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Global Business Trading 
Internationally
WHY DO NATIONS TRADE? 
In general, nations trade in order to achieve 
some benefit. 
Typically, firms within nations are trading 
internationally, although governments sometimes 
engage in trade as well. 
? What benefits might nations or firms within 
nations receive by trading internationally?
KEY TERMS IN INTERNATIONAL 
TRADE 
Exporting 
Selling abroad 
Importing 
Buying from abroad 
Merchandise 
Tangible products being traded 
Service 
Intangible services being traded
INTERNATIONAL TRADE 
Trade deficit 
When a nation imports more than it 
exports 
Trade surplus 
When a nation exports more than it 
imports 
Balance of trade 
Whether a country has a trade surplus or 
deficit
INTERNATIONAL TRADE 
THEORIES 
Classical trade theories 
(1) Mercantilism 
(2) Absolute Advantage 
(3) Comparative advantage
INTERNATIONAL TRADE 
THEORIES 
Modern trade theories 
(1) Product Life Cycles 
(2) Strategic trade 
(3) “Diamond”
MERCANTILISM 
Theory of mercantilism 
Wealth of the world (measured in gold and silver) 
is fixed and that a nation that exports more and 
imports less would enjoy the net inflows of gold 
and silver and thus become richer; international 
trade is viewed as a zero-sum game 
Protectionism 
Idea that governments should actively protect 
domestic industries from imports and vigorously 
promote exports
ABSOLUTE ADVANTAGE 
Free trade 
Buying and selling of goods and services with 
little or no government intervention 
Theory of absolute advantage 
Nation gains by specializing in economic 
activities in which that nation has an 
absolute advantage 
Absolute advantage 
To be more efficient than anyone 
else in the production of any good or service
COMPARATIVE ADVANTAGE 
Nation A has an absolute advantage in 
production of all goods compared to 
Nation B 
As long as Nation B is not equally less 
efficient in the production of both 
goods, Nation B can still choose to 
specialize 
in the production of one good in which 
it has comparative advantage
COMPARATIVE ADVANTAGE 
Comparative advantage 
Relative (not absolute) advantage in 
one economic activity that one nation 
enjoys in comparison with other nations 
Opportunity cost 
Cost of pursuing one activity at the 
expense of another activity, given the 
alternatives
SOURCE OF ABSOLUTE AND 
COMPARATIVE ADVANTAGES 
Factor endowment 
Extent to which different countries 
possess various factors of production 
such as labor, land, and technology 
Factor endowment theory (Heckscher- 
Ohlin theory) 
Nations will develop comparative 
advantages based on their locally 
abundant factors
PRODUCT LIFE CYCLE 
Product life cycle theory 
The first dynamic theory to account for changes in the 
patterns of trade over time
STRATEGIC TRADE 
Strategic trade theory 
Strategic intervention by governments 
in certain industries can enhance 
their odds for international success 
First-mover advantage 
Advantages that first entrants enjoy 
and do not share with late entrants 
? What advantages might a firm enjoy by being 
the © first 2011 Cengage mover Learning. All into Rights Reserved. a market? 
May not be scanned, copied or duplicated, or posted to a 
publicly accessible website, in whole or in part.
NATIONAL COMPETITIVE 
ADVANTAGES OF 
INDUSTRIES 
Theory of national competitive 
advantage of industries (diamond 
theory) 
Certain industries (but not others) within 
a nation are competitive 
internationally
REALITIES OF INTERNATIONAL 
TRADE 
Tariff barrier 
Means of discouraging imports by placing 
a tariff (tax) on imported goods 
Import tariff 
Tax imposed a good brought in from 
another country 
Deadweight cost 
Net losses that occur when import tariffs 
are imposed
NONTARIFF BARRIERS (NTBs) 
Nontariff barrier (NTB) 
Discourages imports using means other than taxes on 
imported goods
NONTARIFF BARRIERS (NTBs) 
Import quota 
Restriction on the quantity of a good that can 
be brought into a country 
Voluntary export restraint (VER) 
Exporting countries voluntarily agree to restrict 
their exports 
Local content requirement 
Rules stipulating that a certain proportion of 
the value of the goods made in one 
country must originate from that country
NONTARIFF BARRIERS (NTBs) 
Administrative policy 
Bureaucratic rules that make it 
harder to import foreign goods 
Antidumping duty 
Costs levied on imports that have 
been “dumped” (selling below costs 
to “unfairly” drive domestic firms out of 
business
ARGUMENTS AGAINST 
FREE TRADE 
Infant industry argument 
Young domestic firms need government protection 
because they stand no chance of surviving and will 
be crushed by mature foreign rivals
ARGUMENTS AGAINST 
FREE TRADE 
Trade embargo 
Politically motivated trade sanctions against foreign 
countries to signal displeasure
CLASSICAL THEORIES VS NEW 
REALITIES 
Classical theorists and their modern-day disciples argue that 
the US and India trade by tapping into each other’s 
comparative advantage: 
India leverages its abundant, high-skill, and low-wage labor 
Americans will channel their energy and resources to higher 
skill, higher paying jobs 
Regrettably, certain Americans will lose jobs, but the nation 
as a whole benefits? 
