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CHAPTER V

INTERNATIONAL TRADE

International Trade & Investment

INTERNATIONAL BUSINESS

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Learning ObjectivesDescribe 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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Benefits of International Trade

Volume of International Trade

International Trade Patterns

Trade dependence & Independence

OVERVIEW OF INTERNATIONAL TRADE

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International Trade is opening doors to new

entrepreneurial opportunity across the globe

International Trade is an important engine

for job creation in many countries.

Benefits of International Trade

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International Trade is opening doors to

new entrepreneurial opportunity across

the globe

• Provide: a greater choice of Goods & Services

Benefits of International Trade

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International Trade is an important

engine for job creation in many

countries.

• US 1 billion Exports 22,800 jobs.

Benefits of International Trade

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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.

Volume of International Trade

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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.

International Trade Patterns

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Effect on Developing and Transition

Nations

Dangers of Trade Dependency

Balance between Dependence and

Independence

Trade Dependence & Independence

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Effect on Developing and Transition Nations

Developing and transition nations share borders

with developed countries are often dependent on

their wealthier neighbors

Trade Dependence & Independence

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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

Trade Dependence & Independence

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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.

Trade Dependence & Independence

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Mercantilism

Absolute Advantage

Comparative Advantage

Factor Proportions

International Product Life Cycle.

New Trade theory

National Competitive Advantage

Theories of International Trade

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Mercantilism: Trade theory that

nations should accumulate

financial wealth, usually in the

form of gold, by encouraging

exports and discouraging imports

Mercantilism

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How Mercantilism Worked

Trade Surpluses

Government Intervention

Colonization

Flaws of Mercantilism

Mercantilism

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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.

Mercantilism

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Absolute Advantage : Ability of a

nation to produce a good more

efficiently than any other nation

Absolute Advantage

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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.

Absolute Advantage

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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.

Comparative Advantage

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Gains from Specialization and Trade

Assumptions and Limitations

Comparative Advantage

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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

Factor Proportions Theory

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Labor versus Land and Capital

Equipment

Country specialize in products that

require labor

if labor’s costs is low

Evidence on Factor Proportion Theory

Factor Proportions Theory

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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.

International Product Life Cycle

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Stages of the product Life Cycle

Limitations of the Theory

International Product Life Cycle

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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.

New Trade Theory

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First-Mover Advantage: Economic

and strategic advantage gained by

being the first company to enter an

industry

New Trade Theory

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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

National Competitive Advantage

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Factor Conditions

Demand Conditions

Related and Supporting Industries

Firm Strategy, Structure, and Rivalry

Government and Chance

National Competitive Advantage

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