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Merchandise of Trade

Merchandise trade
includes all trade in goods
trade in services is excluded

International Business Activities


International Trade
includes exports and imports

Foreign Direct Investment (FDI)


International companies must make FDI to establish and expand
their overseas operations

Foreign Sourcing
is the overseas procurement of raw materials, components, and
products

Volume of Trade
In 1990,
volume of international trade in goods and services surpassed $4 trillion
In 2003,
international trade in goods and services exceeded $9 trillion
One-fourth of everything grown or produced in the world is now exported
By 2008
exports of goods and services had nearly quintupled, exceeding $19.5 trillion
Increases in exports to developing countries, especially
Latin America
Central and Eastern Europe
Middle East
Asia
Quadrupling of world exports in less than 31 years demonstrates that the opportunity
to increase sales by exporting is a viable growth strategy

Merchandise and Services Trade as a Percentage of Gross Domestic Product

10 Leading Exporters and Importers in World Merchandise and Service Trade, 2009
(billions of dollars)

Direction of Trade
Largest exporters and importers of merchandise are
generally developed countries
Among largest 25 exporters emerging economies of
China, Mexico, Malaysia, Thailand, Brazil
Among largest merchandise importers
China, Mexico, Malaysia, Thailand, India, Turkey

Some Newer Explanations for the Direction of Trade


Differences in Resource Endowments
Some countries have an abundance of resources, when compared to the endowments
of other nations. For example, the United States has a large supply of fertile farmland,
Chile has abundant supplies of copper, and Saudi Arabia has extensive amounts of
crude oil. These differences in endowments can result in differences across countries in
the opportunity cost of producing these resources.
Overlapping Demand
In contrast to resource endowmentbased theory, Swedish economist Stefan Linder
theorized that customers tastes are strongly affected by income levels, and therefore a
nations income per capita level determines the kinds of goods its people will demand.
Because an entrepreneur will produce goods to meet this demand, the kinds of
products manufactured reflect the countrys level of income per capita. Goods
produced for domestic consumption will eventually be exported, due to similarity
of income levels and therefore demand in other countries

Direction of Trade -The Exceptions


Reasons the United States exports more to developing nations
The U.S. has significantly more subsidiaries in developing countries than
Japanese companies

Some customers prefer to buy from American firms

Reasons Japan exports more to developing nations


Japan established extensive distribution in developing nations since early 1900s
Uses sogo shosha to import raw materials and components necessary for the
Japanese industry, due to lack of local sources for raw materials
Other industrialized nations have imposed import restrictions on Japanese
exports to protect their home industries

Major Trading Partners


Major U.S. Trading Partners
Mexico and Canada
Share common border with the U.S.
Freight charges lower
Delivery times shorter
Contacts easier and less expensive

Nations from East and Southeast Asia have become important trading
partners
China, South Korea, Taiwan, Malaysia and Singapore supply U.S. with huge
quantities of electronic components and manufactured goods

Major Trading Partners of the United States, 2009 ($ billions)

EXPLAINING TRADE: INTERNATIONAL TRADE THEORIES


Mercantilism
Mercantilism, the economic philosophy Smith attacked, evolved in Europe between the 16th
and 18th centuries. A complex political and economic arrangement, mercantilism traditionally
has been interpreted as viewing the accumulation of precious metals as an activity essential
to a nations welfare. These metals were, in the mercantilists view, the only source of wealth.
Because England had no mines, the mercantilists looked to international trade to supply gold
and silver.
In balance of-payments accounting, an export that brings dollars to the country is called
positive, but imports that cause dollar outflow are labeled negative

Theory of Absolute Advantage

Adam Smith argued against mercantilism by claiming that market forces, not government
controls, should determine the direction, volume, and composition of international trade.
He argued that under free, unregulated trade, each nation should specialize in producing
those goods it could produce most efficiently (for which it had an absolute advantage,
either natural or acquired).
Theory of Comparative Advantage
David Ricardo demonstrated in 1817 that even though one nation held an absolute
advantage over another in the production of each of two different goods, international
trade could still create benefit for each country (thus representing a positivesum
game, or one in which both countries win from engaging in trade). The only limitation to
such benefit-creating trade is that the less efficient nation cannot be equally less efficient in
the production of both goods.