fundamental of business enviroment
DESCRIPTION
chapter 5TRANSCRIPT
-
5 International Trade
Copyright 2014 Pearson Education
-
5 - 2 Copyright 2014 Pearson Education
Chapter Objectives
Describe the relationship between international trade
volume and world output, and identify overall trade patterns
Describe mercantilism and explain its impact on world
powers and their colonies
Explain the theories of absolute advantage and comparative
advantage
Explain the factor proportions and international product life
cycle theories
Explain the new trade and national competitive advantage
theories
-
China-Caribbean Trade
Dramatic growth since 2008 Mainly building materials from the Caribbean Textiles and food products from China
5 - 3 Copyright 2014 Pearson Education
-
5 - 4 Copyright 2014 Pearson Education
International Trade
Purchase, sale, or exchange of goods and services across national borders
People have larger selection of products Important engine for job creation
-
5 - 5 Copyright 2014 Pearson Education
Trade and World Output
World trade
80% merchandise
20% services
World output impacts trade
Growing output = growing trade
Sluggish output = sluggish trade
World trade grows faster
than world output
-
5 - 6 Copyright 2014 Pearson Education
Worlds Top Exporters
-
5 - 7 Copyright 2014 Pearson Education, Inc.
Trade Patterns
60%
34%
6%
Merchandise trade among:
Low- and
middle-income
nations High-income
nations
High-income and low- and
middle-income nations
-
5 - 8 Copyright 2014 Pearson Education
Who Trades with Whom?
-
5 - 9 Copyright 2014 Pearson Education
Trade Dependence and Independence
Potential effects of dependence:
+ Infuses needed capital + Creates jobs and raises wages + Imports technology and skills
Economic problems transferred Political turmoil can spill over
Total
dependence
Total
independence
-
5 - 10 Copyright 2014 Pearson Education
Discussion Question
What are the
patterns of global
and regional trade
flows that we see
among nations?
-
5 - 11 Copyright 2014 Pearson Education
Answer to Discussion Question
60 percent of world merchandise trade
occurs among high-income countries. 34
percent of world merchandise trade occurs
among high-income countries and low- and
middle-income nations. About 6 percent of
trade occurs only among low- and middle-
income nations.
Intra-regional trade accounts for 71 percent
of Europes exports, 52 percent of Asias exports, and around 48 percent of North
Americas exports.
This century is called the Pacific century due to expected growth in Asia and a shift in
trade from the Atlantic to the Pacific Ocean.
-
5 - 12 Copyright 2014 Pearson Education
Trade Theory Timeline
-
5 - 13 Copyright 2014 Pearson Education
Foundations of Mercantilism
Nations accumulate financial wealth by encouraging
exports and discouraging imports
Three pillars:
Maintain trade surplus
Government intervention
Exploit colonies
-
European sea-faring nations practiced mercantilism
from around 1500 to the late 1700s.
These countries acquired colonies in Africa, Asia,
and the Americas as sources of inexpensive raw
materials and as markets for higher-priced finished
goods.
Mercantilist nations used profits from this trade to
create armies and navies to control colonies and
protect their shipping.
5 - 14 Copyright 2014 Pearson Educationpublishing as Prentice Hall
Foundations of Mercantilism
-
5 - 15 Copyright 2014 Pearson Education
Flaws of Mercantilism
World trade is a zero-sum game - idea that a nation benefits from trade only at the expense of other nations
Limits colonies market potential - people there received higher prices for their resources
Constrains output and consumption - mercantilist policies
-
5 - 16 Copyright 2014 Pearson Education
Absolute Advantage
Ability of a nation to produce a good more efficiently than any
other nation (greater output using same or fewer resources)
Specialization and trade allows each to
produce and consume more
1 resource unit = 1 ton rice or
1/5 ton tea
Riceland
1 resource unit = 1/6 ton rice or
1/3 ton tea
Tealand
-
5 - 17 Copyright 2014 Pearson Education
Trade Gains: Absolute Advantage
Specialization and trade:
+ Riceland gets five times more tea than it would
have produced itself
+ Tealand gets two times more rice than it would
have produced itself
-
Trade Gains: Absolute Advantage
Assume that Riceland and Tealand expend additional
resource units to produce extra rice and tea, respectively, and
then trade additional output with the other nation on a one-to-
one basis.
This means that Riceland expends an additional resource unit to produce one extra ton of rice that it then trades with
Tealand to obtain one ton of tea. Riceland gets four-fifths of
a ton more tea than the one-fifth of a ton it would have
produced itself with one additional resource unit.
