Expert answer:BUS 4480 Week 4 Trade
Solved by verified expert:Please choose ONE of the five topics below and provide a 1-2 page discussion. Support your stance with information in the reading material and one peer reviewed academic journal article.In text reference and references are required. Participate in the Weekly Discussion Forum: Choose ONE Topic In your opinion, is free trade fair? Discuss and support your stance. Why is it necessary for the government to intervene in international trade? Mercantilism is a bankrupt theory that has no place in the modern world. Discuss. Do you think the governments should consider human rights when granting preferential trading rights to countries? What are the arguments for and against taking such a position? Free style-Discuss any current events topic that is related to the concepts and principles in Chapter 6 & 7. Freestyle–Choose any hot topic in the news (current events) and relate it to concepts and principles studied in this week’s chapter reading assignment.
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Global Business Today 10e
by Charles W.L. Hill
and G. Tomas M. Hult
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Source: © Stephen Morton/Bloomberg/Getty Images
The Global Trade and Investment Environment
Chapter 6: International Trade Theory
Learning Objectives
LO 6-1 Understand why nations trade with each other.
LO 6-2 Summarize the different theories explaining trade flows
between nations.
LO 6-3 Recognize why many economists believe that
unrestricted free trade between
nations will raise the
economic welfare of
countries that participate in a free
trade
system.
LO 6-4 Explain the arguments of those who maintain that
government can play a proactive role in
promoting
national competitive
advantage in certain industries.
LO 6-5 Understand the important implications that international
trade theory holds for management practice.
Opening Case:
The Trans Pacific Partnership
Free trade deal between 12 countries that account for 36% of
world’s GDP and 26% of world trade
Many U.S. politicians criticized partnership – Obama called it
of major importance
TPP will eliminate/reduce 18,000 tariffs, taxes, and nontariff
barriers
U.S. agriculture will benefit
Some U.S. companies urged Congress to reject the deal
✓ Ford Motors
✓ Labor unions
✓ Drug companies
Introduction
Economists argue that free trade stimulates
economic growth and raising the standard of living
Many theories explain why free trade is beneficial
An Overview of Trade Theory 1 of 5
Free trade refers to a situation where a government
does not attempt to influence through quotas or duties
what its citizens can buy from another country or what
they can produce and sell to another country
• Mercantilism (16th and 17th centuries) encouraged exports
and discouraged imports
• Adam Smith (1776) promoted unrestricted free trade
• David Ricardo (19th century) built on Smith ideas
• Eli Heckscher and Bertil Ohlin (20th century ) refined
Ricardo’s work
An Overview of Trade Theory 2 of 5
The Benefits of Trade
• Specialize in the manufacture and export of products that
can be produced most efficiently in that country
• Import products that can be produced more efficiently in
other countries
• Gains arise because international trade allows a country to
specialize in the manufacture and export of products
Did You Know?
Did you know that sugar
prices in the United States
are much higher than sugar
prices in the rest of the
world?
Click to play
video
An Overview of Trade Theory 3 of 5
The Pattern of International Trade
✓ Ricardo’s theory of comparative advantage
Trade patterns reflect differences in labor productivity
✓ Heckscher and Ohlin
Trade reflects the interplay between the proportions in
which the factors of production are available in different
countries and the proportions in which they are need for
producing particular goods
✓ Ray Vernon
Trade patterns reflect a product’s life cycle
An Overview of Trade Theory 4 of 5
The Pattern of International Trade continued
✓ Paul Krugman’s new trade theory
The world market can only support a limited number of firms in
some industries
Trade will skew toward those countries that have firms that were
able to capture first mover advantages
✓ Michael Porter’s theory
Country factors explain a nation’s dominance in the production
and export of certain products
An Overview of Trade Theory 5 of 5
Trade Theory and Government Policy
✓ Mercantilism makes a case for government involvement in
promoting exports and limiting imports
✓ Smith, Ricardo, and Heckscher-Ohlin promote unrestricted
free trade
✓ New trade theory and Porter justify limited and selective
government intervention to support the development of
certain export-oriented industries
Mercantilism
Mercantilism (mid-16th century): it is in a country’s best
interest to maintain a trade surplus – to export more
than it imports
✓ Advocated government intervention to achieve a surplus in
the balance of trade
✓ Viewed trade as a zero-sum game: one in which a gain by
one country results in a loss by another
Absolute Advantage
Smith (1776) – countries differ in their ability to
produce goods efficiently
A country has an absolute advantage in the
production of a product when it is more efficient
than any other country in producing it
According to Smith
✓ Trade is not a zero-sum game
✓ Countries should specialize in the production of goods for
which they have an absolute advantage and then trade
these goods for the goods produced by other countries
Figure 6.1 The Theory of Absolute Advantage
Table 6.1 Absolute Advantage and the Gains from Trade
Resources Required to Produce 1 Ton of Cocoa and Rice
Cocoa
Rice
Ghana
10
20
South Korea
40
10
Production and Consumption Without Trade
Ghana
10
5
South Korea
2.5
10
Total Production
12.5
15
Production with Specialization
Ghana
20
0
South Korea
0
20
Total Production
20
20
Consumption after Ghana Trades 6 Tons of Cocoa for 6 Tons of South Korean Rice
Ghana
14
6
South Korea
6
14
Increase in Consumption as a Result of Specialization and Trade
Ghana
4
1
South Korea
3.5
4
Comparative Advantage 1 of 7
Ricardo (1817): What happens when one country has an
absolute advantage in the production of all goods?
