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International BusinessChapter Five

International Trade Theory

I n t er n

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/ S ul l i v

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Chapter Objectives

Explain trade theoriesDiscuss how global efficiency can beincreased through free tradeIntroduce prescriptions for alteringtrade patterns

Explore how business decisionsinfluence international trade

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General Types of Trade Theories

Descriptive: the natural order oftrade Laissez-faire conditions

Which products, how much, and withwhom a country will trade in theabsence of restrictions

Prescriptive: questions whethergovernments should interfere withthe free movement of goods andservices

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Mercantilism Terms

Favorable balance of trade: country isexporting more than it is importingUnfavorable balance of trade: country isimporting more than it is exporting, i.e. atrade deficitNeomercantilism: current term to describethe approach of countries that try to runfavorable balances of trade to achievesome social or political gains

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Absolute Advantage

Absolute advantageholds that differentcountries producesome goods moreefficiently than othercountriesThus, global efficiencycan be increasedthrough internationalfree trade

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Country Specialization

Under the concept of absoluteadvantage countries couldincrease efficiency because:

Labor could become more skilled byrepeating the same tasksLabor would not lose time in switchingfrom the production of one kind ofproduct to anotherLong production runs would provideincentives for the development ofmore effective working methods

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Natural Advantage

Countries have inherent advantages Climate Natural resources Labor forces

Two countries that have oppositenatural advantages should favortrade with one another

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Acquired Advantage

Most contemporary trade ismanufactured goods and servicesrather than agricultural goods or

natural resourcesCountries with an acquiredadvantage produce manufacturedgoods and services competitively Product technology Process technology

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Absolute Trade Advantage

Figure 5.2 5-10

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Comparative Advantage

There are still global gains to bemade if a country specializes inproducts it produces more efficientlythan other productsRegardless of whether othercountries can produce those sameproducts even more efficiently

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Comparative Advantage

Figure 5.35-12

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Basic Assumptions

Full employmentEconomic efficiency is soughtDivision of gains

Two countries/two commoditiesTransportation costsMobility

Statics and dynamicsServicesCountry size/variety of resources

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Factor Proportions

Land-labor relationshipLabor-capital relationship

Technological complexities

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Global Competitive Advantage

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Product Life Cycle Theory

IntroductionGrowthMaturityDecline

Production Location

Market LocationCompetitive FactorsProduction Technology

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Limitations of Product Life CycleTheory

Products with extremely short PLCsLuxury products where cost may beof little concernBusinesses with products that followa differentiation strategy

Products that require specializedtechnical labor for subsequentgenerations

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Looking to the Future

Protectionist sentiment is growingEconomies are growing, thereforeefficiencies of multiple productionlocations growFlexible, small-scale productionmethods are on the rise

(robotics/automation processes)Services are growing faster thanproduction in industrial countries

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Categories of World Trade

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Economically Linking Countries

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Chapter Review

Explain trade theoriesDiscuss how global efficiency can beincreased through free tradeIntroduce prescriptions for alteringtrade patterns

Explore how business decisionsinfluence international trade

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