Mercantilism and Absolute Advantage

International Business Economics: Mercantilist Views on Trade

• Mercantilists measured wealth by precious metals, while today wealth is measured by human capital, manufactured goods, services availability, and productive resources.
• Thomas Munn's work, England's Treasure by Foreign Trade, stressed exporting more than importing to prevent losing gold and silver.
• Mercantilists viewed global wealth as a zero-sum game, where one nation's gain meant another's loss, leading to trade conflicts.
• Adam Smith and David Ricardo critiqued mercantilism, advocating mutually beneficial trade.

Trade Based on Absolute Advantage

• Adam Smith, a Scottish economist and philosopher known as the "Father of Economics" or "Father of Capitalism,"
• Smith wrote The Wealth of Nations in 1776; his ideas influenced classical economists like David Ricardo and John Stuart Mill.
• Smith's theories include the invisible hand, laissez-faire economics, division of labor and specialization, and absolute advantage.
• Smith introduced the absolute advantage theory, arguing international trade benefits countries when each specializes in producing goods using fewer resources than others.
• Absolute Advantage benefits include higher production, lower costs, and better resource use.

Trade Based on Comparative Advantage

• In 1817, David Ricardo introduced the law of comparative advantage in Principles of Political Economy and Taxation.
• Comparative advantage suggests even if one nation is less efficient in producing all goods, there's still a basis for mutually beneficial trade if each specializes in producing goods/services at a lower cost.

The Heckscher-Ohlin (H-O) Model and New Trade Theories

• The H-O model explains international trade based on factor endowments: countries export goods using abundant factors and import goods using scarce factors.
• Economies of scale, product differentiation, and technological change drive the need for new trade theories.
• New Trade Theory (NTT), introduced by Paul Krugman, explains trade between similar countries using economies of scale and market imperfections.
• The Technological Gap Model suggests trade occurs when one country develops a new technology.
• The Product Cycle Theory says a country initially innovates but later shifts production to low-cost countries.

Relaxing Assumptions & Their Effects

• More nations, goods, and factors increase complexity, but the model remains valid.
• Differing technologies necessitate additional models, like the Product Cycle Theory.
• Factor-intensity reversal is rare, but can invalidate predictions.
• Economies of scale explain trade, but the H-O model does not.

Challenges to the H-O Model

• Imperfect competition and product differentiation exist; many industries operate under monopolistic competition.
• International factor mobility, where labor and capital move across borders, changes trade patterns.
• Trade barriers and costs, such as transportation costs, reduce trade volume.

Technical Progress

• John Hicks (1904-1989) was a British economist and Nobel Prize winner in Economics in 1972.

Neutral Technical Progress

• Increases productivity of labor (L) and capital (K) proportionately, keeping the K/L ratio the same.

Labor-Saving Technical Progress

• Increases capital productivity more than labor productivity, where capital substitutes for labor and K > L.

Capital-Saving Technical Progress

• Increases labor productivity more than capital productivity, where labor substitutes for capital and L > K.

Trade Restrictions: Tariffs

• Import tariffs are duties on imported commodities; export tariffs are duties on exported commodities.
• Import tariffs are common; export tariffs are prohibited in the U.S. but used in other developing countries to regulate prices.
  • Types of Tariffs
    • Ad valorem tariffs are a fixed percentage of the traded commodity's value.
    • Specific tariffs are a fixed sum per physical unit of the traded commodity.
    • Compound tariffs combine ad valorem and specific tariffs.

Strategic Decision Making

• Strategic business decision-making involves leaders evaluating options and selecting the best course to achieve long-term organizational goals.
  • Key elements include data-driven decisions, alignment with strategic goals, risk assessment, long-term focus, consideration of alternatives, and inclusivity.
  • Strategic Choices influence Sustainability; aiding risk management and enhance competitive advantage.

Factors Influencing Strategic Business Decision-Making

• Influencing factors include internal elements (organizational culture, leadership, resources) and external elements (market/economic/ Competitive conditions).

Stakeholder Influence

• Customers (needs, preferences), investors/shareholders (profit growth, ethical concerns), and employees (skill sets, morale) centrally affect strategic decisions.

Risks and Uncertainty

• Decision-makers assess potential financial, operational, market, and legal risks when formulating strategies, alongside environmental issues.

Decision-Making Frameworks

• SWOT analysis evaluates internal and external factors.
• PESTEL analysis helps assess macro-environmental factors.
• Porter’s Five Forces analyzes competitive forces within an industry.

Process of Strategic Business Decision-Making

• Define the problem, gather information, develop/evaluate options, choose the best action based on facts/logic/intuition, and implement/monitor the decision.

Examples of Strategic Business Decision-Making

• Apple launched the iPhone in 2007 with a fully touchscreen interface.
• Netflix shifted from DVD rentals to online streaming in 2007.

Challenges in Strategic Business Decision-Making

• Uncertainty about Future market Conditions causes difficulties, suggesting continuous monitoring and adaptation.
• Lack of Sufficient Data requires robust data analysis.
• Cognitive Biases demand critical thinking and bias awareness.
• Information Overload requires utilizing Advanced Data Analytics Tools, while resistance to change requires comprehensive change management practices.
• Difficulty in predicting competitor actions demands competitive intelligence.

Labor Economics and Human Capital

• Labor economics studies the workforce as a production element, including employees, employers, and the self-employed.
• Crucial concepts include the labor force participation rate (percentage employed or seeking employment), unemployment rate, and human capital (skills, education, experience).
• The labor market connects workers (labor supply) and firms (labor demand) to produce goods and services.
• The labor supply curve illustrates workers' willingness at different wage rates.
  • Influencing factors include wage rates, non-wage benefits, taxes, and leisure.
• The Factors labor demand curve illustrates firms' eagerness to hire at varying rates.
  • Affected by wage rates, technology, government policies, and output prices.

Human Capital Defined

• Human capital includes knowledge, skills, experience, health, and education.
• Labor markets operate worldwide locally, nationally, and internationally.
• Markets can segment based on education, gender, age, experience, and location impacting employment.
• Technological Innovations, worker inclinations, policies that define labor's institutions are driving factors

Education and Skills Impact

• Education and skills enhance market productivity, employability, and earnings.
• Education and skills reduce the risk of unemployment, while formal, informal, general, specific, cognitive, and non-cognitive skills all play a role. -Structured learning, self/on-the job training, adaptable and specialized skills.
• Labor policies and organizations safeguard workers’ rights, promote employment, improve conditions, enhance productivity, and reduce inequality. Labor trends affect job availability and required skills.