Module 3_International Trade.ppt
- 1. Module 3 International Trade DR. Ghada Mohamed AbdelFattah ghada.Abdelfattah@alexu.edu.eg
- 2. International Trade Purchase, sale, or exchange of goods and services across national borders People have larger selection of products Important engine for job creation
- 3. International Trade Main Issues International Trade Provides Indications related to: 1- Export Performance. 2- International Demand. 3- Alternative Markets. 4- The Role of Competitors.
- 4. Trade 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
- 6. Trade Theories try to answer one main question: Why do nations trade?
- 7. Trade Theories: It was not until the fifteenth century that people tried to explain why trade occurs. Efforts continue to refine existing trade theories and develop new ones. 1- Mercantilism - Nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports. Other measures of a nation’s well-being, such as living standards or human development, are irrelevant. Practiced from around 1500 to the late 1700s by European nations, including Britain, France, the Netherlands, Portugal, and Spain. How Mercantilism Worked? -Trade was to benefit mother countries; colonies (in Africa, Asia, and North, South, and Central America) were exploitable resources.
- 8. Mercantilism Nations accumulate financial wealth by encouraging exports and discouraging imports Three pillars • Maintain trade surplus • Government intervention • Exploit colonies Inherent flaws • World trade is zero-sum game • Constrains output and consumption • Limits colonies’ market potential
- 9. 2- Absolute Advantage Theory Absolute advantage is the ability of a nation to produce a good more efficiently than any other nation (produce a greater output using the same, or fewer, resources) Adam Smith reasoned that international trade should not be burdened by tariffs and quotas, but should flow according to market forces A country should produce the goods in which it holds an absolute advantage and trade with others to obtain the goods it needs but does not produce efficiently Ex: Rice-land has an absolute advantage in rice production and Tea-land has an absolute advantage in tea production.
- 10. The theory of absolute advantage destroys the mercantilist idea that international trade is a zero-sum game. Because both countries gain, international trade is a positive-sum game. The theory argues against restrictive trade policies and for nations to instead open their doors to trade so their people obtain more goods more cheaply in order to raise living standards. Specialization and trade allows each to produce and consume more Riceland Tealand
- 11. 3- Comparative Advantage Theory Is the ability of a nation to produce one good more efficiently than it does with any other good, so that country should specialize in the production of goods it has comparative advantage in, and import other goods Thus, trade is still beneficial even if one country is less efficient in the production of two goods, as long as it is less inefficient in the production of one of the two goods. The theory has limitations because of its assumptions, like the assumption of free transportation, and the assumption of only two countries are involved in trade. The theory was introduced by David Ricardo.
- 12. 4- Factor Proportions Theory Countries produce and export goods that require resources (factors) that are abundance in the country, and import goods that require resources that are in short Supply in that country. Thus, the theory focuses on the productivity of the production process. Factor proportions theory breaks resources into two categories: (1) labor, and (2) land and capital equipment. It predicts that a country will specialize in products that require labor if labor cost is low relative to land and capital costs, and vice versa.
- 13. Leontief Paradox Research discovered evidence opposite the prediction of factor proportions theory U.S. exports are more labor-intensive than U.S. imports although U.S. uses an abundance of capital intensive - Try to explain how this is possible? - What are the implications of this result?
- 14. 5- International Product Life Cycle A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle
- 15. Stages of the Product Life Cycle In new product stage, stage 1, the high purchasing power and demand of buyers spur a company to design and introduce a new product concept. Although initially there is virtually no export market, exports increase late in the new product stage. In the maturing product stage, stage 2, the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. Near the end of the maturity stage, the product generates sales in developing nations, and manufacturing is established there. In the standardized product stage, stage 3, competition from other companies selling similar products pressures companies to lower prices in order to maintain sales levels. An aggressive search for low-cost production bases abroad begins and the home market may begin importing.
- 16. 6- New Trade Theory Fundamentals Gains from specialization and increasing economies of scale Companies first to market create barriers to entry Government may help by assisting home companies First-mover advantage Economic and strategic advantage of being first to enter an industry May create a formidable barrier to market entry for potential rivals
- 17. 7- National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (Porter’s Diamond) (plus government and chance) 1- Factor conditions 2- Demand conditions 4- Firm strategy, structure, and rivalry 3- Related and supporting industries
- 18. 1- Factor Conditions Basic factors Advanced factors Nation’s resources (large workforce, natural resources, climate, and surface features) Result of investing in education and innovation (skill of workforce segments, technological infrastructure) Basic factors can spark initial production, but advanced factors account for sustained competitive advantage
- 19. 2- Demand 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
- 20. 3- Related and Supporting Industries Companies 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
- 21. 4- Firm Strategy, Structure, and Rivalry Highly skilled managers are essential because strategy has lasting effects on firm competitiveness Domestic industry whose structure and rivalry create an intense struggle to survive, strengthens its competitiveness
- 22. Bottom line for Business This module explores the benefits of international trade by introducing classical trade theories. Trade can free a nation’s entrepreneurial spirit and bring economic development. New theories emerged to explain why countries trade.