? Are the theories still valid?

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Global Business Trading Internationally

  • 1. Global Business Trading Internationally
  • 2. WHY DO NATIONS TRADE? In general, nations trade in order to achieve some benefit. Typically, firms within nations are trading internationally, although governments sometimes engage in trade as well. ? What benefits might nations or firms within nations receive by trading internationally?
  • 3. KEY TERMS IN INTERNATIONAL TRADE Exporting Selling abroad Importing Buying from abroad Merchandise Tangible products being traded Service Intangible services being traded
  • 4.
  • 5.
  • 6. INTERNATIONAL TRADE Trade deficit When a nation imports more than it exports Trade surplus When a nation exports more than it imports Balance of trade Whether a country has a trade surplus or deficit
  • 7. INTERNATIONAL TRADE THEORIES Classical trade theories (1) Mercantilism (2) Absolute Advantage (3) Comparative advantage
  • 8. INTERNATIONAL TRADE THEORIES Modern trade theories (1) Product Life Cycles (2) Strategic trade (3) “Diamond”
  • 9. MERCANTILISM Theory of mercantilism Wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and imports less would enjoy the net inflows of gold and silver and thus become richer; international trade is viewed as a zero-sum game Protectionism Idea that governments should actively protect domestic industries from imports and vigorously promote exports
  • 10. ABSOLUTE ADVANTAGE Free trade Buying and selling of goods and services with little or no government intervention Theory of absolute advantage Nation gains by specializing in economic activities in which that nation has an absolute advantage Absolute advantage To be more efficient than anyone else in the production of any good or service
  • 11.
  • 12.
  • 13. COMPARATIVE ADVANTAGE Nation A has an absolute advantage in production of all goods compared to Nation B As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specialize in the production of one good in which it has comparative advantage
  • 14. COMPARATIVE ADVANTAGE Comparative advantage Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations Opportunity cost Cost of pursuing one activity at the expense of another activity, given the alternatives
  • 15.
  • 16.
  • 17. SOURCE OF ABSOLUTE AND COMPARATIVE ADVANTAGES Factor endowment Extent to which different countries possess various factors of production such as labor, land, and technology Factor endowment theory (Heckscher- Ohlin theory) Nations will develop comparative advantages based on their locally abundant factors
  • 18. PRODUCT LIFE CYCLE Product life cycle theory The first dynamic theory to account for changes in the patterns of trade over time
  • 19.
  • 20. STRATEGIC TRADE Strategic trade theory Strategic intervention by governments in certain industries can enhance their odds for international success First-mover advantage Advantages that first entrants enjoy and do not share with late entrants ? What advantages might a firm enjoy by being the © first 2011 Cengage mover Learning. All into Rights Reserved. a market? May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 21.
  • 22. NATIONAL COMPETITIVE ADVANTAGES OF INDUSTRIES Theory of national competitive advantage of industries (diamond theory) Certain industries (but not others) within a nation are competitive internationally
  • 23.
  • 24.
  • 25.
  • 26. REALITIES OF INTERNATIONAL TRADE Tariff barrier Means of discouraging imports by placing a tariff (tax) on imported goods Import tariff Tax imposed a good brought in from another country Deadweight cost Net losses that occur when import tariffs are imposed
  • 27.
  • 28. NONTARIFF BARRIERS (NTBs) Nontariff barrier (NTB) Discourages imports using means other than taxes on imported goods
  • 29. NONTARIFF BARRIERS (NTBs) Import quota Restriction on the quantity of a good that can be brought into a country Voluntary export restraint (VER) Exporting countries voluntarily agree to restrict their exports Local content requirement Rules stipulating that a certain proportion of the value of the goods made in one country must originate from that country
  • 30. NONTARIFF BARRIERS (NTBs) Administrative policy Bureaucratic rules that make it harder to import foreign goods Antidumping duty Costs levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business
  • 31. ARGUMENTS AGAINST FREE TRADE Infant industry argument Young domestic firms need government protection because they stand no chance of surviving and will be crushed by mature foreign rivals
  • 32. ARGUMENTS AGAINST FREE TRADE Trade embargo Politically motivated trade sanctions against foreign countries to signal displeasure
  • 33.
  • 34. CLASSICAL THEORIES VS NEW REALITIES Classical theorists and their modern-day disciples argue that the US and India trade by tapping into each other’s comparative advantage: India leverages its abundant, high-skill, and low-wage labor Americans will channel their energy and resources to higher skill, higher paying jobs Regrettably, certain Americans will lose jobs, but the nation as a whole benefits? ? Are the theories still valid?