Transcript Benefits of International Trade

INTERNATIONAL BUSINESS
CHAPTER V
INTERNATIONAL TRADE
International Trade & Investment
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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.
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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.
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OVERVIEW OF INTERNATIONAL TRADE
Benefits of International Trade
Volume of International Trade
International Trade Patterns
Trade dependence & Independence
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Benefits of International Trade
International Trade is opening doors to new entrepreneurial
opportunity across the globe
International Trade is an important engine for job creation in
many countries.
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Benefits of International Trade
International Trade is opening doors to new entrepreneurial
opportunity across the globe
• Provide: a greater choice of Goods & Services
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Benefits of International Trade
International Trade is an important engine for job creation in
many countries.
• US 1 billion Exports 22,800 jobs.
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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.
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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.
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Trade Dependence & Independence
Effect on Developing and Transition Nations
Dangers of Trade Dependency
Balance between Dependence and Independence
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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
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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
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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.
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Theories of International Trade
Mercantilism
Absolute Advantage
Comparative Advantage
Factor Proportions
International Product Life Cycle.
New Trade theory
National Competitive Advantage
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Mercantilism
Mercantilism: Trade theory that nations should
accumulate financial wealth, usually in the form of gold,
by encouraging exports and discouraging imports
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Mercantilism
How Mercantilism Worked
Trade Surpluses
 Government Intervention
 Colonization
Flaws of Mercantilism
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Mercantilism
Trade Surpluses: Condition that results when the value of a nation’s
exports is greater than the value of its imports.
 Trade Deficit: Condition that results when the value of a country’s
imports is greater than the value of its exports.
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Absolute Advantage
Absolute Advantage : Ability of a nation to produce a good
more efficiently than any other nation
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Absolute Advantage
 Case: Riceland and Tealand
 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.
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Comparative Advantage
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.
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Comparative Advantage
Gains from Specialization and Trade
Assumptions and Limitations
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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
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Factor Proportions Theory
Labor versus Land and Capital Equipment
Country specialize in products that require labor
if labor’s costs is low
Evidence on Factor Proportion Theory
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International Product Life Cycle
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.
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International Product Life Cycle
Stages of the product Life Cycle
Limitations of the Theory
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New Trade Theory
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.
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New Trade Theory
First-Mover Advantage: Economic and strategic advantage
gained by being the first company to enter an industry
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National Competitive Advantage
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
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National Competitive Advantage
Factor Conditions
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry
Government and Chance
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THE END
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