vz lect ch 5 fall 09 intttradetheories moodle

8/14/2019 VZ Lect Ch 5 Fall 09 InttTradeTheories MOODLE

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Vasile Zamfirescu - Lecture Notes Fall2009

International Business BUSI 2490


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Objectives

Discuss the volume andpatterns of world trade

Discuss Canadas volume

and structure ofinternational trade

Sources of trade stats


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Prentice Hall, 2008 International Business 4e Chapter 5 - 3

International TradeInternational Trade

Purchase, sale, or exchange of goods andservices across national borders

People have larger selection of products Important engine for job creation

People have larger selection of products Important engine for job creation


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Trade and World OutputTrade and World Output

World trade 80% merchandise

20% services

World output impacts trade Growing output = growing trade

Sluggish output = sluggish trade

World trade grows faster

than world output


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Copyright 2010 Pearson Education, Inc.

publishing as Prentice Hall

International Business 5e Chapter 5 - 5

Worlds Top ExportersWorlds Top Exporters

SeeHand-

out


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Who Trades with Whom?Who Trades with Whom?


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Trade PatternsTrade Patterns

60%

34%

6%

Merchandise trade among:Western European

trade is mostly intra-

regional trade

Low- and

middle-incomenations High-income

nations

High-income and low- and

middle-income nations

North America imports

twice as much fromAsia as it exports to

Asia


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Trade and theTrade and the

Dependent NationDependent Nation

Total

dependence

Potential effects of dependence:+ Infuses needed capital+ Creates jobs and raises wages+ Imports technology and skills

Economic problems transferred Political turmoil can spill over May see the developed firms leave (Mexico)

Total

independence


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CANADA?CANADA?

GDP?

EXPORTS -

GOODS?

Exports by

Sector??? EXPORTS -

SERVICES?

When one thinks of Canadian

exports one product clearly sits

at the top of the list, forestryproducts. The exportation (sic)

of Canadian wood products is

a billion dollar a year industry

and the biggest contributor toCanadas overall GDP (excerptfrom paper by group of BUSI-2490 students)
http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.phphttp://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php


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WTO a great source of tradestats

See pdf file separately on this sectionon Moodle


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Objectives contd

Why trade? Classical trade theories: Mercantilism Absolute competitive advantage (Adam Smith)

Comparative competitive advantage (Ricardo)

Heckscher-Ohlin (Factors-Proportions)

The Product Life-cycle (Vernon)

Why trade? New trade theories: The new trade theory

National competitive advantage (Porter)


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Importance of topic

Mercantilism still present? First-mover implications

Economies of scale Location Implication Foreign Investment Decisions

Government Policyimplications


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Trade Theory TimelineTrade Theory Timeline


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Basic difference

Classical trade theories:explain national economy conditions--country advantages--that enableexchange to happen

New trade theories:

explain links among natural countryadvantages, government action, and

industry characteristics that enableexchange to happen


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MercantilismMercantilism

Nations accumulate financial wealth byNations accumulate financial wealth by

encouraging exports and discouragingencouraging exports and discouraging

importsimports

Three pillarsThree pillars Maintain trade

surplus

Government

intervention

Exploit colonies

Inherent flawsInherent flaws World trade is

zero-sum game Constrains output

and consumption Limits colonies

market potential


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MercantilismMercantilism

US VERSUS THEM VIEW OFUS VERSUS THEM VIEW OFTRADETRADE

Other countrys gainOther countrys gain

is our countrys lossis our countrys loss

The views persistThe views persist

today astoday as

Neo-mercantilismNeo-mercantilism


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theories

Theories supporting Free Trade:Show that specialization of production and free flowof goods grow all trading partners economies Absolute Advantage (Adam Smith, 1776)

Comparative Advantage (David Ricardo, 1817) Free Trade refined

Factor-proportions (Heckscher-Ohlin, 1919)

International product life cycle (Ray Vernon, 1966)


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Absolute AdvantageAbsolute Advantage

Ability of a nation to produce a good more efficiently than any

other nation (greater output using same or fewer resources)

Specialization and trade allows each to

produce and consume more

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

RicelandRiceland

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

TealandTealand


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Trade Gains:Trade Gains:

Absolute AdvantageAbsolute Advantage


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Comparative AdvantageComparative 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

Specialization and trade allows each to

produce and consume more

1 resource unit = 1 ton rice or

1/2 ton tea

RicelandRiceland

1 resource unit = 1/6 ton rice or

1/3 ton tea

TealandTealand


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Trade Gains:Trade Gains:

