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PART THREE

THEORIES AND INSTITUTIONS: TRADE AND INVESTMENT

CHAPTER SIX
INTERNATIONAL TRADE
AND FACTOR MOBILITY THEORY

OBJECTIVES
• To understand theories of why countries should trade
• To comprehend how global efficiency can be increased through free trade
• To become familiar with factors affecting countries’ trade patterns
• To realize why countries’ export capabilities are dynamic
• To discern why the production factors of labor and capital move internationally
• To grasp the relationship between foreign trade and international factor mobility

CHAPTER OVERVIEW
Chapter Six provides a conceptual foundation for the exploration of the international
trade process. First, it examines the basic theories of mercantilism, absolute advantage,
and comparative advantage. Then it explores patterns of trade in light of the theories of
country size, factor proportions, and country similarity. It also considers the role of
distance and explains the relevance of Product Life Cycle Theory and Porter’s Diamond
of national competitive advantage. The chapter concludes with a discussion of factor
mobility and its relationship to the international trade process.

CHAPTER OUTLINE

OPENING CASE: COSTA RICAN TRADE, FOREIGN INVESTMENT,
AND ECONOMIC TRANSFORMATION
[See Map 6.1.]
Costa Rica, a Central American country of barely 4 million people, has successfully
transformed its primarily agricultural economy to one that includes strong technology and
tourism sectors as well. Bordering both the Pacific Ocean and the Caribbean arm of the
Atlantic, Costa Rica used international trade and factor mobility policies to help achieve
its economic objectives. Although exports of coffee and bananas are still important,
high-tech manufactured products (electronics, software, and medical devices) are now the
backbone of Costa Rica’s economy and export earnings. As in all countries, Costa Rica’s
policies continually evolved, but generally fall into four periods and categories:

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] II. INTERVENTIONIST THEORIES Interventionist trade theories prescribe government action with respect to the international trade process. as well as the opening case regarding Costa Rican Trade. A. software. INTRODUCTION Trade theory helps managers and government policymakers focus on three critical questions: What products should be imported and exported. which is cited throughout the chapter. It purports that a country’s wealth is measured by its holdings of treasure (usually gold). 6.. how much should be traded. and with whom should they trade? While descriptive (free trade) theories suggest a laissez-faire treatment of trade. and considerable substitution occurred in the pharmaceutical industry) • 1983–Early 1990s: a less protectionist regime that promoted the liberalization of imports. Mercantilism The concept of mercantilism (a zero-sum game) served as the foundation of economic thought for nearly three hundred years (1500–1800). i. [See Fig. I.e. and provided incentives to attract foreign capital and expertise • Early 1990s-Present: a liberal trade regime that seeks the production of electronics. i. encouraged export promotion. To amass a surplus (a favorable balance of trade). 60 .e. and medical devices via strategic trade policy. Trade in goods and services and the movement of production factors links countries internationally. prescriptive (interventionist) theories suggest that governments should influence trade patterns.1. the identification and development of targeted domestic industries in order to improve their competitiveness at home and abroad TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Six. Neomercantilism Neomercantilism represents the more recent strategy of countries that use protectionist trade policies in an attempt to run favorable balances of trade and/or accomplish particular social or political objectives. a policy of developing domestic industries to manufacture goods and provide services that would otherwise be imported (although results were mixed. a country must export more than it imports and then collect gold and other forms of wealth from countries that run a deficit (an unfavorable balance of trade).. the processing of coffee and cotton seeds increased the value of Costa Rican exports. • 1800s–1960: a liberal trade regime that promoted the exports of coffee and bananas • 1960–1982: a more protectionist regime that promoted import substitution. B.

