International Trade

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Transcript International Trade

International Trade

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

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People have larger selection of products Important engine for job creation

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Trade and World Output

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World trade

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80% merchandise 20% services

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World output impacts trade

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Growing output = growing trade Sluggish output = sluggish trade

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World trade grows faster than world output

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World’s Top Exporters

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Trade Patterns

Merchandise trade among: Low- and middle-income nations

6% 34%

High-income and low- and middle-income nations High-income nations

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Who Trades with Whom?

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Trade Dependence and Independence

Total dependence Total independence Potential effects of dependence:

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Infuses needed capital Creates jobs and raises wages Imports technology and skills

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Economic problems transferred Political turmoil can spill over

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Trade Theory Timeline

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Foundations of Mercantilism

Nations accumulate financial wealth by encouraging exports and discouraging imports

Three pillars:

▪ Maintain trade surplus ▪ Government intervention ▪ Exploit colonies

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Flaws of Mercantilism

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World trade is a zero-sum game Limits colonies’ market potential Constrains output and consumption

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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

1/5 ton tea 1 resource unit = 1/6 ton rice

1/3 ton tea Specialization and trade allows each to produce and consume more

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Trade Gains: Absolute Advantage

Specialization and trade:

Riceland gets five times more tea than it would have produced itself

Tealand gets two times more rice than it would have produced itself

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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

1/2 ton tea 1 resource unit = 1/6 ton rice

1/3 ton tea Specialization and trade allow each to produce and consume more

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Trade Gains: Comparative Advantage

Specialization and trade:

Riceland gets two times more tea than it would have produced itself

Tealand gets two times more rice than it would have produced itself

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Assumptions and Limitations

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Nations strive only to maximize production and consumption Only two countries produce and consume just two goods No transportation costs of traded goods Labor is the only resource used to produce goods Ignores efficiency and improvement gains from producing just one good

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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 __________.

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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 __________.

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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 found evidence opposite of that predicted by the factor proportions theory:

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

Possible explanations:

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Theory assumes nation’s production factors to be homogeneous

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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

Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5 th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.

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New Trade Theory Fundamentals First-mover advantage

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Gains from specialization and economies of scale

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Companies first to market create barriers to entry

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Government may help by assisting home companies

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Economic and strategic advantage of being first to enter an industry

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May create a formidable barrier to market entry for potential rivals

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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

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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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Firm Strategy, Structure, and Rivalry

Highly skilled managers are essential because strategy has lasting effects on firm competitiveness

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Domestic industry whose structure and rivalry create an intense struggle to survive strengthens competitiveness 5 - 26

Discussion Question

National __________ theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.

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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.

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International Trade

Transcript International Trade

International Trade