Chapter 3: Theories of International Trade and Investment

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Theories of International Trade and Investment

Chapter 3

International Trade Theory

  Mercantilism    Goals Effects on today Economic nationalism Theory of Absolute Advantage   Adam Smith Specialize

International Trade Theory

  Heckscher- Ohlin Theory of Factor Endowment      Countries export Countries import Assumptions   Perfect market Technology Leontief Paradox    U.s. is capital-intensive Why?

Outcome Differences in Taste Money can change flow of trade   Exchange rates Currency devaluation

International Trade Theory

  New Explanations for Direction of Trade   Economies of scale and experience curve  Why?

First-mover theory Linder Theory of Overlapping Demand   Manufacturing goods Income levels

International Product Life Cycle

   What is it?

 Exports  imports Process     U.S. exports Foreign production begins Foreign competition in export markets Import competition in U.S.

Technology Life Cycle    U.S develops Other developed Developing

Porter’s Competitive Advantage of Nations   What is it?

Factors     Demand conditions Factor conditions Related and supporting industries Firm strategy, structure, and rivalry

Summary

    Differences in endowments of factors of production Differences in level of technology Differences in efficiencies with which factor intensities are utilized Foreign exchange rates

Trade Restrictions

 Arguments for Restriction   National Defense Sanctions to Punish Offending Nations      Protect Infant Industries Protect Declining Industries Protect Domestic Jobs Scientific Tariff or “Fair Competition” Retaliation   Dumping  Five types Subsidies  Countervailing duties

Trade Barriers

 Tariffs       Ad valorem Specific duty Compound duty Official prices Variable levy Lower duty for more local input

Trade Barriers

 Nontariff Barriers  Quantitative  Quotas  Absolute   Tariff-rate Global   Voluntary export restraints Orderly marketing arrangements  Multifiber Arrangement

Trade Barriers

 Nontariff Barriers  Nonquantitative    Direct government participation in trade    Agriculture procurement policies Government procurement policies 1920 Jones Act Customs and other administrative procedures Standards  Managers must be aware of barriers!!!!!!

Trade Barriers

 Multinational  Systems  Two options Global Manufacturing  Costs of Barriers  Consumer costs

Economic Development

 Categories        Developed Developing New Industrialized Countries  Three characteristics Newly Industrialized Economies IMF Classifications World Bank    GNP/capita Problems with that   Underground market Exchange rates Purchasing power parity Atlas conversion factors

Characteristics of Developing Nations              GNP/ capita of less than $9,075 Unequal distribution of income, small middle class Technological dualism Regionalism dualism 80-85% of population in unproductive agricultural sector Disguised unemployment or underemployment- two people doing what one can do High population growth (2.5-4%) High rate of illiteracy Widespread malnutrition Political instability High dependence on few exports (agriculture and minerals) Inhospitable topography Low savings rates and inadequate banks

Human-Needs Approach

   Goals Human Development Index Investment in Human Capital  Return

International Investment Theories     Monopolistic Advantage Theory Product and Factor Market Imperfections International Product Life Cycle Other Theories     Follow-the-leader theory Cross investment Internationalism theory Dunning’s Eclectic Theory of International Production    Ownership-specific Internalization Location-specific

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