1. INTERNATIONAL BUSINESS International Trade & Investment
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

30. THE END