Comparative AdvantageComparative Advantage


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McGraw-HillR erson

2006 The McGraw-Hill Companies, Inc., All Rights

Theory of Relative Factor

Endowments(Heckscher-Ohlin) Factor endowments vary among countries

Products differ according to the types of factorsthat they need as inputs

A country has a comparative advantage inproducing products that intensively use factors ofproduction (resources) it has in abundance

Factors of production: labour, capital, land,

human resources, technology

Slide

4-9


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Factor Proportions TheoryFactor Proportions Theory

Countries produce and export goods that require

resources (factors) in abundance, and import goods

that require resources in short supply

Two factor types

Land and CapitalLabor


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Copyright 2010 Pearson Education, Inc.publishing as Prentice Hall


Leontief ParadoxLeontief Paradox

Research discovered evidence opposite the

prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports

Research discovered evidence opposite the

prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports

Possible explanationPossible explanation

Theory assumes nations production

factors to be homogeneous

Theory is better predictor when

expenditures on labor are considered

Possible explanationPossible explanation

Theory assumes nations production

factors to be homogeneous

Theory is better predictor when

expenditures on labor are considered


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International Product LifeInternational Product Life

CycleCycleA company begins by exporting its product and later undertakes

foreign direct investment as a product moves through its life

cycle


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McGraw-HillR erson


Classic Theory Limitations

Fundamentally, free trade expands the world piefor goods/services which is good!

However, the theories are based on [often] flawed

assumptions:

simplified world (two countries, two products)

no transportation costs

no price differences in resources

resources immobile across countries

constant returns to scale

each country has a fixed stock of resources and noefficiency gains in resource use from trade

full employment

Slide 4-11


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McGraw-HillR erson


New Trade Theories

Global Strategic Rivalry

Firms gain competitive advantage through:

intellectual property, R&D, economies of scale

and scope, experience

National Competitive Advantage (Porter,

1990)

Slide

4-4


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New Trade TheoryNew Trade Theory

FundamentalsFundamentals

Gains from specializationand increasing economies

of scale

Companies first to market

create barriers to entry

Government may help by

assisting home companies

First-mover advantageFirst-mover advantage

Economic and strategic

advantage of being first to

enter an industry

May create a formidable

barrier to market entry forpotential rivals


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McGraw-HillR erson


The New Trade Theory

Government intervention: strategic trade policy

Limited number of producers worldwide possible

Because of such scale economies, world demand

supports only a few firms in such industries (e.g.,

commercial aircraft, automobiles)

Countries that had an early entrant to such an

industry have an advantage:

First-mover advantage

Barrier to entry

Slide

4-3

Slid


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McGraw-HillR erson


National Competitive Advantage(Porter, 1990)

Michael Porter of Harvard Business School

Porters work driven by the belief that existing

trade theories only told part of the story

Looked at 100 industries in 10 nations Porter theorized that four broad attributes of a

nation shape the environment in which firms

compete

Slide

4-13

National Competitive Advantage


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Copyright 2006 Pearson Education Canada Inc.slide number 5-31

National Competitive Advantage Competitiveness in industry depends on capacity toCompetitiveness in industry depends on capacity to

innovate and upgrade, which depends on fourinnovate and upgrade, which depends on four

conditions:conditions:

Factor conditions (i.e.,factors of production: basic+ advanced)

Demand conditions (i.e.,large domestic consumer

base)Related & supportingindustries (strongsuppliers & industrialcustomers)

Strategies, Structures &Rivalries leading to

QUALITY & PRODUCTIVITY


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Factor ConditionsFactor Conditions

Basic factors Advanced factors

Nations resourcesNations resources

(large workforce, natural

resources, climate and surface

features)

Nations resourcesNations resources

(large workforce, natural

resources, climate and surface

features)

Result of investing inResult of investing in

education and innovationeducation and innovation

(skill of workforce segments,

technological infrastructure)

Basic factors can spark initial production, but advanced

factors account for sustained competitive advantage


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Demand ConditionsDemand 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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Related and SupportingRelated and Supporting

IndustriesIndustries

Related and SupportingRelated and Supporting

IndustriesIndustriesCompanies 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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Firm Strategy, StructureFirm Strategy, Structure

and Rivalryand Rivalry

Highly skilled managers are

essential because strategy

has lasting effects on firmcompetitiveness

Domestic industry whose

structure and rivalrycreate

an intense struggle to

survive, strengthens its

competitiveness


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Importance of topic

Classic trade theories: explain national economy conditions--country

advantages--that enable exchanges to happen

New trade theories: explain links among natural country advantages,

PRODUCTIVITY(!), government action, and

industry characteristics that enable such

exchanges to happen


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Looking forward Please read: CHAPTER 6

Prepare presentation assignments Work continually & diligently on

Group Term Projects Follow carefullythe MESP requirements in each

chapter

QUESTIONS?

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