International Business Chapter 5 - international trade -summary

International trade volume and world output.

International trade is the purchase, sale, or exchange of goods and services across national borders. International trade provides a country's people with a greater choice of goods and services and is an important engine for job creation in many countries. Most of world merchandise trade is comprised of trade and manufactured goods. Service exports make up roughly 20% of total world trade annually. Slower world economic outputs slows the volume of international trade, and higher output spurs greater trade. Also, trade has consistently grown faster than output.

The pattern of international trade in merchandise is dominated by flows among the high and come economies of the world (60%), followed by trade among high income countries and low and middle income nations (34%. Trade among the low and middle income nations is just 6% of the total. A large amount of trade in Western Europe is interregional, meaning that it largely occurs between Western European nations.

The impacts of mercantilism

the trade theory that nation should accumulate financial wealth, usually the form of gold, by encouraging exports and discouraging imports is called mercantilism. Nation-states in Europe followed this economic philosophy from about 1500 to the late 1700s.

Countries implemented mercantilism by doing three things:

1. first, they increased their wealth by maintaining a trade surplus -- the condition that results when the value of the nation's exports is greater than the value of its imports
2. second, national governments actively intervened in international trade to maintain a trade surplus
3. third, mercantilist nations required less-developed territories (colonies) around the world to serve as sources of inexpensive raw materials, and as markets for higher-priced finished goods.

Mercantilism assumes that a nation increases its wealth only at the expense of other nations -- a zero-sum game.

Absolute advantage and comparative advantage

the ability of a nation to produce a good more efficiently than any other nation is called an absolute advantage. According to this theory, international trade should be allowed to flow according to market forces. A country can concentrate on producing the goods in which it holds an absolute advantage. And then trade with other nations to obtain the visit needs, but does not produce. Because there are games to be had by both countries party to an exchange, international trade is shared to be a positive-sum game. The theory measures a nation's wealth by the living standards of its people.

A nation holds a comparative advantage in the production of a good when it is unable to produce the good more efficiently than other nations, but can produce it more efficiently than they can any other good. As a result, trade is still beneficial. Even if one country is less efficient in the production of two goods, so long as it is less inefficient and the production of one of the goods.

Factor proportions and international product lifecycle theories.

The factor proportions theory states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources that are in short supply. The factor proportions. Predicts that a country will specialize in products that require labor. If it's cost is low relative to the cost of land in capital. Alternatively, a country will specialize in products that require lien and capital equipment. If their cost is low relative to the cost of labor. The apparent paradox between predictions of the theory and actual trade flows is called the Leontief paradox.

The international product life cycle theory says that a company will begin exporting its product, and later undertake foreign direct investment as the product news through its life cycle. In the new-product stage production volume is low in remains based in the home country. And the maturing product stage, the company introduces production facilities and the countries with the highest in the end. And the standardized product stage competition forces of aggressive search for low-cost production bases in developing nations to supply a worldwide market.

New trade and national competitive advantage theories.

The new trade theory argues that as a company increases. The extent to which it specializes in the production of a particular good, output rises because of the gains in efficiency. As specialization in output increase, companies can realize economies of scale, thereby pushing the unit costs of production lower. The presence of large economies of scale can allow a firm to gain a first mover advantage -- the economic and strategic advantage gained by being the first company to enter an industry.

National competitive advantage there he states that a nations competitiveness in an industry (and, therefore, trade flows) depends on the capacity of the industry to innovate and upgrade.

The Porter diamond identifies four elements that form the basis of national competitiveness:

1. factor conditions, including the skill levels of different segments of the workforce and the quality of the technology infrastructure
2. demand conditions, such as a sophisticated domestic market
3. related and supporting industries that spring up and form clusters of related economic activities
4. firm strategy, structure, and rivalry conditions that are present in an industry.

Finally, the actions of governments and the occurrence of chance of vents can also affect the competitiveness of a nations company.