Chapter 6 Flashcards
International Trade and Factor Mobility Theory
Trade theory helps government policymakers and firm manager focus on these questions:
- What products should we import & export?
- How much should we trade?
- With whom should we trade?
Some trade theories prescribe that
government should influence trade patterns; others propose a laissez-faire treatment for free trade
According to mercantilism
countries should export more than they import
Favourable balance of trade (trade surplus)
indicates that a country is exporting more than it imports
Unfavourable balance of trade (trade deficit)
indicates a country is importing more than it exports
Neomercantilism
is the running of a favourable balance of trade to achieve some social or political objective
Running a favourable balance of trade
is not necessarily beneficial
A country that practices neomercantilism
attempts to run an export surplus to achieve a social or political objective
Absolute advantage
holds that different countries produce different things more efficiently than others and that consumers should not have to buy domestically produced goods when they can buy them more cheaply abroad
According to Adam Smith
a country’s wealth is based on available goods and services for its residents rather than on gold
Specialization increases efficiency because
- labour skills improve
- less time is lost by not switching production
- it incentivizes better working methods
Natural advantage
considers climate, natural resources, and labour force availability
Acquired advantage
occurs through either product of process technology
Free trade will bring
- specialization
- higher global output
Gains from trade will occur
even in a country that has absolute advantage in all products, because the country must give up less efficient output to produce more efficient output
Full employment is
not necessarily a valid assumption of absolute and comparative advantage
Countries’ goals
may not be limited to economic efficiency
Countries’ absolute and comparative advantages
can change
Free trade advantages
apply to services as well as physical products
Neither domestic labour mobility nor international labour immobility
is as great as implied by the free trade theories
Theory of country size
countries with larger land masses usually depend less on trade than smaller ones
Bigger countries (in terms of land mass) differ in several ways from smaller countries. They
- tend to export a smaller portion of output and import a smaller part of consumption
- have higher average transport costs for foreign trade
Larger economies
are the biggest traders because they produce and consume more
Factor proportions theory
differences in countries’ proportional endowments of labour, land, and capital explain differences in these endowments’ costs
According to the factor proportions theory
countries have their best trade advantage when depending on their relatively abundant production factors
Production factors, such as land and labour
are not homogeneous
Companies may substitute
capital for labour, depending on the cost of each
Countries with bigger markets
depend more on producing products requiring larger production runs
Most new products
originate in developed countries
Developed countries trade primarily with each other because they
- produce and consume more
- emphasize technical breakthroughs in different industrial sectors
Product differentiation
causes countries to conduct two-way trade in seemingly similar products
Trading partners are affected by
- cultural similarity
- political relations between countries
- distance
Product life cycle (PLC) theory of trade
1) introduction
2) growth
3) maturity
4) decline
According to the PLC theory of trade
the production location for many products moves from one country to another depending on the stage in the product’s life cycle
The introduction stage in PLC is marked by
- innovation in response to observed need
- exporting by the innovative country
- evolving product characteristics
Growth in PLC is characterized by
- increases in exports by the innovating country
- more competition
- increased capital intensity
- some foreign production
Maturity in PLC is characterized by
- a decline in exports from the innovating country
- more product standardization
- more capital intensity
- increased competitiveness of price
- production start-ups in emerging economies
Decline in PLC is characterized by
- a concentration of production in developing countries
- an innovating country becoming a net importer
Not all products
conform to the dynamics of the PLC
Diamond of national competitive advantage
a theory showing 4 features as important for competitive superiority:
1) demand conditions
2) factor conditions
3) related & supporting industries
4) firm strategy, structure & rivalry
According to the diamond of national competitive advantage theory
companies development and maintenance of internationally competitive products depends on favourable
- demand conditions
- factor conditions
- related and supporting industries
- firm strategy, structure and rivalry
Domestic existence of all conditions
- does not guarantee an industry will develop
- is not necessary with globalization
Factor mobility theory
focuses on why production factors move, the effects of that movement on transforming countries’ factor endowments, and the impact of international factor mobility on trade
People and capital move internationally to
- gain more income
- flee adverse political situations
Expatriate
a person who lives outside their native country
Factor movements
alter factor endowments
Brain drain
countries lose potential productive resources when educated people leave
There are pressures for the most abundant factors
to move to areas of scarcity
Factor mobility through foreign investment often
stimulates trade because of
- the need for components
- the parent company’s ability to sell complementary products
- the need for equipment for subsidiaries
