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Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-1
Chapter 6
International Trade
and Factor Mobility
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-2
Learning Objectives
 To understand theories of i...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-3
Introduction
Learning Objective 1:
To understand ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-4
Laissez-Faire vs. Intervention
 Trade theory hel...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-5
Laissez-Faire vs. Intervention
International Oper...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-6
Theories of Trade Patterns
 Theories explore
 c...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-7
Trade Theories and Business
What Major Trade Theo...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-8
Factor Mobility Theory
 A country’s competitiven...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-9
Interventionist Theories
 Theories that support ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-10
Mercantilism
 Mercantilism countries should exp...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-11
Neomercantilism
 Neomercantilism run an export ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-12
Free Trade Theories
 Two theories that support ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-13
Theory of Absolute Advantage
 Theory of absolut...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-14
Theory of Absolute Advantage
Production Possibil...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-15
Theory of Comparative Advantage
 Theory of comp...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-16
Theory of Comparative Advantage
Production Possi...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-17
Theories of Specialization:
Assumptions and Limi...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-18
Theories of Specialization:
Assumptions and Limi...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-19
Trade Pattern Theories
Learning Objective 3:
To ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-20
How Much Does A Country Trade?
 Theory of count...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-21
What Does A Country Trade?
 Factor proportions ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-22
What Does A Country Trade?
Worldwide Trade by Ma...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-23
Choosing Trading Partners
 Country similarity t...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-24
The Statics and
Dynamics of Trade
Learning Objec...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-25
Product Life Cycle Theory
 The product life cyc...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-26
Product Life Cycle Theory
Life Cycle of the Inte...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-27
Diamond of National Advantage
 The diamond of n...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-28
Diamond of National Advantage
The Diamond of Nat...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-29
Factor Mobility Theory
Learning Objective 5:
To ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-30
Why Production Factors Move
 Factor mobility th...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-31
Effects of Factor Movements
 Factor movements a...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-32
Trade and Factor Mobility
Learning Objective 6:
...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-33
Trade and Factor Mobility
 There are pressures ...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-34
Trade and Factor Mobility
Unrestricted Trade, Fa...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-35
Trade and Factor Mobility
 Factor mobility thro...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-36
In What Direction
Will Trade Winds Blow?
 Issue...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-37
In What Direction
Will Trade Winds Blow?
 Monit...
Copyright © 2013 Pearson Education, Inc.
publishing as Prentice Hall
6-38
All rights reserved. No part of this publication...
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06 International Trade and Factor Mobility

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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

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06 International Trade and Factor Mobility

  1. 1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-1 Chapter 6 International Trade and Factor Mobility
  2. 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
  3. 3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-3 Introduction Learning Objective 1: To understand theories of international trade
  4. 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
  5. 5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-5 Laissez-Faire vs. Intervention International Operations and Economic Connections
  6. 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
  7. 7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-7 Trade Theories and Business What Major Trade Theories Do and Don’t Discuss: A Checklist
  8. 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. 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. 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
  11. 11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-11 Neomercantilism  Neomercantilism run an export surplus to achieve social or political objectives
  12. 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. 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
  14. 14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-14 Theory of Absolute Advantage Production Possibilities under Conditions of Absolute Advantage
  15. 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
  16. 16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-16 Theory of Comparative Advantage Production Possibilities under Conditions of Comparative Advantage
  17. 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. 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
  19. 19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-19 Trade Pattern Theories Learning Objective 3: To identify factors affecting national trade patterns
  20. 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. 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
  22. 22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-22 What Does A Country Trade? Worldwide Trade by Major Sectors
  23. 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
  24. 24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-24 The Statics and Dynamics of Trade Learning Objective 4: To explain why a country’s export capabilities are dynamic
  25. 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
  26. 26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-26 Product Life Cycle Theory Life Cycle of the International Product
  27. 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
  28. 28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-28 Diamond of National Advantage The Diamond of National Competitive Advantage
  29. 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. 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. 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. 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. 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
  34. 34. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6-34 Trade and Factor Mobility Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes
  35. 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. 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. 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. 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.

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