5 - 18 Copyright 2014 Pearson Educationpublishing as Prentice Hall
-
Trade Gains: Absolute Advantage
Tealand expends an additional resource unit to produce an extra one-third of a ton of tea that it then trades with
Riceland to obtain one-third of a ton of rice. Tealand gets
one-sixth of a ton more rice than the one-sixth of a ton it
would have produced itself with one additional resource
unit.
Specialization and trade gives Riceland five times more tea
than it would have produced itself, and gives Tealand two
times more rice than it would have produced itself.
This means that if each country specializes in the area in
which it has an absolute advantage, world output (and
consumption) of both goods increases. In other words, each
nation benefits from specialization and trade.
5 - 19 Copyright 2014 Pearson Educationpublishing as Prentice Hall
-
5 - 20 Copyright 2014 Pearson Education
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
Specialization and trade allow each to
produce and consume more
1 resource unit = 1 ton rice or
1/2 ton tea
Riceland
1 resource unit = 1/6 ton rice or
1/3 ton tea
Tealand
-
5 - 21 Copyright 2014 Pearson Education
Trade Gains: Comparative Advantage
Specialization and trade:
+ Riceland gets two times more tea than it would
have produced itself
+ Tealand gets two times more rice than it would
have produced itself
-
5 - 22 Copyright 2014 Pearson Education
Assumptions and Limitations
Nations strive only to maximize production and consumption
Only two countries produce and consume just two goods
No transportation costs of traded goods
Labor is the only resource used to produce goods and it cannot cross borders
Specialization does not create efficiency and improvement gains
-
5 - 23 Copyright 2014 Pearson Education
Factor Proportions Theory
Countries produce and export goods that require
resources (factors) in abundance, and import goods
that require resources in short supply
Two factor types
Land and Capital Labor
-
5 - 24 Copyright 2014 Pearson Education
Leontief Paradox
Research found evidence opposite of that predicted
by the factor proportions theory: U.S. exports are more labor-intensive than U.S. imports
Possible explanations:
Theory assumes nations production factors to be homogeneous
Theory is better predictor when expenditures on labor are considered
-
5 - 25 Copyright 2014 Pearson Education
International Product Life Cycle
A company begins by exporting its product and later undertakes
foreign direct investment as a product moves through its life cycle
Source: Raymond Vernon and Louis T. Wells, Jr., The Economic Environment of International Business, 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 1991), p. 85.
-
5 - 26 Copyright 2014 Pearson Education
New Trade Theory
Fundamentals
Gains from specialization
and economies of scale
Companies first to market
create barriers to entry
Government may help by
assisting home companies
First-mover advantage
Economic and strategic
advantage of being first to
enter an industry
May create a formidable
barrier to market entry for
potential rivals
-
5 - 27 Copyright 2014 Pearson Education
Discussion Question
Briefly describe the
new trade theory. Does
its focus on productivity
put it at odds with the
theory of comparative
advantage and factor
proportions theory?
-
5 - 28 Copyright 2014 Pearson Education
Answer to Discussion Question
New trade theory says that there are
gains from specialization and
economies of scale, companies first to
market create barriers to entry, and
government is helpful if it assists its
home-based companies.
Because new trade theory emphasizes
productivity rather than a nations resources, it is in line with the theory of
comparative advantage and at odds
with factor proportions theory.
-
5 - 29 Copyright 2014 Pearson Education
National Competitive Advantage
Nations competitiveness in an industry depends on the industrys capacity to innovate and upgrade, which in turn depends on four main determinants
(plus government and chance)
Factor conditions
Demand conditions
Firm strategy, structure, and rivalry
Related and supporting industries
-
5 - 30 Copyright 2014 Pearson Education
Factor Conditions
Basic Factors
Advanced Factors
-
5 - 31 Copyright 2014 Pearson Education
Demand Conditions
Sophisticated home-market
buyers drive companies to
improve existing products and
develop entirely new products
and technologies
This should improve the
competitiveness of the entire
group of companies in a market
-
5 - 32 Copyright 2014 Pearson Education
Related and Supporting Industries
Companies in an internationally competitive
industry do not exist in isolation
Supporting industries form clusters of economic activity in the geographic area
Each industry reinforces the competitiveness of
every other industry in the cluster
-
5 - 33 Copyright 2014 Pearson Education
Firm Strategy, Structure, and Rivalry
Highly skilled managers are essential because strategy
has lasting effects on firm
competitiveness
Domestic industry whose structure and rivalry create
an intense struggle to
survive strengthens
competitiveness