daniels ib14 stppt06 ge

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Copyright 2013 Pearson Education 6-1

International

BusinessEnvironments & Operations

14e Global Edition

Daniels

Radebaugh

Sullivan


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Chapter 6

International Tradeand Factor Mobility


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Learning Objectives To understand theories of international trade

To explain how free trade improves globalefficiency

To identify factors affecting national tradepatterns

To explain why a countrys export capabilities aredynamic

To understand why production factors, especiallylabor and capital, move internationally

To explain the relationship between foreign tradeand international factor mobility


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Introduction

Learning Objective 1:

To understand theories of internationaltrade


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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 andcomparative advantage

Intervention approach

Mercantilism and neomercantilism


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Laissez-Faire vs. InterventionInternational 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 BusinessWhat Major Trade Theories Do and Dont Discuss: A Checklist


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Factor Mobility Theory

A countrys competitiveness depends on

quality and quantity of production factors

Land

LaborCapital


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Interventionist Theories

Theories that support governmentintervention in the flow of trade

Mercantilism

Neomercantilism


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Mercantilism

Mercantilism countries should exportmore 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 surplusto 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 ofabsolute 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 AdvantageProduction Possibilities under Conditions of Absolute Advantage


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Theory of Comparative Advantage

Theory ofcomparative advantage

free trade can increase global output even ifone 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 Limitations


To explain how free trade improves globalefficiency


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Theories of Specialization:Assumptions and Limitations

Theories of specialization makeassumptions 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 Theories


To identify factors affecting national tradepatterns


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How Much Does A Country Trade?

Theory of country size

large countries depend less on trade thansmall 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 thanfactors 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 thandeveloping countries

Trading partners are affected by

Cultural similarity

Political relations between countries

Distance

Th S i d


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The Statics andDynamics of Trade


To explain why a countrys exportcapabilities are dynamic


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Product Life Cycle Theory

The product life cycle theory

the production location of certainmanufactured products shifts as they gothrough their life cycle

Four stages

Introduction

Growth

Maturity Decline


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Product Life Cycle TheoryLife Cycle of the International Product


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Diamond of National Advantage

The diamond of national advantage

Four conditions are important for gaining andmaintaining competitive superiority

Demand conditionsFactor conditions

Related and supporting industries

Firm strategy, structure, and rivalry


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Diamond of National AdvantageThe Diamond of National Competitive Advantage


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Factor Mobility Theory


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, theeffects of that movement on transformingfactor endowments, and the impact ofinternational 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


To explain the relationship betweenforeign trade and international factor

mobility


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There are pressures for the mostabundant factors to move to areas ofscarcity

The lowest costs occur when trade andproduction factors are both mobile


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Trade and Factor MobilityUnrestricted Trade, Factor Mobility, and the Cost of Tomatoes


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Factor mobility through foreign investmentoften stimulates trade because of

the need for components

the parents ability to sell complimentaryproducts

the need for equipment for subsidiaries

In What Di ection


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In What DirectionWill Trade Winds Blow?

Issues to consider

1. Displacement of jobs as developed countriesshift production to more rapidly developingcountries

2. Relationships among land, labor, and capitalwill continue to evolve

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

In What Direction


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In What DirectionWill Trade Winds Blow?

Monitor

As economies grow, efficiencies of multipleproduction locations also grow because theycan all gain sufficient economies of scale

Small-scale production methods may enablecountries to produce many goods efficiently fortheir own consumption

Output from 3D printers

Services are growing more rapidly thanproducts as a portion of production andconsumption within developed countries


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daniels ib14 stppt06 ge

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