Proposed the theory of comparative advantage
✓ A country should specialize in the production of those goods that it
produces most efficiently and buy the goods that it produces less
efficiently from other countries
Figure 6.2 The Theory of Comparative Advantage
Comparative Advantage 2 of 7
The Gains from Trade
The theory of comparative advantage – trade is a positive sum
game in which all gain
✓ Potential world production is greater with unrestricted free trade than
it is with restricted trade
✓ Provides a strong rationale for encouraging free trade
Table 6.2 Comparative Advantage and the Gains from Trade
Resources Required to Produce 1 Ton of Cocoa and Rice
Cocoa
Rice
Ghana
10
13.33
South Korea
40
20
Production and Consumption Without Trade
Ghana
10
7.5
South Korea
2.5
5
Total Production
12.5
12.5
Production with Specialization
Ghana
15
3.75
South Korea
0
10
Total Production
15
13.75
Consumption after Ghana Trades 4 Tons of Cocoa for 4 Tons of South Korean Rice
Ghana
11
7.75
South Korea
4
6
Increase in Consumption as a Result of Specialization and Trade
Ghana
1
.25
South Korea
1.5
1
Comparative Advantage 3 of 7
Qualifications and Assumptions
1.
2.
3.
4.
Only two countries and two goods
Zero transportation costs
Similar prices and values
Resources are mobile between goods within countries,
but not across countries
5. Constant returns to scale
6. Fixed stocks of resources
7. No effects on income distribution within countries
Comparative Advantage 4 of 7
Extensions of the Ricardian Model
✓ Suppose the following assumptions are relaxed
1. Resources move freely from the production of one good to another
within a country
2. There are constant returns to scale
3. Trade does not change a country’s stock of resources or the
efficiency with which those resources are utilized
Comparative Advantage 5 of 7
Extensions of the Ricardian Model continued
✓ Immobile Resources
Resources do not always move freely from one economic activity
to another
Governments may help retrain displaced workers
✓ Diminishing Returns
The simple model assumes constant returns to specialization: the
units of resources required to produce a good are assumed to
remain constant
An assumption of diminishing returns is more realistic since not all
resources are of the same quality and different goods use
resources in different proportions
Comparative Advantage 6 of 7
Extensions of the Ricardian Model continued
✓ Dynamic Effects and Economic Growth
Trade might increase a country’s stock of resources as increased
supplies become available from abroad
Free trade might increase the efficiency of resource utilization, and
free up resources for other uses
Figure 6.4 The Influence of Free Trade on PPF
Comparative Advantage 7 of 7
Extensions of the Ricardian Model continued
✓ The Samuelson Critique
Dynamic gains can lead to less beneficial outcomes
Free trade has historically benefitted rich counties
✓ Evidence for the Link between Trade and Growth
Countries that are open to trade have higher growth rates than
countries that close their economies to trade
Higher growth rates raise income levels and living standards
Heckscher-Ohlin Theory 1 of 2
Heckscher and Ohlin: Comparative advantage reflects
differences in national factor endowments: the extent to
which a country is endowed with resources such as land,
labor, and capital
✓ This theory has commonsense appeal
Export goods that make intensive use of those factors that are
locally abundant
Import goods that make intensive use of factors that are locally
scarce
Heckscher-Ohlin Theory 2 of 2
The Leontief Paradox
✓ Leontief (1953): Since the U.S. was relatively abundant in
capital, it would export capital intensive goods and import
labor-intensive goods
Leontief found that U.S. exports were less capital intensive than
U.S. imports
✓ Possible explanations
The U.S. has a special advantage in producing products made with
innovative technologies that are less capital intensive
Differences in technology lead to differences in productivity which
then drives trade patterns
Should Factor Endowments or Productivity
Drive Trade?
