Introduction Part Three. Introduction International Trade Growth International Trade Milestones...

Introduction

Part Three

Introduction

International Trade Growth

International Trade Milestones

Largest Exporting and Importing Countries

International Trade Drivers

International Trade Theories

The International Business Environment

Adam Smith 1723-1790

In 1776 wrote An Inquiryinto the Nature and Causesof the Wealth of Nations.

http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html


Adam Smith's Theory of Absolute Advantage

From: The Wealth of Nations (1776)

When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.

Absolute Advantage

http://z.about.com/d/geography/1/0/1/L/europe.jpg

France: 1 year of labor =

.

Absolute Advantage


France: 1 year of labor =20k liters of wine

Absolute Advantage


France: 1 year of labor =20k liters of wine or

Absolute Advantage


France: 1 year of labor =20k liters of wine or2 units of machinery

Absolute Advantage



Germany: same labor =15k liters of wine

Absolute Advantage



Germany: same labor =15k liters of wine or

Absolute Advantage



Germany: same labor =15k liters of wine or3 units of machinery

Absolute Advantage



Germany: same labor =15k liters of wine or3 units of machinery

France sellsWine to Germany

Germany sellsMachinery toFrance



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Ricardo's Theory of Comparative Advantage

Political Economy and Taxation (1815)• Nations trade with one another when they can

produce certain goods relatively more efficiently than one another.

• Most international trade today is explained by the Theory of Comparative Advantage.


Theory of Comparative Advantage Illustration• The UK can make 25 tons of wheat or 5 units of machinery

using one year of labor. • Brazil can make 21 tons of wheat or 3 units of machinery

using the same amount of labor.• The UK has an absolute advantage in machinery and

wheat. • However, in the UK, the “relative price” of a unit of

machinery is 5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons of wheat.

• If the UK decides to grow wheat, it has to “give up” 1/5 of a piece of machinery. If it can find wheat at a lower price than 1/5 of a piece of machinery, it finds it advantageous.


Theory of Comparative Advantage Illustration• If Brazil decides to make machinery, it has to “give up” 7

units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous.

• The UK will sell its machinery to Brazil at the price of 6 tons of wheat.

• The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it can make it (6 tons of wheat).

• Both nations gain from this trade.


Factor Endowment Theory

Developed by Hecksher and Ohlin (1933)• A country will enjoy a comparative advantage

over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship.

• Explains why certain countries specialize in the production of certain products.


Factor Endowment Theory• Countries with an abundance of land will specialize in the

production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans).

• Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming).

• Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance).

• Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for example, United States and intellectual property).


International Product Life Cycle

Developed by Raymond Vernon (1966)• Over its life cycle, a product will be

manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.


International Product Life Cycle • First Stage

A new product is launched in a country, called the country of innovation, to satisfy market need.

• Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there.

• Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries.


Porter's Cluster Theory • A firm can develop a substantial competitive

advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity.

• The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient.

• Such a grouping of companies is called a cluster.


Porter's Cluster Theory Examples• Silicon Valley, California, is a cluster for

information technology.• Sassuolo, Italy, is a cluster for ceramic tiles.• Limoges, France, is a cluster for porcelain.• Genève, Switzerland, is a cluster for watches.• Yiwu, China, is a cluster for socks and hosiery.

Introduction








• Culture• Demographics• Economics• Regulations and Laws• Infrastructure• Communications• .....much of the international business

environment is different from the domestic environment.

Introduction







Introduction Part Three. Introduction International Trade Growth International Trade Milestones...

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