] B. 3. even if other countries can produce those same things even more efficiently. The invisible hand of the market will determine which competitors survive. Smith also asserted that country-specific advantages can either be natural or acquired. and/or capital assets that yields differentiated product offerings and/or cost-competitive homogeneous products. Ricardo’s theory of comparative advantage holds that a country can maximize its own economic well-being by specializing in the 61 . Smith reasoned that: (i) workers become more skilled by repeating the same tasks. 2. as customers buy those products that best serve their needs.II. [See Fig. in particular. nations as a whole specialize in the production of certain products. thus optimizing global efficiency. and altered trading-partner relationships. The concept of free trade (a positive-sum game) purports that nations should neither artificially limit imports nor artificially promote exports. 6. Theory of Absolute Advantage In 1776 Adam Smith asserted that the wealth of a nation consisted of the goods and services available to its citizens. Resource Efficiency Example. Variations in natural advantages among countries help to explain where particular products can be produced most efficiently. Comparative Advantage In 1817 David Ricardo reasoned that there would still be gains from trade if a country specialized in the production of those things it can produce most efficiently. 1. A. Real income depends on the output of products as compared to the resources used to produce them. and some of which may be exported. Acquired Advantage. the production possibilities curve shows that through the use of specialization and trade. An acquired advantage represents a distinct advantage in skills. etc. A country may have a natural advantage in the production of particular products because of given climatic conditions. Free trade implies specialization— just as individuals and firms efficiently produce certain products that they then exchange for things they cannot produce efficiently. FREE TRADE THEORIES The explanatory power of the theories of absolute and comparative advantage is limited to the demonstration of how economic growth can occur via specialization and trade. (ii) workers do not lose time in switching from the production of one kind of product to another. By defining the cost of production in terms of the resources needed to produce a product. export earnings can then in turn be used to pay for imported goods and services. displaced old products. Technology. Put another way. and (iii) long production runs provide greater incentives for the development of more effective working methods. His theory of absolute advantage holds that a country can maximize its own economic well being by specializing in the production of those goods and services that it can produce more efficiently than any other nation and enhance global efficiency through its participation in (unrestricted) free trade. technology. has created new products. the availability of labor. some of which will be consumed domestically. access to particular resources.2. the output of two countries will be greater. Natural Advantage.

Would it make sense for the best physician in town. When countries have many unemployed or underemployed resources. If one country believes that a trading partner is receiving too large a share of the benefits.e. they may seek to restrict imports in order to employ their own available workers and other assets. global output can be increased. 62 . it is unclear how those gains will be divided. the theories are still useful. has a comparative ad-vantage in wheat production. economists have applied the same reasoning and demonstrated the economic efficiency advantages in multi-product and multi-country production and trade relationships. However. who also happens to be the most talented medical secretary. Transport Costs. 6. then the gains from trade are negated. An Analogous Explanation. If it costs more to deliver products than can be saved via specialization. and specialization and trade will benefit both countries. however. a country will gain if it concentrates its resources on the production of the goods and services it can produce most efficiently. Both theories assume that resources are fully employed. both theories make certain assumptions that may not always be valid. Each holds that specialization will maximize output and that subsequent trade will maximize consumer welfare. Nonetheless. In the same manner. [See Fig. concentration on the production of a limited number of products. 1.. A country can simultaneously have a comparative advantage and an absolute advantage in the production of a given product.2. 1. Two Commodities. it may choose to forego its relatively smaller gains in order to prevent the partner country from receiving larger gains. 5. Assume that the United States is more efficient than Costa Rica in the production of both wheat and tea. Although specialization does maximize output. Individuals and countries often pursue objectives other than economic efficiency. Division of Gains. Two Countries. Individuals may prefer activities and/or occupations that are economically less productive. Economic Efficiency Objective. Some Assumptions and Limitations of the Theories of Specialization The theories of absolute and comparative advantage are based upon the economic gains from specialization. 3. Production Possibility Example. i. and nations may choose to avoid overspecialization because of the vulnerability created by potential changes in technology and price fluctuations. 2. The world is comprised of multiple countries and multiple commodities. By concentrating on the production of the product in which it has the greater advantage (wheat) and allowing Costa Rica to produce the product in which the United States is comparatively less efficient (coffee). the U. 4. 2. The physician can maximize both output and income by working as a physician and employing a less skilled secretary.] C. production of those goods and services it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade. Full Employment. to handle all of the administrative duties of an office? No.S.

