MGCR 382 International Business Pre-Midterm Study Guide lecture notes for the first half of the class McGill University
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MGCR 382 International Business
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MGCR 382 International Business
MGCR 382 International Business Pre-Midterm Study Guide lecture notes for the first half of the class McGill University
Trade Theory
International Trade and the World Economy
- Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another.
- Inter...
MGCR 382 International Business
Pre-Midterm Study Guide lecture
notes for the first half of the class
McGill University
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MGCR-382 Pre-Midterm
Study Guide
Trade Theory
International Trade and the World Economy
-Trade: voluntary exchange of goods, services, assets, or money between one person
or organization and another.
- International Trade: trade between residents of two countries.
Why Does International Trade Occur?
- Both parties to the transaction benefit.
- Imports provide (1) higher quality and/or (2) less expensive products and/or (3)
more quantity.
- Exports spark additional economic activity.
- Improve competitiveness.
International Trade Theories: Classical Country-Based
Theories
Definition
- Focuses on the individual country.
- Useful for describing trade in commodities.
- Price is an important component of the customer’s purchase decision.
- Useful for explaining interindustry trade among nations, but not intraindustry trade
because country-level theories use the country as a unit of analysis and examine
differences in the characteristics of a country (such as land, labor, and capital) to
explain trade between nations. In contrast, firm-based theories use the firm as a unit of
analysis and focus on differences between firms (such as ownership advantages) to
explain trade between countries.
1. Mercantilism
- Mercantilism: a sixteenth-century economic philosophy that maintains that a
country’s wealth is measured by its holdings of gold and silver. According to
mercantilists, a country’s goal should be to enlarge these holdings by promoting
exports and discouraging imports.
- Because mercantilism does benefit certain members of society, mercantilist policies
are still politically attractive to some firms and their workers.
- Modern supporters of such policies are called neomercantilists or protectionists.
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2. Absolute Advantage
- Adam Smith’s Absolute Advantage Theory: export those goods and services for which
it is more productive than other countries are and import those goods and services for
which other countries are more productive than it is.
- Smith advocated free trade among countries because it enlarges a country’s wealth
and it also enables a country to expand the amount of goods and services available to
it by specializing in the production of some goods and services and trading for others.
3. Comparative Advantage
- David Ricardo’s Comparative Advantage Theory: comparative advantage incorporates
the concept of opportunity cost (value of what is given up getting the good) in
determining which good a country should produce.
- Lessons of the theory of comparative advantage: (1) you are better off specializing in
what you do relatively best, (2) produce (and export) those goods and services you
are relatively best able to produce, and (3) buy other goods and services from people
who are relatively better at producing them than you are.
4. Relative Factor Endowments
- Heckscher-Ohlin Theory: a country will have a comparative advantage in
producing products that intensively use resources (factors of production) it has in
abundance.
- Factor endowments (types of resources) vary among countries and goods
differ according to the types of factors that are used to produce them.
- Pattern of comparative advantage: export products that use relatively abundant
factors of production and import products that need relatively scarce factors of
production.
International Trade Theories: Modern Firm-Based
Theories
- Focus on the firm’s role in promoting international trade.
- Useful in describing patterns of trade in differentiated goods.
- Brand name is an important component of the customer’s purchase decision.
- Useful for explaining both interindustry and intraindustry trade among nations.
- Firm-based theories have developed for several reasons: (1) the growing importance
of multinationals in the postwar international economy, (2) the inability of the
country- based theories to explain and predict the existence and growth of intra-
industry trade, and (3) the failure of Leontief and other researchers to empirically
validate Heckscher- Ohlin theory.
- Unlike country-based theories, firm-based theories incorporate factors such as
quality, technology, brand names, and customer loyalty into explanations of trade
flows.
Because firms, not countries, are the agents for international trade, the newer theories
explore the firm’s role in promoting exports and imports.
1. Linder’s Country Similarity Theory
- Linder’s Country Similarity Theory: aim to open a specific industry market to
other countries with similar per capita income.
- Interindustry trade: the exchange of goods produced by one industry in country A for
goods produces by a different industry in country B (i.e., the exchange of French
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wines for Japanese clock radios).
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