Trade and Factor Mobility

Theory
Chapter Outline
1. Communicate the importance of economic analysis
2. Discuss the idea of economic freedom
3. Profile the characteristics of the types of economic
systems
4. Introduce the notion of state capitalism
5. Profile leading indicators of economic development,
performance, and potential
6. Profile the benefits and drawbacks of economic
growth
7. Profile leading global indices of economic
performance
Introduction
Trade theory helps managers and government
policymakers focus on these questions:
1. What products should we import and export?
2. How much should we trace?
3. With whom should we trade?
Laissez-Faire Versus Interventionist
Approaches to Exports and Imports
Laissez-Faire Approach
• Allows market forces to determine the trading relations
Free Trade Theories (absolute and comparative advantage)
• Take a complete laissez-faire approach because they
prescribe that governments should not intervene
directly to affect trade
Mercantilism and Neomercantilism
• Great deal of government intervention
International
Operations and
Economic Connections
To meet its international objectives, a
company must gear its strategy to
trading and transferring its means of
operation across borders––say, from
(Home) Country A to (Host) Country
B. Once this process has taken place,
the two countries are connected
economically.
Trade Theories and Business
Interventionist Theories
Mercantilism
• holds that a country’s wealth is measured by its holdings of
“treasure,” which usually means its gold
• export more than they import and, if successful, receive gold
from countries that run deficits
• to export more than they imported, governments restricted
imports and subsidized production that otherwise could not
compete in domestic or export markets
• favorable balance of trade (also called a trade surplus)
• unfavorable balance of trade (also known as a trade deficit)
Interventionist Theories (Cont’d)
Neomercantilism
• try to run favorable balances of trade in an attempt to achieve
some social or political objective
• aim for increased employment by setting economic policies
that encourage its companies to produce in excess of the
demand at home and send the surplus abroad
• maintain political influence in an area by sending more
merchandise there than it receives from it, such as a
government granting aid or loans to a foreign government to
use to purchase the granting country’s excess production
Free Trade Theories
Theory of Absolute Advantage
• holds that different countries produce some goods more
efficiently than others, and questions why the citizens of any
country should have to buy domestically produced goods
when they can buy them more cheaply from abroad
• unrestricted trade would lead a country to specialize in those
products that gave it a competitive advantage
• resources would shift to the efficient industries because it
could not compete in the inefficient ones
Free Trade Theories (Cont’d)
Theory of Absolute Advantage (continued…)
Specialization could increase efficiency:
• Labor could become more skilled by repeating the same tasks.
• Labor would not lose time in switching production from one
kind of product to another.
• Long production runs would provide incentives for developing
more effective working methods.
Free Trade Theories (Cont’d)
Theory of Absolute Advantage (continued…)
National Advantage
• creating a product or service comes from climatic conditions,
access to certain natural resources, or availability of certain
labor forces
• variations among countries in natural advantages also help
explain where certain manufactured or processed items might
best be produced, particularly if a company can reduce
transportation costs by processing an agricultural commodity
or natural resource prior to exporting
Free Trade Theories (Cont’d)
Theory of Absolute Advantage (continued…)
Acquired Advantage
• it enables a country to produce a unique product or one that is
easily distinguished from those of competitors
• an advantage in process technology is a country’s ability to
efficiently produce a homogeneous product (one not easily
distinguished from that of competitors)
• acquired advantage through technology has created new
products, displaced old ones, and altered trading-partner
relationships
Production
Possibilities under
Conditions of
Absolute Advantage
Free Trade Theories (Cont’d)
Theory of Comparative Advantage
• global efficiency gains may still result from trade if a country
specializes in what it can produce most efficiently—regardless
of other countries’ absolute advantage
1. Comparative Advantage by Analogy
2. Production Possibility
Production
Possibilities under
Conditions of
Comparative
Advantage
Free Trade Theories (Cont’d)
Theories of Specialization: Some Assumptions and
Limitations
• full employment is not a valid assumption of absolute and
comparative advantage
• countries’ goals may not be limited to economic efficiency
• division of gains
• transport costs
• statics and dynamics
• services
• production networks