BUS 200 – International Trade Theory PDF

| business.gmu.edu BUS 200 – International Trade Theory Learn Here. Lead Anywhere.  | business.gmu.edu Learning Objectives Describe the nature of international trade. Explain how mercantilism worked and identify it...

| business.gmu.edu BUS 200 – International Trade Theory Learn Here. Lead Anywhere.  | business.gmu.edu Learning Objectives Describe the nature of international trade. Explain how mercantilism worked and identify its inherent flaws. Detail the theories of absolute advantage and comparative advantage. Summarize the factor proportions theory of trade. Explain the international product life cycle theory. Outline the new trade theory and the first-mover advantage. Describe the national competitive advantage theory and the Porter diamond. Learn Here. Lead Anywhere.  | business.gmu.edu International Trade People around the world are accustomed to purchasing goods produced in other countries. Provides a glimpse of another country’s culture Chanel No. 5 perfume, Imari porcelain, Columbia Sportswear Globalization and increased competition cause companies to move operations to locations where they can be performed most efficiently. Allows companies to maximize efficiency and boost competitiveness Learn Here. Lead Anywhere.  | business.gmu.edu The Nature of International Trade International trade Purchase, sale, or exchange of goods and services across national borders Differences in national culture and systems of politics, economics, and law are just some features of international trade that make it more complicated than domestic trade Learn Here. Lead Anywhere.  | business.gmu.edu The Nature of International Trade: Benefits of Trade Three primary benefits from international trade: Greater choice of goods and services Finland exports products made from lumber and imports cotton Job creation International trade supports one in five US jobs Greater consumption possibilities and higher standards of living Specialization and efficiency increases consumption possibilities Learn Here. Lead Anywhere.  | business.gmu.edu The Nature of International Trade: Economic Importance of Trade We can measure the importance of trade to a nation by examining the value of its trading activity relative to its gross domestic product. Trade as a share of GDP is equal to the sum of exports and imports (of goods and services) divided by GDP Learn Here. Lead Anywhere.  | business.gmu.edu The Nature of International Trade: Top Trading Nations World merchandise exports are valued at $17.6 trillion, which is more than three times the value of service exports at $4.9 trillion Trade between the world’s high-income economies accounts for roughly 60% of total world merchandise trade. Two-way trade between high-income countries and low- and middle- income nations accounts for about 34% of world merchandise trade. Merchandise trade between low- and middle-income nations accounts for only about 6% of total world trade. Learn Here. Lead Anywhere.  World’s Top Exporters Table 6.1 World’s Top Exporters World’s Top Merchandise Exporters World’s Top Service Exporters Rank Exporter Value Share of World Rank Exporter Value Share of World (US $ billions) Total (%) (US $ billions) Total (%) 1 China 2,591 14.7 1 United States 684 13.9 2 United States 1,432 8.1 2 United Kingdom 339 6.9 3 Germany 1,380 7.8 3 Germany 305 6.2 4 Netherlands 674 3.8 4 China 278 5.7 5 Japan 641 3.6 5 Ireland 262 5.3 6 Hong Kong, China 549 3.1 6 France 245 5.0 7 South Korea 512 2.9 7 India 203 4.1 8 Italy 496 2.8 8 Singapore 187 3.8 9 France 488 2.8 9 Netherlands 186 3.8 10 Belgium 419 2.4 10 Japan 156 3.2 Source: Based on data obtained from World Trade Statistical Review 2021 (Geneva, Switzerland: World Trade Organization, July 2021), Tables A.6 and A.8, available at www.wto.org) Learn Here. Lead Anywhere.  Global Trade and Output Learn Here. Lead Anywhere.  Trade Theory Timeline Learn Here. Lead Anywhere.  | business.gmu.edu Mercantilism Trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s. Britain, France, the Netherlands, Portugal, and Spain Learn Here. Lead Anywhere.  | business.gmu.edu Mercantilism: How Mercantilism Worked Three pillars: Trade surpluses Maintain a trade surplus, avoid a trade deficit Government intervention Tariffs/quotas Colonialism Acquire territories to supply essential raw materials Today, countries trying to maintain a trade surplus and expand their national treasuries at the expense of other nations are accused of practicing neomercantilism or economic nationalism. Learn Here. Lead Anywhere.  | business.gmu.edu Mercantilism: Flaws of Mercantilism Zero-sum game Belief that a nation could increase its share of wealth only at the expense of others Restricts international trade Learn Here. Lead Anywhere.  | business.gmu.edu Theories of Absolute and Comparative Advantage: Absolute Advantage Absolute Advantage Ability of a nation to produce a good more efficiently than any other nation International trade should not be banned or restricted by tariffs and quotas but instead should be allowed to flow as dictated by market forces Without trade barriers, no country would need to produce all the goods it consumed. Instead, a country could concentrate on producing the goods in which it holds an absolute advantage and trade to obtain the goods it needs but does not produce. Learn Here. Lead Anywhere.  | business.gmu.edu Theories of Absolute and Comparative Advantage: 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 Trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the goods Learn Here. Lead Anywhere.  | business.gmu.edu Theories of Absolute and Comparative Advantage: Comparative Advantage Assumptions and Limitations Nations strive only to maximize production and consumption Only two countries produce and consume just two goods No transportation costs of traded goods Labor is the only resource used to produce goods and it cannot cross borders Specialization does not create efficiency and improvement gains Learn Here. Lead Anywhere.  | business.gmu.edu Factor Proportions Theory Factor proportions theory Trade theory stating that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply The theory resulted from the research of two economists, Eli Heckscher and Bertil Ohlin, and is sometimes called the Heckscher-Ohlin theory. Focus is on using factors of production that are abundant and cheap Learn Here. Lead Anywhere.  | business.gmu.edu Factor Proportions Theory: Labor versus Land and Capital Equipment Factor proportions theory breaks a nation’s resources into two categories: Labor Land and capital equipment It predicts that a country will specialize in products that require labor if the cost of labor is low relative to the cost of land and capital Alternatively, a country will specialize in products that require land and capital equipment if their cost is low relative to the cost of labor. Learn Here. Lead Anywhere.  | business.gmu.edu International Product Life Cycle International product life cycle Theory stating that a company begins by exporting its product and later undertakes foreign direct investment as the product moves through its life cycle Learn Here. Lead Anywhere.  | business.gmu.edu International Product Life Cycle: Stages Stage 1: New product stage High purchasing power and demand of buyers in an industrialized country drive a company to design and introduce a new product concept Stage 2: Maturing product stage Domestic market and markets abroad become fully aware of the existence of the product and its benefits Stage 3: Standardized product stage Competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels Learn Here. Lead Anywhere.  Trade Theory Timeline Learn Here. Lead Anywhere.  | business.gmu.edu New Trade Theory New trade theory Trade theory stating that (1) there are gains to be made from specialization and increasing economies of scale, (2) the companies first to market can create barriers to entry, and (3) government may play a role in assisting its home companies. Emphasizes productivity Learn Here. Lead Anywhere.  | business.gmu.edu New Trade Theory: First-Mover Advantage First-mover advantage Economic and strategic advantage gained by being the first company to enter an industry Can create a formidable barrier to entry for potential rivals A country may dominate in the export of a certain product because it has a home-based firm that has acquired a first-mover advantage Role of government United States vs China Learn Here. Lead Anywhere.  | business.gmu.edu National Competitive Advantage How do firms in certain nations develop competitive advantage in specific industries? Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the production of particular products National competitive advantage theory Trade theory stating that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade Porter diamond Learn Here. Lead Anywhere.  | business.gmu.edu National Competitive Advantage: Factor Conditions Basic factors Includes a nation’s resources Can be the initial spark for why an economy begins producing a certain product Advanced factors Include the skill levels of the workforce and the quality of the technological infrastructure in a nation The result of investments in education and innovation Account for the sustained competitive advantage a country enjoys in that product Learn Here. Lead Anywhere.  The Porter Diamond Learn Here. Lead Anywhere. Thank You. Learn Here. Lead Anywhere.