced factors
Nation’s resourcesNation’s resources(large workforce, natural resources, climate and
surface features)
Nation’s resourcesNation’s resources(large workforce, natural resources, climate and
surface features)
Result of investing in Result of investing in education and innovationeducation and innovation
(skill of workforce segments, technological infrastructure)
Basic factors can spark initial production, but advanced factors account for sustained
competitive advantage
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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
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Related and Supporting Related and Supporting
IndustriesIndustriesRelated and Supporting Related and Supporting
IndustriesIndustries
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. ClustersMapping U.S. Clusters
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Firm Strategy, StructureFirm Strategy, Structureand Rivalryand 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
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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 international product life cycle theories
• Explain the new trade and national competitive advantage theories