Ricardo’s theory of trade suggests that it makes sense for a country to
specialize in production of those products that it produces most efficiently
and to buy the products that it produces less efficiently from other countries,
even if this means that the country is buying products that in reality it could
produce more efficiently itself. This means that Ricardo showed that a
country can derive advantages by trade even though it has an absolute
advantage in producing all products. The Heckscher-Ohlin theory of trade
suggests that comparative advantage for a country arises from differences in
national factor endowments (i.e., the extent to which a country is endowed
with such resources as land, labor, and capital). Ricardo’s argument focused
on relative productivity, while Heckscher-Ohlin’s argument focused on having
important resources. If you can only have one of the two— better relative
productivity or lots of resources such as land, labor, and capital—which
would you prefer, any why?
The Product Life Cycle Theory 1 of 2
Vernon (mid-1960s ) proposed product life-cycle
theory
✓ As products mature both the location of sales and the
optimal production location will change affecting the flow
and direction of trade
At the time, the wealth and size of the U.S. market gave a strong
incentive to U.S. firms to develop new products
The Product Life Cycle Theory 2 of 2
Product Life-Cycle Theory in the 21st Century
✓ The product life cycle may not be as relevant today
Many products are now introduced in Japan or South Korea
Many new products are also introduced simultaneously into the
U.S., Europe, and Asia
➢ Firms use globally dispersed production from the start
New Trade Theory 1 of 4
Trade can increase the variety of goods available and
decrease the average cost of those goods because of
economies of scale: unit cost reductions associated
with a large scale of output
When the output required to attain economies of
scale represents a significant proportion of total
world demand, the global market may only be able
to support a small number of firms
New Trade Theory 2 of 4
Increasing Product Variety and Reducing Costs
✓ Without trade
A small nation may not be able to support the demand
necessary for producers to realize required economies of
scale, and so certain products may not be produced
✓ With trade
A nation may be able to specialize in producing a narrower
range of products and then buy the goods that it does not
make from other countries
Each nation then simultaneously increases the variety of
goods available to its consumers and lowers the costs of
those goods
New Trade Theory 3 of 4
Economies of Scale, First-Mover Advantages, and the
Pattern of Trade
✓ Firms with first mover advantages (the economic and
strategic advantages that accrue to many entrants into an
industry) will develop economies of scale and create
barriers to entry for other firms
The pattern of trade we observe in the world economy may
be the result of first mover advantages and economies of
scale
New Trade Theory 4 of 4
Implications of New Trade Theory
✓ Nations may benefit from trade even when they do not
differ in resource endowments or technology
✓ A country may predominate in the export of a good simply
because it was lucky enough to have one or more firms
among the first to produce that good
✓ New trade theory at a variance with Heckscher-Ohlin
theory
✓ New trade theory useful in explaining trade patterns
New trade theory provides an economic rationale for
a proactive trade policy that is at variance with other
free trade theories
National Competitive Advantage: Porter’s Diamond 1 of 6
Porter believed existing theories of international
trade only told part of the story
Wanted to explain why a nation achieves
international success in a particular industry
Four attributes of a nation that shape the
environment in which local firms compete – Porter’s
Diamond
Chance and government can influence the national
diamond
Figure 6.5 The Determinants of National Competitive
Advantage: Porter’s Diamond
Source: Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990; republished with a new introduction, 1998), p. 72
National Competitive Advantage: Porter’s Diamond 2 of 6
Factor Endowments
✓ Hierarchies among factors
Basic: natural resources, climate, location, demographics
Advanced: communication infrastructure, skilled labor,
technological know-how
Advanced factors more significant for competitive advantage
Basic factors can provide an initial advantage that is
extended by investment in advanced factors
National Competitive Advantage: Porter’s Diamond 3 of 6
Demand Conditions
✓ The nature of home demand for an industry’s product or
service
✓ Influence the development of capabilities
Sophisticated and demanding customers pressure
firms to be more competitive and to produce high
quality, innovative products
National Competitive Advantage: Porter’s Diamond 4 of 6
Related and supporting industries
✓ The presence of supplier industries and related industries
that are internationally competitive
✓ Investing in these industries can spill over and contribute
to success in other industries
Successful industries tend to be grouped in clusters
in countries which then prompts knowledge flows
between firms
National Competitive Advantage: Porter’s Diamond 5 of 6
Firm strategy, Structure, and Rivalry
✓ Different nations are characterized by different
management ideologies which either help them or do not
help them build national competitive advantage
✓ There is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive
advantage in an industry
National Competitive Advantage: Porter’s Diamond 6 of 6
Evaluating Porter’s Theory
✓ If Porter is correct, his model should predict the pattern of
international trade in the real world
• Countries should export products from industries where the
diamond is favorable
• Countries should import products from areas where the diamond
is not favorable
✓ So, far there has been little empirical testing of the theory
How Important is Education?
