Flashcards in International Business Ch. 6 Midterm Vocab/Ideas Deck (24):
New Trade Theory
(Paul Krugman) stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms.
-many economists believe that unrestricted free trade between nations will raise the economic welfare if countries that participate in a free trade system
a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country
Theory of national competitive advantage;
justifies some limited government intervention to support the development of certain export-oriented industries
(mid-16th century) suggests that it is in a country’s best interest to maintain a trade surplus -to export more than it imports
-advocates government intervention to achieve a surplus in the balance of trade
to export more than a country imports
one in which a gain by one country results in a loss by another.
A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it.
- Countries should produce those products that they specialize in and then trade for products that they are not efficient at producing.
-This results in net gains for all countries involved.
Positive Sum Game
Proved that mercantilism was incorrect and that trade results in a positive sum game, where all countries benefit.
Constant returns to specialization
the units of resources required to produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a country's production possibility frontier (PPF)
-Remember the example of rice and cocoa between Ghana and Korea.
comparative advantage arises from differences in national factor endowments.
the extent to which a country is endowed with resources like land, labor, and capital.
-The more abundant a factor, the lower it's cost.
Since the US had more capital than other countries, the US would be an exporter of capital intensive goods and an importer of labor-intensive goods.
-However, Leontief found that US exports were less capital intensive than US imports.
-This variance with trade theory became known as the Leontief Paradox.
Product Life-Cycle Theory
- as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade
-mature industries leave the U.S. for low cost assembly locations
-But, the globalization and integration of the world economy has made this theory less valid today
-the theory is ethnocentric
-production today is dispersed globally
-products today are introduced in multiple markets simultaneously
Economies of Scale
unit cost reductions associated with a large scale of output
-Through its impact on economies of scale, trade can increase the variety of goods available to consumers and decrease the average cost of those goods
-Spreads fixed costs over a large volume.
-Enables large-volume producers to utilize specialized employees and equipment that are more productive than less specialized employees and equipment.
First Mover Advantages
the economic and strategic advantages that accrue to early entrants into an industry
-economies of scale
-first movers can gain a scale based cost advantage that later entrants find difficult to match.
-Nations may benefit from trade even when they do not differ in resource endowments or technology
-a country may dominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good
-Governments should consider strategic trade policies that nurture and protect firms and industries where first mover advantages and economies of scale are important
Porter's Diamond of Competitive Advantages
-Relating and Supporting Industries
-Firm, strategy, structure, & rivalry
-Countries should be exporting products from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable.
-a nation’s position in factors of production necessary to compete in a given industry
-can lead to competitive advantage
-can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how)
-the nature of home demand for the industry’s product or service
-influences the development of capabilities
-sophisticated and demanding customers pressure firms to be competitive
Relating and Supporting Industries
- the presence or absence of supplier industries and related industries that are internationally competitive
-can spill over and contribute to other industries
-successful industries tend to be grouped in clusters in countries i.e. Silicon Valley
Firm Strategy, Structure, & Rivalry
- the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry
-different management ideologies affect the development of national competitive advantage
-vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features
3 Major Implications of Trade Theory for Managers
1) Location implications - a firm should disperse its various productive activities to those countries where they can be performed most efficiently
firms that do not may be at a competitive disadvantage
2) First-mover implications - a first-mover advantage can help a firm dominate global trade in that product
3) Policy implications - firms should work to encourage governmental policies that support free trade
-want policies that have a favorable impact on each component of the diamond
Balance of payment accounts
A country’s balance of payments accounts keep track of the payments to and receipts from other countries for a particular time period
-double entry bookkeeping
-sum of the current account balance, the capital account and the financial account should be zero
Balance of Payments
(3 Main Accounts)
1) The CURRENT ACCOUNT records transactions of goods, services, and income, receipts and payments
-current account deficit - a country imports more than it exports
-current account surplus – a country exports more than it imports
2) The CAPITAL ACCOUNT records one time changes in the stock of assets
2) The FINANCIAL ACCOUNT records transactions that involve the purchase or sale of assets
-net change in U.S. assets owned abroad
-foreign owned assets in the U.S.
In the United States, the CURRENT ACCOUNT DEFICIT has been growing because of its imports of physical products, but the country runs a CURRENT ACCOUNT SURPLUS in trade in services.