International

Business
Environments & Operations
14e 6
Chapter
International Trade and Factor Mobility
Daniels ● Radebaugh ● Sullivan

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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
 Intervention approach
 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 run an export surplus

to achieve social or political objectives
 Theories of Trade Patterns
 Theories explore
 country size
 factor proportions
 country similarity
 Theories explore trade competitiveness
 Product life cycle
 Diamond of national advantage
 Factor Mobility Theory
 A country’s competitiveness depends on
 quality and quantity of production factors
 Labor

 Capital
 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 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
 Comparative Advantage

 1. Which nation has an absolute advantage in producing CDs?

 2. Which nation has an absolute advantage in producing beef?

 3. Which nation has a comparative advantage in producing CDs?

 4. Which nation has a comparative advantage in producing beef?

 5. Should Japan specialize in CDs or beef?

 6. Should Canada specialize in CDs or beef?

 Comparative Advantage

 1. Which nation has an absolute advantage in producing CDs?

Neither country
 2. Which nation has an absolute advantage in producing beef?
Canada
 3. Which nation has a comparative advantage in producing CDs?
Japan
 4. Which nation has a comparative advantage in producing beef?
Canada
 5. Should Japan specialize in CDs or beef? CD’s
 6. Should Canada specialize in CDs or beef?
Beef
 Theories of Specialization:
Assumptions and Limitations
 Theories of specialization make
assumptions that may not be valid
 full employment
 economic efficiency
 division of gains
 two countries, two commodities
 transport costs
 statics and dynamics
 services
 production networks
 mobility
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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

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What 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

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 Choosing Trading Partners
 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

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 Product Life Cycle Theory
 The product life cycle theory
 the production location of certain
manufactured products shifts as they go
through their life cycle
 Four stages
 Introduction
 Growth
 Maturity
 Decline

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Product Life Cycle Theory
Life Cycle of the International Product

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Diamond of National Advantage
 The diamond of national advantage
 Four conditions are important for gaining and
maintaining competitive superiority
 Demand conditions

 Factor conditions

 Related and supporting industries

 Firm strategy, structure, and rivalry

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Diamond of National Advantage
The Diamond of National Competitive Advantage

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 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

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Effects of Factor Movements
 Factor movements alter factor
endowments
 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

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 Trade and Factor Mobility
 There are pressures for the most
abundant factors to move to areas of
scarcity
 The lowest costs occur when trade and
production factors are both mobile

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 Trade and Factor Mobility
 Factor mobility through foreign investment
often stimulates trade because of
 the need for components
 the parent’s ability to sell complimentary
products
 the need for equipment for subsidiaries

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