e. the movement of resources such as capital and labor is a very real alternative to trade. is entirely valid. 6.. Services. How Much Does a Country Trade? Apart from nontradable products. much of the same reasoning can be applied to trade in services.2. 2. the relative conditions that surround a country’s particular advantage or disadvantage are dynamic (constantly changing). Nonetheless. the higher the associated transport costs. nor the assumption that resources cannot move internationally. [See Table 6. Statics and Dynamics. Although the theories of absolute and comparative advantage were developed from the perspective of trade in commodities. Despite its low per capita income. i. Thus. using indicators that include the value and share of world trade. one cannot assume that future advantages will remain constant. 63 . 1. A. THEORIES EXPLAINING TRADE PATTERNS The explanatory power of the theories of absolute and comparative advantage is limited to the demonstration of how economic growth can occur via specialization and trade. and country similarity all contribute to the explanation of what types of products are traded and with which partner nations countries will primarily trade. Mobility. the top ten nations account for more than one-half of all of the world’s trade. Further. Theory of Country Size. Neither the assumption that resources can move domestically from the production of one good to another and at no cost. 8. thus making the large countries more self-sufficient. the greater the distance. country size helps to explain why some countries are more dependent on trade than others and why some account for larger portions of world trade than others. Together. factor proportions. Although the theories of absolute and comparative advantage consider gains at a given time (a static view). Thus. Clearly. The theory of country size holds that large countries tend to export a smaller portion of their output and import a smaller portion of their consumption. domestic mobility is greater than the international mobility of resources. Counties can be compared on the basis of their economic size. Size of Economy. firms in large countries often face higher transportation costs in terms of sourcing inputs from and delivering output to distant foreign markets than do their closer foreign competitors.) 7. The theories of country size.] Ten of the world’s top trading nations are high- income countries. III. given the same types of terrain and modes of transportation. China also has a large economy because of its very large population. (This idea will also be relevant to the discussion of the dynamics of the location of production and export sources. Large countries are more apt to have varied climates and a greater assortment of natural resources than smaller economies. goods and services that are impractical to export.

political interests. lower- income countries depend more on the production of primary products. While manufacturing comprises the largest sector of world trade. Nonetheless. it is likely to turn to those foreign markets that are most similar to its domestic market when commencing its initial international expansion activities. Developed by Eli Heckscher (1919) and Bertil Ohlin (1933).B. it is also true that economic and cultural similarities. However. both production and product technology can be very important. Product Technology. most new products tends to be developed in high-income countries.g. Factor proportions analysis becomes more complicated when the same product can be produced by different methods... countries with less skilled and lower paid workers tend to export products that embody a higher intensity of labor. The optimum location will depend on comparisons of the production cost in each potential locale. With respect to the latter. and distance affect the determination of trading partners. countries with rich and abundant land tend to be large exporters of agricultural products. commercial services is the fastest-growing sector. [See Fig. Although larger nations tend to depend more on longer production runs. when long runs are less important. companies may locate long-run production facilities in small countries if export barriers to other markets are relatively low. such as different mixes of labor and capital. i. e. With Whom Do Countries Trade? High-income countries trade primarily with each other. 1. C. labor. The country-similarity theory states that when a firm develops a new product in response to observed conditions in its home market. e. 1. production factors are not homogenous.. and capital explain differences in the cost of production factors and (ii) a country will tend to export products that utilize relatively abundant factors of production because they are relatively cheaper than scarce factors. and variations (particularly in labor) have led to international specialization by task. Factor-Proportions Theory.4. which in turn depend more on natural advantages. In addition. firms tend to locate longer-run production facilities in just a few countries. and emerging economies primarily export primary and labor-intensive products. 64 . there is a greater tendency to scatter production units around the world in a way that will minimize the transportation cost associated with exports. 3. 6. So much trade takes place among industrialized countries because of the growing importance of acquired advantages. whereas countries with capital-intensive production lines tend to be large exporters of manufactured goods. Production Technology. Country-Similarity Theory.] Because manufacturing depends on acquired advantages (largely technology) plus large amounts of capital investment.g.e. On the other hand. Nonetheless. What Types of Products Does a Country Trade? The composition of a country’s trade depends on both its natural and acquired advantages. the factor-proportions theory holds that (i) differences in a country’s relative endowments of land. 2.

growth. may encourage or discourage trade with particular countries. trade in differentiated products occurs because over time firms in different countries develop product variants for particular market segments. as well as economic agreements. and possibly lose their competitive advantages. In particular. markets in most industrialized countries are large enough to support new product introductions and the subsequent variants across the product life cycle. and innovative customers tend to accept relatively high introductory prices. maturity. Distance Among Countries. the production process tends to be relatively labor-intensive. While the disadvantages of distance can often be overcome through innovative technology and marketing methods.] 1. distance. production. At the same time. THE DYNAMICS OF TRADE Both the product life cycle theory and Porter’s Diamond of national competitive advantage help to explain how countries develop. Many small countries need to trade relatively more than larger nations because small countries often lack a wide variety of natural advantages and resources. Factor proportions theory helps explain where certain goods and services may be more efficiently produced. Changes Through the Cycle. Historical and political relationships. A great majority of the new technology that results in new products and production methods originates in industrial countries. Cultural similarity also facilitates trade. and natural resources. In addition. and sales occur in the domestic (innovating) country. maintain. 65 . 2. • Introduction. DOES GEOGRAPHY MATTER? Variety Is the Spice of Life Geography plays a major role in many theories and decisions concerning international trade. Part of a nation’s advantage is embedded in its natural advantages—climate. culture. and political/ economic relationships also play major roles in the process. [See Table 6. Because the product is not yet standardized. terrain. a common language and a common religion represent two major facilitators of the international trade and investment process.3. Innovation. and decline. such gains are difficult to maintain in the long run. IV. arable land. A. In addition. Countries that are near to one another enjoy relatively lower transportation costs than those that are more distant. skills and technology. Product Life Cycle (PLC) Theory Product life cycle theory states that the optimal location for the production of certain types of goods and services shifts over time as they pass through the stages of market introduction.

and product for which transportation costs are relatively high. • Maturity. competitors enter the market. i. the absence of favorable conditions within a country may be overcome by their existence internationally. and (iv) firm strategy. At times. production processes are relatively standardized. firms must make choices regarding their pursuit of existing opportunities. thus. All four determinants are interlinked and generally need to be favorable if a given national industry is going to attain global competitiveness. 66 . competition.. • Firm Strategy. B. and Rivalry. Exceptions to the typical pattern of the product life cycle theory would include: products that have very short life cycles. The nature and level of demand in the home market lead to the establishment of production facilities to meet that demand. Limitations of the Porter Diamond. Structure. • Growth. Foreign demand. resources are ultimately limited. the Porter Diamond. Resource availability (inputs. (ii) factor conditions. As demand grows. Even when abundant. (iii) related and supporting industries. products that can be differentiated from direct competitors. and global price competition forces production site relocation to lower-cost developing countries. theorizes that national competitive advantage is embedded in four determinants: (i) demand conditions. Verification and Limitations of PLC Theory. • Decline. capital. the Diamond of National Competitive Advantage. The product is then imported by the country where it was initially developed—the importing firm may or may not be the innovating firm. exports. • Related and Supporting Industries. given the ability of firms to gain market information and production inputs from abroad. • Factor Conditions. luxury goods and services. 1. The existence of the four favorable conditions may represent a necessary but insufficient condition for the development of a particular national industry. Further. The creation and persistence of national competitive advantage requires leading-edge product and process technologies and business strategies. Global demand begins to peak. structure. Explanation of the Porter Diamond • Demand Conditions. products that require specialized labor. The Porter Diamond Introduced by Michael Porter in 1990. The local presence of inter- nationally competitive suppliers and other related industries contributes to both the cost effectiveness and strategic competitiveness of firms. and often direct investment activities also begin to accelerate. Market factors and cost pressures dictate that almost all production occur in developing countries. 2. determinants can be affected by the roles of chance and government. labor.e. and technology) contributes to the competitiveness of both firms and countries that compete in particular industries. 2. and rivalry.

As shown in the opening case regarding Costa Rica’s economic transformation. V. It may be difficult to distinguish between economic and political motives associated with international labor mobility. Why Production Factors Move Factor mobility concerns the free movement of factors of production. 67 . rather than specific targeted industries. because poor economic conditions often accompany repressive and/or uncertain political conditions. Understanding and having the necessary conditions to be globally competitive are important. and small countries such as Singapore. Using the Diamond for Transformation. either on a temporary or a permanent basis. People transfer internationally in order to work abroad. While capital is the most internationally mobile factor. such as labor and capital. there are numerous examples of the failure of laissez faire trade policies in Africa—given all of their economic inadequacies. Capital is primarily transferred because of differences in expected returns. the mobility of capital. a country must develop and maintain industries that will grow and earn sufficient revenues so that its domestic economy thrives and grows. POINT—COUNTERPOINT: Should Countries Follow Strategic Trade Policies? POINT: Given the importance of acquired advantage in world trade. and people also affects the relative capabilities of countries. and even if governments are able to identify future growth industries in which their countries can likely succeed. COUNTERPOINT: There are few circumstances where targeting will work. technology. it does not follow that firms within those industries should receive government assistance. Likewise. although firms may also respond to government incentives. short-term capital is the most mobile of all. Concomitantly. FACTOR MOBILITY Over time factor conditions change in both quality and quantity. A. At the same time. Targeting industries has proven particularly important for emerging economies such as Costa Rica. it developed local supplies and attracted sufficient numbers of foreign firm so that their combined presence assured a vibrant competitive environment. government guidance and intervention is their best hope for better results. 3. This would improve the investment environment for all industries without the need for government officials to choose which industries to support. across national borders. A better policy would be to alter the conditions that affect a country’s attractiveness to firms in general. the Costa Rican government altered its educational system to tailor the country’s human resource development to fit the needs of targeted industries. but these conditions are neither static nor purely domestic.

and/or complementary products in the destination country. B. or when foreign direct investment leads to import substitution. Factor mobility via foreign direct investment may in fact stimulate foreign trade because of the need for equipment. thus adding to the base of a country’s skills and enabling competition in new areas. such as the development of alternatives for traditional production methods. the inability to gain sufficient access to foreign production factors may stimulate efficient methods of domestic substitution. Immigrants bring human capital. a situation known as brain drain. However. trade may be restricted by local content laws. components. 2. uncertainties exist as to whether the current trend toward the freer movement of trade and production factors will continue. inflows of capital to those same countries can be used to develop infrastructure and natural and other acquired advantages. 1. Thus. but they may in turn gain from the remittances that citizens who are working abroad send home. Alternatively. Likewise.6. 6. LOOKING TO THE FUTURE: Will Conditions for Trade Change? Firms have greater opportunities to pursue global strategies and capture economies of scale by serving markets in more than one country from a single base of production if those countries have relatively few restrictions on foreign trade and investment activities. thus enabling increased participation in the international trade arena. Likewise. Complementarity. in countries where labor is relatively abundant compared to capital. neither international capital nor population movements are new occurrences. workers tend to be poorly paid. they are intertwined.] However. capital tends to move away from countries where it is abundant to those where it is relatively scarce. Effects of Factor Movements Although capital and labor are in fact different production factors. pressures exist for the most abundant factors to move to countries with greater scarcity. Countries lose potentially productive resources when educated people leave. C. The Relationship of Trade and Factor Mobility Factor movement is an alternative to trade that may or may not be a more efficient allocation of resources. [See Fig. Substitution. many will attempt to go to countries that enjoy full employment and offer higher wages. Four factors that might cause merchandise trade to become relatively less significant in the future are: • the growing tide of protectionist sentiment • the possibility of more efficient country-by-country production • increasingly flexible and efficient small-scale production methods • the rapid growth of services as a portion of production and consumption within the industrialized nations 68 . Further. When factor proportions vary widely among countries.

structure. factor proportions theory is applicable. The Porter Diamond of national competitive advantage also helps to explain Russia’s position as an oil exporter.” High market prices have enabled LUKoil to amass sufficient capital to make substantial foreign investments. Questions 1. oil prices have fluctuated widely in response to events during the twenty-first 69 . and rivalry. In spite of their general upward trend. foreign investment and ties to Western oil companies are very important to the firm’s ultimate success. political relations within and outside of Russia could impair LUKoil’s future ability to export. LUKoil sees its foreign acquisitions as a means of gaining experienced personnel. and firm strategy. Thus.S. It is also the first Russian oil company to integrate from “oil wells to filling stations. The fact that a preponderance of its foreign expansion has been to countries of the former Soviet Union supports the country similarity theory. the country enjoys both natural and acquired advantages with respect to oil. Thus. 2.000 people in its operations worldwide. Given the fact that Russia now has 15 more proven reserves than Saudi Arabia and its oil companies have become major global competitors. How do global political and economic conditions affect world markets and prices of oil? Global political and economic conditions affect world markets and prices because of their real and perceived effects on global supply. LUKoil has become Russia’s largest oil company. While both Russia and LUKoil must export to meet their economic objectives.2. CLOSING CASE: LUKoil [See Map 6. Controlling 19 percent of Russia’s oil production and refining capacity and employing more than 120. What theories of trade help to explain Russia’s position as an oil exporter? Which ones do not. While much of its FDI has been directed to nearby countries. and Russian oil companies are making significant strides in the areas of factors conditions. Prices in the global oil market are driven by the laws of supply and demand. Forward integration into filling stations will guarantee LUKoil market access and enable the company to sell its crude oil during times of global oversupply. as well as 800 U. related and supporting industries. Neither the interventionist theory of mercantilism nor the theories of country size apply. and competitive know-how to help it compete more efficiently and effectively both at home and abroad.] LUKoil was one of several firms created in 1991 out of Russia’s state-owned petroleum monopoly. technology. Further. Global demand conditions are favorable. product life cycle theory does not apply because petroleum is not an appropriate type of product for that model. LUKoil has also acquired 100 percent of Getty Petroleum in the United States. and why? Both the theories of absolute and competitive advantage help to explain Russia’s position as an oil exporter. stations from ConocoPhillips. Further.