Both the Heckscher-Ohlin and Michael Porter theories of trade focus to a large degree
on “factor endowments.” The Heckscher-Ohlin theory specifies endowments such as
resources as land, labor, and capital as being critical, while the Porter theory
recognizes hierarchies among these factor endowments. Education- related
endowments such as skilled labor, research facilities, and technological know-how are
what Porter calls “advanced factors.” A long-standing argument across multiple
governmental organizations, research studies, and prominent individuals is that
education drives economic, social, and environmental well-being of countries. The
extension of this argument is that education helps people become better citizens of a
country. But, what do you think education does to a customer’s product needs and
wants? Do they want more foreign products if they have more years of education
(e.g., graduate degree) compared with fewer years of education (e.g., high school)?
Or does education not influence the type of products bought by customers (i.e.,
foreign-made or home-country made)?
Sources: T. Healy and S. Cote, “The Well-Being of Nations: The Role of Human and Social Capital,” Organisation for Economic
Cooperation and Development (OECD) (2001); S. Samuel, “Importance of Education in a Country’s Progress,”
HowToLearn.com, March 13, 2013; K. Matsui, “The Economic Benefits of Educating Women,” Bloomberg Businessweek,
March 7, 2013.
Focus on Managerial Implications
LOCATION, FIRST-MOVER ADVANTAGES, AND
GOVERNMENT POLICY
There are at least three main implications for
international businesses
1. Location
This is an underlying thought in most of the theories
2. First-mover advantages
Particularly true in industries where global market can profitably
support limited number of firms
3. Government policy
Businesses can exert a strong influence on government trade
policy
Summary
In this chapter we have
✓ Understood why nations trade with each other.
✓ Summarized the different theories explaining trade flows
between nations.
✓ Recognized why many economists believe that
unrestricted free trade between nations will raise the
economic welfare of countries that participate in a free
trade system.
✓ Explained the arguments of those who maintain that
government can play a proactive role in promoting
national competitive advantage in certain industries.
✓ Understood the important implications that international
trade theory holds for business practice.
Global Business Today 10e
by Charles W.L. Hill
and G. Tomas M. Hult
©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Source: © Si wei/AP Images
The Global Trade and Investment Environment
Chapter 7: Government Policy and International Trade
Learning Objectives
LO 7-1 Identify the policy instruments used by governments to
influence international trade flows.
LO 7-2 Understand why governments sometimes intervene in
international trade.
LO 7-3 Summarize and explain the arguments against strategic
trade policy.
LO 7-4 Describe the development of the world trading system
and the current trade issue.
LO 7-5 Explain the implications for managers of developments in
the world trading system.
Opening Case:
Is China Dumping Its Excess Steel Production?
Produced half the world’s output of steel by 2015
Bottom fell out of Chinese domestic market for steel
Need to export unwanted product – even at a loss
Low-priced exports impacting global steelmakers
negatively
U.S. producers claim China is dumping product
U.S. Commerce Department implemented duties
European Union considering similar measures
Introduction
Free trade refers to a situation where a government
does not attempt to restrict …
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