International Business and Trade
Part 3- Semi- Finals
International Trade -is the concept of this exchange between
people or entities in two different countries.
Trade – is the concept of exchanging goods and services
between people or entities.
International Trade Theories
 Mercantilism – one of the earliest efforts to develop
an economic theory.
- This theory stated that a country’s wealth was
determined by the amount of its gold and silver
holdings.
- It is also believed that a country should increase
its holdings of gold and silver by promoting
export and discouraging imports.
- The objective of each country was to have trade
surplus –it is where value of exports is greater
than the value of imports. And to avoid trade
deficit – it is where the value of imports is
greater than the value of exports.
- Protectionism – the strategy that many of these
new nations promoted exports was to impose
restrictions on imports.
 Absolute Advantage – it is the ability of a country to
produce greater quantity of a good, product or
service than competitors using the same amount of
resources. In other words, a country that has an
absolute advantage can produce a good with lower
marginal cost (fewer materials, cheaper materials, in
less time with fewer and cheaper workers).
-By specialization, countries would generate
efficiencies, because their labor force would become
more skilled by doing the same tasks.
- Production would also become more efficient
because there would be an incentive to create faster
and better production methods to increase the
specialization.
Smiths theories reasoned that with increased
efficiencies, people in both countries would benefit
and trade should been encouraged.
Ex. Fig.01-absolute productivity.
oil minerals
Philippines 180 40
United States 60 200
Philippine Is productive in oil while US is more productive in
minerals.
 Comparative Advantage – economy’s ability to
produce goods and services at a lower opportunity
cost than that of trade partners.
- Gives the company the ability to sell goods and
services at a lower price that its competitors and
realize stronger margins.
- It focuses on relative productivity differences,
where as absolute advantage looks at the
absolute productivity (Field of specialization)
Ex. Fig. 02
Face mask Price
A Company 120 pcs 100.00
XZ Company 100 pcs 100.00
 Heckscher – Ohlin Theory (Factors Proportion
Theory) – Both theories assumed that free and open
markets would lead countries and producers to
determine which goods they could produce more
efficiently.
 Heckscher- Ohlin Theory – Focused their
attention on how a country could gain
comparative advantage by producing
products that utilized factors that were
abundance in thecountry.
-their theory is based on a country’s
production factors: land, labor, and capital,
which provide the funds of investment in
plants and equipment.
-they determined that the cost of any factor
or resource was a function of demand and
supply.
-Factors that were in great supply relative
to demand would be cheaper.
-Factors that were in great demand relative
to supply would be expensive.
Their theory, also called the Factor
Proportion Theory stated that countries
would produce and export goods that
required resources that were in great
supply and therefore cheaper in production.
In countrast, countries would import goods
that required resources that were short in
supply, but higher demand and therefore
expensive in production.
In short, (+) supply (-) demand = cheap cost
/low price. (-) supply (+) demand =
expensive cost/ high price.
 Leontief Paradox
- In the early 1950’s, Russian –born American
economist Wassily W. Leontief studied the US
economy closely and noted that the United
States was abundant in capital and, therefore,
should export more capital –intensive goods.
However, his research using actual data showed
the opposite: the United States was importing
more capital intensive goods.
 - According to the factor proportion theory, the
United states should have been importing labor-
intensive goods, but instead it was actually
exporting them. His analysis became known as
the Leontief Paradox because it was the reverse
of what was expected by the factor proportions
theory.
 Modern or Firm - Based Trade Theories
 Country – Based Theories
Intraindustry trade – refers to trade
between two countries of goods produced
in the same industry.
Example: Japan export Toyota vehicles to
Germany and imports Mercedez – Benz
automobiles from Germany.
 Firm –Based Theories
-incorporate other product and service
factors including brand and customer
loyalty, technology, and quality, into the
understanding of trade flows.
 Country Similarity Theory
Swedish economist Steffan Linder developed the
country similarity theory in 1961, as he tried to
explain the concept of intraindustry trade.
Linders theory proposed that consumers in countries
that are thesame or similar stage of development
would have similar preferences.
- When they explore exporting,companies often
find that markets that look similar to their
domestic one, in terms of customer preferences,
offer the most potential for success.
- It then states that most trade in manufactured
goods will be between countries with similar per
capita income, and intra industry trade will be
common.
 Product Life Cycle Theory
Reymond Vermon,Harvard Business School
professor, developed the product life cycle theory in
the 1960’s. The theory is originating in the field of
marketing. There are four distinct stages:
1. Introduction – product is new and not known in
the market
2. Growth – the product is newly known in the
market and there is an increase of sales, profit
and demand
3. Maturity - products are now at its standards ,
increase of sales, profit, demand and lot of
competitors
4. Decline – fear of the many firms because
products are no longer demand in the market.
Companies will tend to innovate or invent new
product.
 Global Strategic Rivalry Theory
- This theory emerged in the 1980’s and was
based on the work of economist Paul Kraugman
and Kelvin Lancaster.
- Their theory focused on MNC’s and their efforts
to gain competitive advantage against other
global firms in their industry.
- In order to obtain sustainable competitive
advantage, firms must face the barriers of
entry:
1. Research and Development
2. The ownership of intellectual property
rights
3. Economies of Scale
4. Unique business processes or methods as
well as extensive experience industry, and
5. The control of resources or favourable
access to raw materials.
 Porter’s National Competitive Advantage Theory
-Porter’s Theory stated that a nation’s
competitiveness in an industry depends the capacity
of the industry to innovate and upgrade.
- His theory focused on explaining why some nations
are more competitive in certain industries.
Four Determinants:
1. Local market resources and capabilities
2. Local market demand conditions.
3. Local Suppliers and complementary industries
4. Local firms characteristics.