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Introduction Part Three Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment Adam Smith 1723-1790 In 1776 wrote An Inquiry into the Nature and Causes of the Wealth of Nations. http://jacusers.johnabbott.qc.ca/~bill.russell/Who %20is%20Who.html International Trade Theories Adam Smith's Theory of Absolute Advantage From: The Wealth of Nations (1776) When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. Absolute Advantage France: 1 year of labor = . http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage France: 1 year of labor = 20k liters of wine http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage France: 1 year of labor = 20k liters of wine or http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage Germany: same labor = 15k liters of wine France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage Germany: same labor = 15k liters of wine or France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage Germany: same labor = 15k liters of wine or 3 units of machinery France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg Absolute Advantage Germany: same labor = 15k liters of wine or 3 units of machinery Germany sells Machinery to France France: 1 year of labor = 20k liters of wine or 2 units of machinery France sells Wine to Germany http://z.about.com/d/geography/1/0/1/L/europe.jpg Adam Smith 1723-1790 http://jacusers.johnabbott.qc.ca/~bill.russell/Who %20is%20Who.html Adam Smith 1723-1790 http://jacusers.johnabbott.qc.ca/~bill.russell/Who %20is%20Who.html Adam Smith 1723-1790 http://jacusers.johnabbott.qc.ca/~bill.russell/Who %20is%20Who.html International Trade Theories Ricardo's Theory of Comparative Advantage Political Economy and Taxation (1815) • Nations trade with one another when they can produce certain goods relatively more efficiently than one another. • Most international trade today is explained by the Theory of Comparative Advantage. International Trade Theories Theory of Comparative Advantage Illustration • The UK can make 25 tons of wheat or 5 units of machinery using one year of labor. • Brazil can make 21 tons of wheat or 3 units of machinery using the same amount of labor. • The UK has an absolute advantage in machinery and wheat. • However, in the UK, the “relative price” of a unit of machinery is 5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons International Trade Theories Theory of Comparative Advantage Illustration • If Brazil decides to make machinery, it has to “give up” 7 units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous. • The UK will sell its machinery to Brazil at the price of 6 tons of wheat. • The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it International Trade Theories Factor Endowment Theory Developed by Hecksher and Ohlin (1933) • A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship. • Explains why certain countries specialize in the production of certain products. International Trade Theories Factor Endowment Theory • Countries with an abundance of land will specialize in the production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans). • Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming). • Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance). • Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for International Trade Theories International Product Life Cycle Developed by Raymond Vernon (1966) • Over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries. International Trade Theories International Product Life Cycle • First Stage A new product is launched in a country, called the country of innovation, to satisfy market need. • Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there. • Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries. International Trade Theories Porter's Cluster Theory • A firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity. • The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient. • Such a grouping of companies is called a cluster. International Trade Theories Porter's Cluster Theory Examples • Silicon Valley, California, is a cluster for information technology. • Sassuolo, Italy, is a cluster for ceramic tiles. • Limoges, France, is a cluster for porcelain. • Genève, Switzerland, is a cluster for watches. • Yiwu, China, is a cluster for socks and hosiery. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment The International Business Environment • • • • • • • Culture Demographics Economics Regulations and Laws Infrastructure Communications .....much of the international business environment is different from the domestic environment. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment