International Trade

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International Trade
Purchase, sale, or exchange of goods and services across national borders
Export

12 Million Jobs Better Economy

People have larger selection of products Important engine for job creation Every $1B of exports generates 22,800 jobs
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e
Chapter 5 - 2

Trade and World Output

World trade

World Trade
Products: $12.1 Trillion
Lifting 66 million people from poverty

80% merchandise 20% services

Services: $2.8 Trillion

World output impacts trade

Growing output = growing trade Sluggish output = sluggish trade

Better choices for everyone

International income $290 Billion per year

World trade grows faster than world output

International Business 5e
Chapter 5 - 3

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Worlds Top Exporters

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International Business 5e

Chapter 5 - 4

Trade Patterns
Lowand middleto lowand middleincome nations

Merchandise trade among:

High-income to highincome nations
60%

Western European trade is mostly intraregional trade

6%

34%

High-income and low- to middle-income nations

North America imports twice as much from Asia as it exports to Asia

International Business 5e

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Chapter 5 - 5

Who Trades with Whom?

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International Business 5e

Chapter 5 - 6

Trade and the Dependent Nation

Total dependence Total independence

Potential effects of dependence:

+ Infuses needed capital + Creates jobs and raises wages + Imports technology and skills Economic problems transferred Political turmoil can spill over
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Chapter 5 - 7

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International Business 5e

Chapter 5 - 8

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International Business 5e

Chapter 5 - 9

History of Ships

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International Business 5e

Chapter 5 - 10

Supertanker Size

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International Business 5e

Chapter 5 - 11

History of Trade

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International Business 5e

Chapter 5 - 12

Trade Theory Timeline

Second Theory

Third Theory

First Theory

Seventh Theory

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International Business 5e

Chapter 5 - 13

First Theory

Mercantilism
Nations accumulate financial wealth by encouraging exports and discouraging imports

Three pillars
Maintain trade surplus Government intervention Exploit colonies

Inherent flaws
World trade is zero-sum game Constrains output and consumption Limits colonies market potential

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International Business 5e

Chapter 5 - 14

The Opium Wars 1838-1842 and 1856-1860

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International Business 5e

Chapter 5 - 15

The Opium Wars

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International Business 5e

Chapter 5 - 16

Absolute Advantage
Ability of a nation to produce a good more efficiently than any other nation (greater output using same or fewer resources)

Riceland

Tealand

1 resource unit = 1 ton rice or 1/5 ton tea

1 resource unit = 1/6 ton rice or 1/3 ton tea

Specialization and trade allows each to produce and consume more

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Chapter 5 - 17

Trade Gains: Absolute Advantage

Second Theory

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International Business 5e

Chapter 5 - 18

Third Theory

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

Riceland

Tealand

1 resource unit = 1 ton rice or 1/2 ton tea

1 resource unit = 1/6 ton rice or 1/3 ton tea

Specialization and trade allow each to produce and consume more

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Chapter 5 - 19

Trade Gains: Comparative Advantage

Third Theory

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International Business 5e

Chapter 5 - 20

Fourth Theory

Factor Proportions Theory

Countries produce and export goods that require resources (factors) in abundance, and import goods that require resources in short supply

Labor

Land and Capital

Two factor types

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International Business 5e

Chapter 5 - 21

Leontief Paradox
Research discovered evidence opposite the prediction of factor proportions theory
U.S. exports are more labor-intensive than U.S. imports

Possible explanation
Theory assumes nations production factors to be homogeneous Theory is better predictor when expenditures on labor are considered

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International Business 5e

Chapter 5 - 22

Fifth Theory

International Product Life Cycle

A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle

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International Business 5e

Chapter 5 - 23

Sixth Theory

New Trade Theory

Fundamentals

First-mover advantage

Gains from specialization and increasing economies of scale Companies first to market create barriers to entry Government may help by assisting home companies

Economic and strategic advantage of being first to enter an industry May create a formidable barrier to market entry for potential rivals

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Chapter 5 - 24

Seventh Theory

National Competitive Advantage

Nations competitiveness in an industry depends on the industrys capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Factor conditions Demand conditions

Related and supporting industries

Firm strategy, structure, and rivalry
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Chapter 5 - 25

Seventh Theory

Factor Conditions
Basic factors
Nations resources
(large workforce, natural resources, climate, and surface features)

Advanced factors

Result of investing in education and innovation

(skill of workforce segments, technological infrastructure)

Basic factors can spark initial production, but advanced factors account for sustained competitive advantage
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e
Chapter 5 - 26

Seventh Theory

Demand Conditions

Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products and technologies

This should improve the competitiveness of the entire group of companies in a market
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Chapter 5 - 27

Seventh Theory

Related and Supporting Industries

Companies in an internationally competitive industry do not exist in isolation Supporting industries form clusters of economic activity in the geographic area Each industry reinforces the competitiveness of every other industry in the cluster

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International Business 5e

Chapter 5 - 28

Seventh Theory

Mapping U.S. Clusters

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Chapter 5 - 29

Firm Strategy, Structure, and Rivalry

Seventh Theory

Highly skilled managers are

essential because strategy has lasting effects on firm competitiveness

Domestic industry whose

structure and rivalry create an intense struggle to survive, strengthens its competitiveness
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Chapter 5 - 30