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 country’s 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 Don’t Discuss: A Checklist

Copyright © 2015 Pearson Education, Inc.5-10 Factor Mobility Theory  A country’s 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 country’s 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 parent’s 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. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.