Five Minute

Presentation
 Chapter 5
International Trade
and Factor-Mobility
Theory
 Why does Mr. Modi travel across
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 Learning Objectives
 Discuss how different approaches to
international trade theories help policy
makers achieve economic objectives
 Comprehend the historical and current
rationale for interventionist trade theories
 Evaluate how free trade improves global
efficiency
 Discuss factors affecting national trade
patterns
 Learning Objectives
 Recognize why a country’s export
capabilities are dynamic
 Detect why production factors, especially
labor and capital, move internationally
 Grasp scenarios of possible changes in
trade patterns
Laissez-Faire vs. Intervention
 Trade theory helps answer
 What products should we import and export?
 How much should we trade?
 With whom should we trade?
 Laissez-faire approach
 Free trade theories – absolute advantage and
comparative advantage
 Intervention approach
 Mercantilism and neomercantilism
Laissez-Faire vs. Intervention
International Operations and Economic Connections
 Theories of Trade Patterns
 Theories explore
 country size
 factor proportions
 country similarity
 Theories explore trade competitiveness
 Product life cycle
 Diamond of national advantage
Trade Theories and Business
What Major Trade Theories Do and Don’t Discuss: A Checklist
 Factor Mobility Theory
 A country’s competitiveness depends on
 quality and quantity of production factors
 Land

 Labor

 Capital
 Interventionist Theories
 Theories that support government
intervention in the flow of trade
 Mercantilism
 Neomercantilism
 Mercantilism
 Mercantilism countries should export
more than they import
 Maintain a favorable balance of trade
 trade surplus
 Avoid an unfavorable balance of trade
 trade deficit
 Neomercantilism
 Neomercantilism run an export surplus
to achieve social or political objectives
 Free Trade Theories
 Two theories that support free trade
 Absolute advantage theory
 Comparative advantage theory
 Market forces should determine trade
 specialization
 Theory of Absolute Advantage
 Theory of absolute advantage
 different countries produce some goods more
efficiently than others
 Free trade brings
 Specialization
 natural advantage
 acquired advantage

 product technology
 process technology
 Greater efficiency
 Higher global output
Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute Advantage
Theory of Comparative Advantage
 Theory of comparative advantage
 free trade can increase global output even if
one country has an absolute advantage in the
production of all products
 Consider
 comparative advantage
 absolute disadvantage
Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage
How Much Does A Country Trade?
 Theory of country size
 large countries depend less on trade than
small countries
 Large countries usually
 export a smaller portion of output and import a
smaller part of consumption
 have higher transportation costs for foreign
trade
 What Types of Products Does A
Country Trade?
 Factor proportions theory
 factors in relative abundance are cheaper than
factors that are relatively scarce
 But
 production factors are not homogenous
 labor

 Process technology
 capital versus labor
 With Whom Do Countries Trade?
 Country similarity theory
 most trade occurs among developed countries
 share similar market characteristics

 produce and consume much more than

developing countries
 Trading partners are affected by
 Cultural similarity
 Political relations between countries
 Distance
Diamond of National Advantage
 The diamond of national advantage
 Four conditions are important for gaining and
maintaining competitive superiority
 Factor conditions

 Demand conditions

 Related and supporting industries

 Firm strategy, structure, and rivalry

Diamond of National Advantage
 Why Production Factors Move
 Factor mobility theory
 focuses on why production factors move, the
effects of that movement on transforming
factor endowments, and the impact of
international factor mobility on world trade
 Capital and labor move internationally to
 gain more income
 flee adverse political situations
Effects of Factor Movements
 Factor movements can be substantial for
some countries, and insignificant for
others
 The movement of labor and capital are
intertwined
 Pros and cons of outward and inward
migration
 Brain drain
 Remittances
 In What Direction
Will Trade Winds Blow?
 Issues to consider
1. Displacement of jobs as developed countries
shift production to more rapidly developing
countries
2. Relationships among land, labor, and capital
will continue to evolve
3. Continued trend toward a more finely tuned
specialization of production among countries
 In What Direction
Will Trade Winds Blow?
 Monitor
 As economies grow, efficiencies of multiple
production locations also grow because they
can all gain sufficient economies of scale
 Small-scale production methods may enable
countries to produce many goods efficiently for
their own consumption
 Output from 3D printers
 Services are growing more rapidly than
products as a portion of production and
consumption within developed countries
Ques: The term protectionism, when applied
to international trade, refers to ________.
 A) governmental restrictions and competitive
support actions to affect trade flows
 B) payments to dock workers to prevent
pilferage of imported shipments
 C) border checks to prevent entry of illegal
aliens
 D) methods used to prevent intellectual
property theft
Correct Ans: A) governmental restrictions
and competitive support actions to affect
trade flows
 Ques: Why should managers have an
understanding of trade protectionism?
 A) Trade protectionism targets factor
endowments, thus affecting the best country to
locate production.
 B) Trade protectionism affects a company's
ability to sell abroad and ability to compete at
home.
 C) Trade protectionism affects the number of
people permitted to practice a specific
profession.
 D) Trade protectionism prevents companies'
enactment of merger and acquisition
agreements.
Correct Ans: B) Trade protectionism affects
a company's ability to sell abroad and ability
to compete at home.
 Ques: Assume a government places
restrictions on a specific product from a
specific foreign country. What would be
the government's most likely concern
about the foreign country's response?
 A) the foreign producers raising the prices of
their exports
 B) the foreign country restricting its own
imports
 C) the foreign country restricting its exports in
that industry
 D) the foreign producers seeking other
markets
Correct Ans: B) the foreign country
restricting its own imports
 Ques: Neomercantilism describes the
approach of countries that try to run a
favorable balance of trade to ________.
 A) build up gold reserves
 B) achieve a social or political objective
 C) lower their rates of inflation
 D) buy raw materials more cheaply
Ans: B) achieve a social or political objective