Copyright 2015 Pearson Education, Inc.5-1 International Business Environments & Operations 15e Daniels Radebaugh Sullivan Copyright 2015 Pearson Education, Inc.5-2 Chapter 5 International Trade and Factor-Mobility Theory Copyright 2015 Pearson Education, Inc.5-3 Learning Objectives Understand how different approaches to international trade theories help policy makers achieve economic objectives Comprehend the historical and current rationale for interventionist trade theories Explain how free trade improves global efficiency Distinguish factors affecting national trade patterns Learning Objectives Recognize why a countrys export capabilities are dynamic Detect why production factors, especially labor and capital, move internationally Describe the relationship between foreign trade and international factor mobility Grasp scenarios of possible changes in trade patterns Copyright 2015 Pearson Education, Inc.5-4 Copyright 2015 Pearson Education, Inc.5-5 Introduction Learning Objective: Understand how different approaches to international trade theories help policy makers achieve economic objectives Copyright 2015 Pearson Education, Inc.5-6 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 Copyright 2015 Pearson Education, Inc.5-7 Laissez-Faire vs. Intervention International Operations and Economic Connections Copyright 2015 Pearson Education, Inc.5-8 Theories of Trade Patterns Theories explore country size factor proportions country similarity Theories explore trade competitiveness Product life cycle Diamond of national advantage Copyright 2015 Pearson Education, Inc.5-9 Trade Theories and Business What Major Trade Theories Do and Dont Discuss: A Checklist Copyright 2015 Pearson Education, Inc.5-10 Factor Mobility Theory A countrys competitiveness depends on quality and quantity of production factors Land Labor Capital Copyright 2015 Pearson Education, Inc.5-11 Interventionist Theories Theories that support government intervention in the flow of trade Mercantilism Neomercantilism Copyright 2015 Pearson Education, Inc.5-12 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 Copyright 2015 Pearson Education, Inc.5-13 Neomercantilism Neomercantilism run an export surplus to achieve social or political objectives Copyright 2015 Pearson Education, Inc.5-14 Free Trade Theories Two theories that support free trade Absolute advantage theory Comparative advantage theory Market forces should determine trade specialization Copyright 2015 Pearson Education, Inc.5-15 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 Copyright 2015 Pearson Education, Inc.5-16 Theory of Absolute Advantage Production Possibilities under Conditions of Absolute Advantage Copyright 2015 Pearson Education, Inc.5-17 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 Copyright 2015 Pearson Education, Inc.5-18 Theory of Comparative Advantage Production Possibilities under Conditions of Comparative Advantage Copyright 2015 Pearson Education, Inc.5-19 Theories of Specialization: Assumptions and Limitations Learning Objective: Explain how free trade improves global efficiency Copyright 2015 Pearson Education, Inc.5-20 Theories of Specialization: Assumptions and Limitations Theories of specialization make assumptions that may not be valid full employment economic efficiency division of gains transport costs statics and dynamics services production networks mobility Copyright 2015 Pearson Education, Inc.5-21 Trade Pattern Theories Learning Objective: Distinguish factors affecting national trade patterns Copyright 2015 Pearson Education, Inc.5-22 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 Copyright 2015 Pearson Education, Inc.5-23 What Types of Products 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 Copyright 2015 Pearson Education, Inc.5-24 What Does A Country Trade? Worldwide Trade by Major Sectors Copyright 2015 Pearson Education, Inc.5-25 With Whom Do Countries Trade? 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 Copyright 2015 Pearson Education, Inc.5-26 The Statics and Dynamics of Trade Learning Objective: Recognize why a countrys export capabilities are dynamic Copyright 2015 Pearson Education, Inc.5-27 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 Copyright 2015 Pearson Education, Inc.5-28 Product Life Cycle Theory Life Cycle of the International Product Copyright 2015 Pearson Education, Inc.5-29 Diamond of National Advantage The diamond of national advantage Four conditions are important for gaining and maintaining competitive superiority Factor conditions Demand conditions Related and supporting industries Firm strategy, structure, and rivalry Copyright 2015 Pearson Education, Inc.5-30 Diamond of National Advantage The Diamond of National Competitive Advantage Copyright 2015 Pearson Education, Inc.5-31 Factor Mobility Theory Learning Objective: Detect why production factors, especially labor and capital, move internationally Copyright 2015 Pearson Education, Inc.5-32 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 Copyright 2015 Pearson Education, Inc.5-33 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 Copyright 2015 Pearson Education, Inc.5-34 Trade and Factor Mobility Learning Objective: Describe the relationship between foreign trade and international factor mobility Copyright 2015 Pearson Education, Inc.5-35 Trade and Factor Mobility 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 Copyright 2015 Pearson Education, Inc.5-36 Trade and Factor Mobility Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes Copyright 2015 Pearson Education, Inc.5-37 Trade and Factor Mobility Factor mobility through foreign investment often stimulates trade because of the need for components the parents ability to sell complimentary products the need for equipment for subsidiaries Copyright 2015 Pearson Education, Inc.5-38 In What Direction Will Trade Winds Blow? Issues to consider 1.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 Copyright 2015 Pearson Education, Inc 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 Copyright 2015 Pearson Education, Inc.5-40 All rights reserved. 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