CHAPTER V INTERNATIONAL TRADE International Trade & Investment

1. INTERNATIONAL BUSINESS CHAPTER V INTERNATIONAL TRADE International Trade & Investment

2. Learning Objectives • Describe 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.

3. 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.

4. OVERVIEW OF INTERNATIONAL TRADE • Benefits of International Trade • Volume of International Trade • International Trade Patterns • Trade dependence & Independence

5. Benefits of International Trade • International Trade is opening doors to new entrepreneurial opportunity across the globe • International Trade is an important engine for job creation in many countries.

6. Benefits of International Trade • International Trade is opening doors to new entrepreneurial opportunity across the globe • Provide: a greater choice of Goods & Services

7. Benefits of International Trade • International Trade is an important engine for job creation in many countries. • US 1 billion Exports 22,800 jobs.

8. Volume of International Trade 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.

9. International Trade Patterns • 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.

10. Trade Dependence & Independence • Effect on Developing and Transition Nations • Dangers of Trade Dependency • Balance between Dependence and Independence

11. Trade Dependence & Independence • Effect on Developing and Transition Nations Developing and transition nations share borders with developed countries are often dependent on their wealthier neighbors

12. Trade Dependence & Independence • 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

13. Trade Dependence & Independence • 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.

14. Theories of International Trade • Mercantilism • Absolute Advantage • Comparative Advantage • Factor Proportions • International Product Life Cycle. • New Trade theory • National Competitive Advantage

15. Mercantilism • Mercantilism: Trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports

16. Mercantilism • How Mercantilism Worked • Trade Surpluses • Government Intervention • Colonization • Flaws of Mercantilism

17. Mercantilism • 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.

18. Absolute Advantage • Absolute Advantage : Ability of a nation to produce a good more efficiently than any other nation

19. Absolute Advantage • 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.

20. Comparative Advantage 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.

21. Comparative Advantage • Gains from Specialization and Trade • Assumptions and Limitations

22. Factor Proportions Theory 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

23. Factor Proportions Theory • Labor versus Land and Capital Equipment Country specialize in products that require labor if labor’s costs is low • Evidence on Factor Proportion Theory

24. International Product Life Cycle • 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.

25. International Product Life Cycle • Stages of the product Life Cycle • Limitations of the Theory

26. New Trade Theory • 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.

27. New Trade Theory • First-Mover Advantage: Economic and strategic advantage gained by being the first company to enter an industry

28. National Competitive Advantage • 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

29. National Competitive Advantage • Factor Conditions • Demand Conditions • Related and Supporting Industries • Firm Strategy, Structure, and Rivalry • Government and Chance

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