On the other hand. facilities. Although exports of coffee and bananas are still important to Costa Rica. if such action were permissible. international trade will begin only if companies within that country have competitive advantages that enable them to be viable traders—and they must foresee profits in exporting and importing. and medical devices) are now the backbone of that country’s economy and export earnings. Those firms have since had to rely on their earnings in order to develop or acquire needed products. Whereas LUKoil’s European customers will likely be served from its European reserves. foreign competitors that can do so would be in a position not just to serve the world’s markets. it is critical that both LUKoil and other Russian oil companies become as efficient as the major global competitors. 70 . Even in Russia oil production and processing are capital-intensive activities that require massive amounts of highly valuable and highly specialized capital equipment manned by skilled laborers. Because oil is a limited resource and demand exists the world over. software. Thus. and/or employees. Discuss the following statement as it applies to Russia and LUKoil. but to enter the Russian market via foreign direct investment. general economic uncertainty. 5. The roles of the two governments are quite different in the sense that Costa Rica set about developing acquired advantages in targeted industries. high-tech manufactured products (electronics. “Regardless of the advantages a country may gain by trading. political unrest in Venezuela. and the massive capacity of Russia’s oil producers on the other. and operating efficiencies that will yield the efficiencies required to effectively compete at both the global and local levels.” Given the globalization of the world’s oil industry on the one hand. other customers are more likely to be served by oil sourced from its holdings in other parts of the world. and skilled employees are all critical factors in the global oil industry. and the war in Iraq have all contributed to the favorable market conditions that have led to record-setting prices and profits in the global oil industry. marketing skills. Investment naturally flows to those sites where oil is abundant and production activities are the most efficient. OPEC’s supply quotas. processes. either by developing or acquiring the latest petroleum technology. technology. while Russia chose to exploit its given natural resources in order to compete in global export markets as it transitioned to a market-based economy. China’s economic expansion. In LUKoil’s situation. 4. as Russia moved through the transition from a centrally-planned to a market-based economy. what is the relationship between factor mobility and exports? Capital. competitors such as LUKoil serve their global customers via production sites that are scattered across the world. Compare the role of the Costa Rican government in the chapter’s opening case with the role of the Russian government in their use of trade to meet national economic objectives. Otherwise. it is vital that Russia’s domestic companies have competitive advantages that enable them to operate profitably in global markets. century. 3. it fashioned competitive enterprises such as LUKoil from its state-owned assets.

The factor-proportions theory and the country-similarity theory both address patterns of trade.219 absolute advantage.e. p.207 substitution.215 free trade.211 unfavorable balance of trade. p. p. _________________________ CHAPTER TERMINOLOGY: strategic trade policy.205 Porter diamond. p..206 factor mobility.219 natural advantage.204 country similarity theory.217 invisible hand. p.com/daniels for additional information and links relating to the topics presented in Chapter Six. a comparative advantage.226 _________________________ ADDITIONAL EXERCISES: International Trade and Factor Mobility Exercise 6. Be sure they cite examples and explain their reasoning.225 complementarity.1.204 theory of country size. p. p. p. The theories of absolute and comparative advantage and the product life cycle all contribute to the explanation of the international trade process. p.201 statics. and political similarities. p. Exercise 6.211 favorable balance of trade. Be sure to refer your students to the online study guide. p. p.205 demand conditions. 71 . Ask students to compare and contrast the two theories.203 nontradable products. p. and (c) an emerging country would enjoy an absolute advantage. partner nations.205 product life cycle theory. cultural. p.WEB CONNECTION Teaching Tip: Visit www.204 factor proportions theory. or no particular advantage as each of the products moves through the four stages of the product life cycle. Select two to three different types of products and ask students to discuss the likelihood that (a) an innovating country. p.206 brain drain.210 interventionist trade theories.210 mercantilism.219 acquired advantage.212 neomercantilism. p. i.p.2. (b) a rapidly developing country.224 comparative advantage. p. p. p. p. p. p. p. p.prenhall. p. In what ways are they complementary and in what ways do they differ? Then select two to five home countries of students in your class and ask the class to identify the natural and acquired advantages of those countries and to compare their various economic. p. as well as the Internet exercises for Chapter Six.203 dynamics.223 production possibilities curve.205 factor conditions.

. Newmont Mining). Conclude the discussion by exploring the associated competitive advantages that may accrue to foreign firms that choose to operate in each of those countries.3. one consumer-oriented (e. Porter’s Diamond deals with the competitive advantages of nations. and/or complementary products are needed in host countries as a result of their foreign operations that may stimulate foreign trade in both the short and the long run? 72 . in those nations.Exercise 6.g. components. as well as the recent roles of government and chance.. Select two to five countries and lead the class in a comparative analysis of the four points of the diamond. Then ask students to discuss the concept of complementarity within the context of the operations of those two firms. Select two large multinational enterprises that are known to the students. What equipment. McDonald’s) and one industrial (e.4.g. Exercise 6.