copyright © 2013 pearson education, inc. publishing as prentice hall 6-1 international business...

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6-1

International Business

Environments & Operations

14e

Daniels ● Radebaugh ● Sullivan


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Chapter 6

International Trade and Factor Mobility


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Learning Objectives To understand theories of international trade To explain how free trade improves global

efficiency To identify factors affecting national trade

patterns To explain why a country’s export capabilities are

dynamic To understand why production factors, especially

labor and capital, move internationally To explain the relationship between foreign trade

and international factor mobility


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IntroductionLearning Objective 1:To understand theories of international trade


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Laissez-Faire vs. Intervention

Trade theory helps answer What products should we import and export? How much should we trade? With whom should we trade?

Laissez-faire approach Free trade theories – absolute advantage and

comparative advantage Intervention approach

Mercantilism and neomercantilism


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Laissez-Faire vs. Intervention

International Operations and Economic Connections


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Theories of Trade Patterns

Theories explore country size factor proportions country similarity

Theories explore trade competitiveness Product life cycle Diamond of national advantage


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Trade Theories and Business

What Major Trade Theories Do and Don’t Discuss: A Checklist


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Factor Mobility Theory A country’s competitiveness depends on

quality and quantity of production factors Land Labor Capital


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Interventionist Theories Theories that support government

intervention in the flow of trade Mercantilism Neomercantilism


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Mercantilism Mercantilism countries should export

more than they import Maintain a favorable balance of trade

trade surplus Avoid an unfavorable balance of trade

trade deficit


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Neomercantilism Neomercantilism run an export surplus

to achieve social or political objectives


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Free Trade Theories Two theories that support free trade

Absolute advantage theory Comparative advantage theory

Market forces should determine trade specialization


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Theory of Absolute Advantage

Theory of absolute advantage different countries produce some goods more

efficiently than others Free trade brings

Specialization natural advantage acquired advantage

product technology process technology

Greater efficiency Higher global output


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Theory of Absolute Advantage

Production Possibilities under Conditions of Absolute Advantage


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Theory of Comparative Advantage

Theory of comparative advantage free trade can increase global output even if

one country has an absolute advantage in the production of all products

Consider comparative advantage absolute disadvantage


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Theory of Comparative Advantage

Production Possibilities under Conditions of Comparative Advantage


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Theories of Specialization: Assumptions and

LimitationsLearning Objective 2: To explain how free trade improves global efficiency


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Theories of Specialization: Assumptions and

Limitations Theories of specialization make

assumptions that may not be valid full employment economic efficiency division of gains two countries, two commodities transport costs statics and dynamics services production networks mobility


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Trade Pattern TheoriesLearning Objective 3:To identify factors affecting national trade patterns


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How Much Does A Country Trade?

Theory of country size large countries depend less on trade than

small countries Large countries usually

export a smaller portion of output and import a smaller part of consumption

have higher transportation costs for foreign trade


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What Does A Country Trade?

Factor proportions theory factors in relative abundance are cheaper than

factors that are relatively scarce But

production factors are not homogenous labor

Process technology capital versus labor


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What Does A Country Trade?

Worldwide Trade by Major Sectors


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Choosing Trading Partners

Country similarity theory most trade occurs among developed countries

share similar market characteristics produce and consume much more than

developing countries Trading partners are affected by

Cultural similarity Political relations between countries Distance


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The Statics and Dynamics of Trade

Learning Objective 4: To explain why a country’s export capabilities are dynamic


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Product Life Cycle Theory

The product life cycle theory the production location of certain

manufactured products shifts as they go through their life cycle

Four stages Introduction Growth Maturity Decline


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Product Life Cycle Theory

Life Cycle of the International Product


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Diamond of National Advantage

The diamond of national advantage Four conditions are important for gaining and

maintaining competitive superiority Demand conditions Factor conditions Related and supporting industries Firm strategy, structure, and rivalry


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Diamond of National Advantage

The Diamond of National Competitive Advantage


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Factor Mobility TheoryLearning Objective 5: To understand why production factors, especially labor and capital, move internationally


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Why Production Factors Move

Factor mobility theory focuses on why production factors move, the

effects of that movement on transforming factor endowments, and the impact of international factor mobility on world trade

Capital and labor move internationally to gain more income flee adverse political situations


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Effects of Factor Movements

Factor movements alter factor endowments

Factor movements can be substantial for some countries, and insignificant for others

The movement of labor and capital are intertwined

Pros and cons of outward and inward migration Brain drain Remittances


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Trade and Factor Mobility

Learning Objective 6: To explain the relationship between foreign trade and international factor mobility


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There are pressures for the most abundant factors to move to areas of scarcity

The lowest costs occur when trade and production factors are both mobile


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Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes


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Factor mobility through foreign investment often stimulates trade because of the need for components the parent’s ability to sell complimentary

products the need for equipment for subsidiaries


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In What Direction Will Trade Winds Blow?

Issues to consider1. Displacement of jobs as developed countries

shift production to more rapidly developing countries

2. Relationships among land, labor, and capital will continue to evolve

3. Continued trend toward a more finely tuned specialization of production among countries


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In What Direction Will Trade Winds Blow?

Monitor As economies grow, efficiencies of multiple

production locations also grow because they can all gain sufficient economies of scale

Small-scale production methods may enable countries to produce many goods efficiently for their own consumption

Output from 3D printers Services are growing more rapidly than

products as a portion of production and consumption within developed countries


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copyright © 2013 pearson education, inc. publishing as prentice hall 6-1 international business...

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