International Trade and Factor-Mobility Theory

1. Copyright © 2015 Pearson Education, Inc. 5-1
Chapter 3
International Trade
and Factor-Mobility
Theory

2. Copyright © 2015 Pearson Education, Inc. 5-2
Introduction
Learning Objective:
Understand how different approaches to
international trade theories help policy
makers achieve economic objectives

3. Copyright © 2015 Pearson Education, Inc. 5-3
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

4. Copyright © 2015 Pearson Education, Inc. 5-4
Laissez-Faire vs. Intervention
International Operations and Economic Connections

5. Copyright © 2015 Pearson Education, Inc. 5-5
Theories of Trade Patterns
 Theories explore
 country size
 factor proportions
 country similarity
 Theories explore trade competitiveness
 Product life cycle
 Diamond of national advantage

6. Copyright © 2015 Pearson Education, Inc. 5-6
Trade Theories and Business
What Major Trade Theories Do and Don’t Discuss: A Checklist

7. Copyright © 2015 Pearson Education, Inc. 5-7
Factor Mobility Theory
 A country’s competitiveness depends on
 quality and quantity of production factors
 Land
 Labor
 Capital

8. Copyright © 2015 Pearson Education, Inc. 5-8
Interventionist Theories
 Theories that support government
intervention in the flow of trade
 Mercantilism
 Neomercantilism

9. Copyright © 2015 Pearson Education, Inc. 5-9
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

10. Copyright © 2015 Pearson Education, Inc. 5-10
Neomercantilism
 Neomercantilism run an export surplus
to achieve social or political objectives

11. Copyright © 2015 Pearson Education, Inc. 5-11
Free Trade Theories
 Two theories that support free trade
 Absolute advantage theory
 Comparative advantage theory
 Market forces should determine trade
 specialization

12. Copyright © 2015 Pearson Education, Inc. 5-12
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

13. Copyright © 2015 Pearson Education, Inc. 5-13
Trade Pattern Theories
Learning Objective:
Distinguish factors affecting national trade
patterns

14. Copyright © 2015 Pearson Education, Inc. 5-14
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

15. Copyright © 2015 Pearson Education, Inc. 5-15
What Types of Products 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

16. Copyright © 2015 Pearson Education, Inc. 5-16
What Does A Country Trade?
Worldwide Trade by Major Sectors

17. Copyright © 2015 Pearson Education, Inc. 5-17
With Whom Do Countries Trade?
 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

18. Copyright © 2015 Pearson Education, Inc. 5-18
The Statics and
Dynamics of Trade
Learning Objective:
Recognize why a country’s export
capabilities are dynamic

19. Copyright © 2015 Pearson Education, Inc. 5-19
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

20. Copyright © 2015 Pearson Education, Inc. 5-20
Product Life Cycle Theory
Life Cycle of the International Product

21. Copyright © 2015 Pearson Education, Inc. 5-21
Diamond of National Advantage
 The diamond of national advantage
 Four conditions are important for gaining and
maintaining competitive superiority
 Factor conditions
 Demand conditions
 Related and supporting industries
 Firm strategy, structure, and rivalry

22. Copyright © 2015 Pearson Education, Inc. 5-22
Diamond of National Advantage
The Diamond of National Competitive Advantage

23. Copyright © 2015 Pearson Education, Inc. 5-23
Factor Mobility Theory
Learning Objective:
Detect why production factors, especially
labor and capital, move internationally

24. Copyright © 2015 Pearson Education, Inc. 5-24
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

25. Copyright © 2015 Pearson Education, Inc. 5-25
Trade and Factor Mobility
Learning Objective:
Describe the relationship between foreign
trade and international factor mobility

26. Copyright © 2015 Pearson Education, Inc. 5-26
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

27. Copyright © 2015 Pearson Education, Inc. 5-27
Trade and Factor Mobility
Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes

28. Copyright © 2015 Pearson Education, Inc. 5-28
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