The document discusses different theories of international trade and factor mobility. It describes theories that support free trade like absolute advantage and comparative advantage. It also covers interventionist theories like mercantilism that support government involvement in trade. Theories of trade patterns explore how factors like country size, differences in production factors, and country similarities affect trade. Theories like product life cycle and diamond of national advantage aim to explain why certain countries gain competitive advantages in different industries. Factor mobility theory examines why production factors like capital and labor move internationally and how this impacts trade.

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Chapter 3
International Trade
and Factor-Mobility
Theory

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Introduction
Learning Objective:
Understand how different approaches to
international trade theories help policy
makers achieve economic objectives

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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

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Laissez-Faire vs. Intervention
International Operations and Economic Connections

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Theories of Trade Patterns
 Theories explore
 country size
 factor proportions
 country similarity
 Theories explore trade competitiveness
 Product life cycle
 Diamond of national advantage

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Trade Theories and Business
What Major Trade Theories Do and Don’t Discuss: A Checklist

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Factor Mobility Theory
 A country’s competitiveness depends on
 quality and quantity of production factors
 Land
 Labor
 Capital

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Interventionist Theories
 Theories that support government
intervention in the flow of trade
 Mercantilism
 Neomercantilism

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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

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Neomercantilism
 Neomercantilism run an export surplus
to achieve social or political objectives

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Free Trade Theories
 Two theories that support free trade
 Absolute advantage theory
 Comparative advantage theory
 Market forces should determine trade
 specialization

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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

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Trade Pattern Theories
Learning Objective:
Distinguish factors affecting national trade
patterns

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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

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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

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What Does A Country Trade?
Worldwide Trade by Major Sectors

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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

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The Statics and
Dynamics of Trade
Learning Objective:
Recognize why a country’s export
capabilities are dynamic

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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

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Product Life Cycle Theory
Life Cycle of the International Product

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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

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Diamond of National Advantage
The Diamond of National Competitive Advantage

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Factor Mobility Theory
Learning Objective:
Detect why production factors, especially
labor and capital, move internationally

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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

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Trade and Factor Mobility
Learning Objective:
Describe the relationship between foreign
trade and international factor mobility

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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

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Trade and Factor Mobility
Unrestricted Trade, Factor Mobility, and the Cost of Tomatoes

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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