International Trade Theory

benefits of trade

• Allows a country to specialize in the manufacture and export of products that can be produced most efficiently in that country, while importing products that can be produced more efficiently in other countries

• Reducing costs of production for goods that their country can't support

patterns of international trade and productoin

• Climate and natural resource endowments

• Relationship between the sizes in which the factors of production are available in different countries and the sizes in which they are needed for producing particular goods.

trade theory and government policy

• Some justify limiting government intervention to support the development of certain export oriented industries

• However, a lot of the successful trade theories believe in unrestricted free trade, which does not allow government policies to exist.

mercantilism

• Gold and silver were the foundations of national wealth and essential to vigorous trade

• It was in the countries best interests to maintain a trade surplus meaning export more than import

• By doing this, a country could accumulate gold and silver and increase its national wealth

• Advocated government intervention b/c used policies like subsidies on exports and tariffs and quotas to limit imports.

zero-sum game

A gain by one country results in the loss by another

absolute advantage theory

• Has an absolute advantage in the production of a product when it is more efficient than any other country in producing it

• Should specialize in a product and trade for other goods produced in other countries

• Both countries could benefit from this trade

comparative advantage theory

• Makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods it produces less efficiently from other countries, even if it means buying goods from other countries that it could produce more efficiently itself. (should trade even if it has absolute advantage in all products, sacrificing less to produce something)

constant returns to specialization

The units of resources required to produce a good are assumed to remain constant no matter where one is on a countries production possibility frontier

diminishing returns to specialization

Occurs when more units of resources are required to produce each additional unit

trade and economic growth of a nation

•increase a country's stock of resources

• increase the efficiency with which a country uses its resources

• stimulate economic growth

samuelson critique

when the US engages with a newly free trade regime country like china that rapidly improves its productivity which in turn lowers the prices US consumers pay but does not earn enough to compensate for the lower wage rates in the US

heckscher-ohlin theory

The H-O theorem says that a capital-abundant country will export the capital-intensive good while the labor-abundant country will export the labor-intensive good.

the leonteif paradox

• Because the United States was relatively abundant in capital compared to other nations, the United States would be an exporter of capital-intensive goods and an importer of labor-intensive goods

• To his surprise, he found that US exports were less capital intensive than US imports.

free trade

A government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country

problems with trade surplus when trading between two countires

generates inflation on one side and makes lower prices on the other

product life cycle theory

1. Early life of product begins and US and the demand is not worthwhile enough in other countries for them to start producing it

2. Demand for new product starts to grow in other advanced countries, making it more worthwhile for them to produce it

3. Might now export to US because labor costs are lower in other countries making the goods cheaper

4. in the end, the US becomes a major importer rather than an exporter

economies of scale

unit cost reductions associated with a large scale of output (more goods produced, less fixed costs spread over more products)

new trade theory

-gains from specialization and economies of scale

-companies first to market create barriers to entry

-government may help by assisting home companies

first mover advantage

advantages accruing to the first to enter a market (benefitting from lower cost structure)

national competitive advantage theory: porter's diamond consists of:

1. factor endowments

2. demand conditions

3. related and supporting industries

4. firm strategy, structure, and rivalry

factor endowments

the factors of production necessary to compete in a given industry

(believes that the improving of the education of those in a nation can upgrade a nation's advanced factors)

demand conditions

the nature of home demand for the industry's product or service

(-argues that a nation's firms gain competitive advantage if their domestic consumers are sophisticated and demanding

-pressures local firms to meet higher standards of product quality)

related and supporting industries

the presence or absence of supplier industries and related industries that are internationally competitive

firm strategy, structure and rivalry

the conditions governing how companies are created, organized, and managed and the nature of domestic rivalry

(-Different nations have different management ideologies which either help them or do not help them to build national competitive advantage

-there is a strong association between domestic rivalry and improved efficiency and standards)

what are two things that influence the diamond?

chance and government

3 implications of international trade for international business

1. location

2. first mover advantages

3. government policy