06 International Trade and Factor Mobility

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-2 Learning Objectives  To understand theories of international trade  To explain how free trade improves global efficiency  To identify factors affecting national trade patterns  To explain why a country’s export capabilities are dynamic  To understand why production factors, especially labor and capital, move internationally  To explain the relationship between foreign trade and international factor mobility

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-4 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

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-6 Theories of Trade Patterns  Theories explore  country size  factor proportions  country similarity  Theories explore trade competitiveness  Product life cycle  Diamond of national advantage

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-8 Factor Mobility Theory  A country’s competitiveness depends on  quality and quantity of production factors  Land  Labor  Capital

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-9 Interventionist Theories  Theories that support government intervention in the flow of trade  Mercantilism  Neomercantilism

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-10 Mercantilism  Mercantilism countries should export more than they import  Maintain a favorable balance of trade  trade surplus  Avoid an unfavorable balance of trade  trade deficit

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-12 Free Trade Theories  Two theories that support free trade  Absolute advantage theory  Comparative advantage theory  Market forces should determine trade  specialization

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-13 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

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-15 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  Consider  comparative advantage  absolute disadvantage

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-17 Theories of Specialization: Assumptions and Limitations Learning Objective 2: To explain how free trade improves global efficiency

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-18 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

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-20 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

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-21 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

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-23 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

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-25 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

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-27 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

29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-29 Factor Mobility Theory Learning Objective 5: To understand why production factors, especially labor and capital, move internationally

30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-30 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

31. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-31 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

32. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-32 Trade and Factor Mobility Learning Objective 6: To explain the relationship between foreign trade and international factor mobility

33. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-33 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

35. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-35 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

36. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-36 In What Direction Will Trade Winds Blow?  Issues to consider 1. Displacement of jobs as developed countries shift production to more rapidly developing countries 2. Relationships among land, labor, and capital will continue to evolve 3. Continued trend toward a more finely tuned specialization of production among countries

37. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-37 In What Direction Will Trade Winds Blow?  Monitor  As economies grow, efficiencies of multiple production locations also grow because they can all gain sufficient economies of scale  Small-scale production methods may enable countries to produce many goods efficiently for their own consumption  Output from 3D printers  Services are growing more rapidly than products as a portion of production and consumption within developed countries

38. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-38 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

06 International Trade and Factor Mobility

Brent Weeks

06 International Trade and Factor Mobility