INTERNATIONAL BUSINESS CHAPTER V INTERNATIONAL TRADE International Trade

INTERNATIONAL BUSINESS CHAPTER V INTERNATIONAL TRADE International Trade & Investment 1

Learning Objectives Describe the relation between International trade volume and world output, and identify overall trade patterns. Describe mercantilism and explain………. . . Explain absolute advantage and comparative advantage and identify their differences Explain the factor proportions and international product life cycle theories. Explain the new trade and national competitive advantage theories. 2

OVERVIEW OF INTERNATIONAL TRADE International Trade: Purchase, sales, or exchange of goods and services across national borders. The Importance of Trade: Nation’s trade volume as a share of its Gross Domestic Product (GDP). Trade as a share of GDP is defined as follows: The sum of exports and imports (goods and services) measured as a share of GDP. 3

OVERVIEW OF INTERNATIONAL TRADE Benefits of International Trade Volume of International Trade Patterns Trade dependence & Independence 4

Benefits of International Trade is opening doors to new entrepreneurial opportunity across the globe International Trade is an important engine for job creation in many countries. 5

Benefits of International Trade is opening doors to new entrepreneurial opportunity across the globe • Provide: a greater choice of Goods & Services 6

Benefits of International Trade is an important engine for job creation in many countries. • US 1 billion Exports 22, 800 jobs. 7

Volume of International Trade The value and volume of international trade continues to increase. Trade and World Output: The level of world output in any given year influences the level of international trade in that year. 8

International Trade Patterns Exploring the volume of international trade and world output provides useful insights into the international trade environment. It does not reveal who trades which whom. 9

Trade Dependence & Independence Effect on Developing and Transition Nations Dangers of Trade Dependency Balance between Dependence and Independence 10

Trade Dependence & Independence Effect on Developing and Transition Nations Developing and transition nations share borders with developed countries are often dependent on their wealthier neighbors 11

Trade Dependence & Independence Dangers of Trade Dependency • Trade dependency can be dangerous. • Trade dependency is causing concern in Mexico: – Poor education – Rampant corruption – Red tape – High taxes – Outdated infrastructure Companies to abandon Mexico 12

Trade Dependence & Independence Balance between Dependence and Independence • Today trade between most countries is characterized by a certain degree of interdependency. • The level of interdependency often reflects the amount of trade. 13

Theories of International Trade Mercantilism Absolute Advantage Comparative Advantage Factor Proportions International Product Life Cycle. New Trade theory National Competitive Advantage 14

Mercantilism: Trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports 15

Mercantilism How Mercantilism Worked v. Trade Surpluses v Government Intervention v Colonization Flaws of Mercantilism 16

Mercantilism v. Trade Surpluses: Condition that results when the value of a nation’s exports is greater than the value of its imports. v Trade Deficit: Condition that results when the value of a country’s imports is greater than the value of its exports. 17

Absolute Advantage : Ability of a nation to produce a good more efficiently than any other nation 18

Absolute Advantage v Case: Riceland Tealand v Gains from Specialization and Trade In Riceland 1 ton of Rice= ½ ton of Tea In Tealand 1 ton of Rice= 2 ton of Tea. 19

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. 20

Comparative Advantage Gains from Specialization and Trade Assumptions and Limitations 21

Factor Proportions Theory Factor proportions theory: Trade theory holding that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply 22

Factor Proportions Theory Labor versus Land Capital Equipment Country specialize in products that require labor if labor’s costs is low Evidence on Factor Proportion Theory 23

International Product Life Cycle: theory holding that a company will begin by exporting its product and later undertake foreign direct investment as the product moves through its life cycle. 24

International Product Life Cycle Stages of the product Life Cycle Limitations of the Theory 25

New Trade Theory: Trade theory holding that there are gains to be made from specialization and increasing economies of scale, the companies first to market can create barriers to entry, and government may play a role in assisting its home companies. 26

New Trade Theory First-Mover Advantage: Economic and strategic advantage gained by being the first company to enter an industry 27

National Competitive Advantage theory: Trade theory holding that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade Stages of the product Life Cycle 28

National Competitive Advantage Factor Conditions Demand Conditions Related and Supporting Industries Firm Strategy, Structure, and Rivalry Government and Chance 29

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