Chapter 1 - International trade Flashcards
Treaty of Rome
Rome 1957
Creation of the European Union, originally six countries: Belgium France Germany Italy Luxembourg Netherlands
World Trade Organization
Replaced GATT in 1995 as global organization to enforce free trade
Worlds Largest EXPORTING Countries
China U.S. Germany Japan Netherlands France Korea Russia Italy China
EURO
Currency was created in 1999, put into circulation in 2002 in 12 of the 15 countries
Worlds Largest IMPORTING Countries
U.S. China Germany Japan UK France Netherlands China Korea India
Cost Drivers
Companies increase their sales worldwide to recover their high investment costs
EX:
Automobile production is dominated by 18 companies, concentrated across 15 countries, and sold in 143 countries
Competition Drivers
Companies enter foreign markets to keep up with their competitors, retaliate against them, or enter a market first
EX: French company Carrefour and US company Wal-Mart split the world market
Market Drivers
Companies enter foreign markets because their customers expect them to be present in those countries
EX: McDonalds, Hilton, Benneton, Cartier, Exxon-Mobil are all in close to 100/100+ countries
Technology Drivers
Companies enter foreign markets because their customers use technology to make purchases from these markets
Theory of Absolute Advantage
Adam Smith, 1776
An economic theory that holds that when a nation can produce a certain type of product more efficiently than other countries, it will trade with other countries that produce other goods more efficiently.
A country has absolute advantage if it produces more goods with the same amount of input. Ie if it is more efficient
EX: France and Germany require the same amount of labor to produce wine and machinery, respectively.
Theory of Comparative Advantage
David Ricardo, 1815-1817
An economic theory that holds that nations will trade with one another as long as they can produce certain goods relatively more efficiently than one another
Basically a country or company produces that which they can competitively, than purchases that which they can’t
EX: Ford can produce the parts to assemble it’s cars, but it doesn’t because it is cheaper to buy them from someone that can produce them more efficiently
Theory of Factor Endowment
Eli Heckscher and Bertil Ohlin 1933
Building on Ricardo’s comparative advantage theory: An economic theory that holds that a nation will have a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production
Factors: land, labor, capital, entrepreneurship
EX: Argentina - grazing land - beef
India - educated labor - call centers
USA - entrepreneurship - development of IP
International Product Life Cycle Theory
Raymond Vernon 1966
An economic theory that holds that, over its lifecycle a product will be manufactured in different countries
3 stages:
1- Product is created in a developed country, using new technology, to meet a market need
2- As sales grow, competitors start to make similar products in other developed countries, responding to local needs
3- manufacturing of product has become routine and costs need to be reduced, production moves to developing country
Cluster Theory
Michael Porter 1990
An observation that 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
This is an explanation of success of certain regions ie Silicon Valley, Sassuolo Italy, Geneva
Logistics Cluster Theory
Yossi Sheffi 2012
An extension of Porter’s Cluster Theory: some locations can develop into economic powerhouses bc they combine in one area multiple providers of logistical services
EX: Singapore, Memphis, Rotterdam, Zaragoza
