Chapter 3 2e_JB

Chapter 3: International Trade Theory

Learning Outcomes

• Understand globalisation's origin and consequences.

• Discuss the benefits of foreign trade.

• Describe basic trade theory elements.

• Recognize causes of comparative advantage.

• Identify tariff and non-tariff barriers.

Globalisation

• Motivations for trade and recent causes of globalisation.

• Impact of containerisation on international business, including key trends:

  • Increase in domestic firms engaging in exporting and importing.

  • Growth of foreign-based firms in various markets.

  • Development of regional trade areas.

  • Rapid expansion of world markets.

  • More competitors in the global market.

• Anti-globalisation sentiments.

Importance of Foreign Trade

• Significant component of commerce for marketers.

• Domestic firms face competition from imports while exporting goods abroad.

Openness of Economies to Trade (Table 3.1)

• Data illustrating selected countries’ trade openness over decades, showing varying degrees of trade exposure.

• Australia, Germany, and Ireland demonstrate significant openness compared to other nations.

Benefits of Trade

• Enhanced utilisation of resources and increased production.

• Economic and technological growth.

• Boosted global competitiveness and job opportunities.

• Earning foreign currency with benefits for consumers and overall economic growth.

Pattern of International Trade

• Countries should focus on comparative advantage.

• Similar countries may trade similar goods, but patterns can be unpredictable.

• Consumers increasingly demand differentiated products.

Trade Theory for International Traders

• Trade theories guide government industrial and trade policy.

• Divided into descriptive and prescriptive theories related to trade regulation.

Mercantilism and Neo-mercantilism

• Advocates for promoting a favorable trade balance (exports > imports) to generate surpluses.

• A win-lose perspective leads to interventionist policies; neo-mercantilism argues against free trade.

Absolute Advantage and Specialisation

• Absolute advantage occurs when a country can produce more with the same resources or less.

• Specialisation leads to surplus production, allowing for trade and income generation.

Trade on Absolute Cost Differences (Box 1)

• Australia has an absolute advantage in torches, while South Africa excels in candles.

• Trading based on absolute cost differences enables beneficial exchanges.

Trade on Relative Cost Differences (Box 2)

• Even if a country is more efficient overall, focusing on products with the highest relative advantage can benefit trade.

Comparative Advantage

• A country has a comparative advantage if it produces goods/services at a lower opportunity cost.

• Specialisation is beneficial even when a country is less efficient overall.

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Comparative Advantage Example

• Data illustrating production costs for wheat and wine in England and Portugal demonstrates comparative advantage mechanics.

Determinants of Comparative Advantage

• Factors influencing comparative advantage include:

  • Technological differences

  • Factor proportions theory (Heckscher-Ohlin)

  • Specific factors model

  • Leontief paradox

  • Product life cycle theory

  • Taste similarities and differences

  • Increasing returns to scale and imperfect competition

  • Country size theory.

Barriers to Trade

• Types of barriers include:

  • Government interventions.

  • Natural barriers.

• Trade strategies include import-substitution industrialisation and export-oriented development.