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© Professor Daniel F. Spulber
Midea: Leading Chinese appliance manufacturer Every major manufacturer is producing air conditioners in China for customers there. Many of the major manufacturers are exporting from their facilities in China. These developments suggest that China has a comparative advantage in the production of air conditions and related appliances relative to its trading partners. How does this fit into the overall pattern of exports and imports and the product mix?
International product mix How do you explain the mix of traded goods? How do you explain the location of production in a particular country for a specific product or service? How do you explain the types of goods that are imported to a particular country? What products should the international business provide?
these decisions are connected! Identify supplier countries and the products that they can provide Identify customer countries and the products they need Profit by capturing some of the gains from trade 4 .A key task of the manager of the international business is to identify gains from trade Coordinate serving and sourcing to maximize net gains from trade -.
Specialization and division of labor The division of labor generates ³the greatest improvement in the productive powers of labor´ ³the division of labor is limited by the extent of the market´ So. greater trade means more opportunities for greater productivity Adam Smith 1723-1790 The Wealth of Nations 1776 5 .
David Ricardo 1772-1823 Principles of Political Economy and Taxation 1817 ³To produce the wine in Portugal. and to produce the cloth in the same country. ³This exchange might even take place. might require the labour of 90 men for the same time. might require only the labour of 80 men for one year. she would import it from a country where it required the labour of 100 men to produce it. for which she would obtain more cloth from England. because it would be advantageous to her rather to employ her capital in the production of wine. It would therefore be advantageous for her to export wine in exchange for cloth.´ 6 . than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth. Though she could make the cloth with the labour of 90 men. notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England.
it is still better for each to specialize a bit more in one or the other activity 7 .Differences in productivity and technology: The theory of comparative advantage Absolute advantage of one industry over the same industry in another country is not the issue Comparative advantage means that there are returns to each country specializing in certain activities Even if a country is better at both producing clothing and computers than another country.
the other country should focus more on clothing (transferring some resources from computers to clothing) There are some costs of transferring resources and adjusting production 8 .What to produce ± computers or clothing? Comparative Advantage asks which country is relatively better at computers than clothing in comparison with the other country A country should focus more on computers than clothing if transferring resources at the margin from clothing to computers will yield greater returns than doing so in the other country Correspondingly.
England would export sweaters to France and import bicycles from France 9 .Comparative advantage Sweaters England France 24 6 Bicycles 18 12 England has a comparative advantage in sweaters and France has a comparative advantage in bicycles These are the productivities of one unit of labor in each country So.
Sweaters Bicycles 18 12 Comparative advantage England France 24 6 Find the productivity ratios for each good England compared to France is relatively more productive in England compared to France for sweaters than bicycles each good: Sweaters 24/6 = 4 England has a comparative advantage in sweaters Bicycles: 18/12 = 3/2 The productivity ratio for sweaters France has a comparative advantage in bicycles is greater than for bicycles 10 .
Sweaters Bicycles 18 12 Comparative advantage and gains from trade England France 24 6 Suppose that England exports 54 sweaters and imports 72 bicycles For 72 bicycles. England can shift four units of labor to sweaters since 72/18 = 4 Shifting 4 units of labor to sweaters produces 4 x 24 = 96 sweaters. therefore England·s net gain in sweaters: 96 .54 = 42 11 .
France can shift 9 units of labor to bicycles because 54/6 = 9 Then France can produce 108 more bicycles since 12 x 9 = 108 France·s net gain in bicycles: 108 .72 = 36 12 .Sweaters Bicycles 18 12 Comparative advantage and England gains from trade France 24 6 France imports 54 sweaters.
Each country has a labor force of 20 Suppose that labor is evenly divided by sector. Table showing total output and consumption before trade takes place weaters Englan France Totals 240 60 300 Bicycles 180 120 300 13 .
Each country has a labor force of 20.Total output rises England shifts workers 4 from bicycles to sweaters France shifts 9 workers from sweaters to bicycles Table showing total outputs -.total outputs increase Sweaters England France Totals 14 x 24 = 336 1x6=6 342 Bicycles 6 x 18 = 108 19 x 12 = 228 336 14 . -.
72 = 156 336 England gets to consume more sweaters and France gets to consume more bicycles 15 .Sweaters England 24 6 Bicycles 18 12 Table showing total consumption after trade France S eaters England France Totals 336 .54 = 282 6 + 54 = 60 342 Bicycles 108 + 72 = 180 228 .
ratios Good Good Productivity of a unit of labor in each country for each good. 16 .Trade and the product mix Good ountry A ountry B Prod.
Trade and the product mix Production function: QA1 = gA1 LA1 Zero profit condition: PA1 QA1 = WA LA1 PA1 = WA /gA1 Price of each good equals the unit cost of labor This shows the tradeoff between the cost and productivity of labor 17 .
Recall that prices equal unit labor costs: PA1 = WA /gA1 PB1 = WB/gB1 So.Trade and the product mix General rule: The low-price country exports and the high-price country imports. Country A supplies the good if lower unit costs: WA /gA1 < WB/gB1 18 . Country A supplies the good if PA1 < PB1.
Trade and the product mix Country A supplies the good if WA /gA1 < WB/gB1 which is the same as WA / WB < gA1/gB1 Conclusion: Country with productivity ratio above wage ratio is the exporting country. 19 .
Trade and the product mix Example: Which country exports which good? Goo 1 o o try try 10 Goo Goo ro . ratios 20 .
21 .Trade and the product mix Example: Which country exports which good? Wages: WA = 18 WB = 6 WA / WB = 3. Wage ratio: Productivity ratio greater than wage ratio: Country A exports Good 2 and Good 3 to Country B. Country A imports Good 1 from Country B.
Trade and the product mix gA/gB TECHNOLOGY CURVE: List the goods in decreasing order: Country A supplies goods below X* Good 2 Country B supplies goods above X* Good 3 WA/WB Good 1 Country A X* Country B gA/gB X 22 .
Effect of wage changes on the product mix gA/gB Relative wages increase Relatively higher wages in Country A Shift in product mix W1A/W1B WA/WB gA/gB X* X1 Country A Country B X 23 .
Trade and the product mix Table showing prices based on unit costs of labor Good 1 Country A Country B 18/10 /5 Good 18/45 /9 Good 18/28 /7 Helps explain inter-country price differences 24 .
000 0 8.000 0 6.000 0 00 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1998 2001 2002 NDON S A CH NA THA LAND ALAYS A Comparative advantage keeps changing: GDP per capita in some Asian countries $ per Capita Year 25 .000 0 KOR A 10.000 0 4.000 0 2.Managers should understand constant change in opportunities for sourcing and serving PH L PP N S 12.
Managers should try to recognize effects of changes in comparative advantage Population movements in China reflect shift from agriculture to industrial production 26 .
Effect of technological change on product mix gA/gB Lower labor requirements in Country A cause shift in product mix ± even assortment of products changes within in each country WA/WB gA/gB Country A X* X1 Country B X 27 .
Effect of costs of trade on product mix gA/gB Country A produces goods from 0 to X** Country B¶s produces goods above X* Country B sees trade costs as if wages rise in Country A WA*/WB Country A sees trade costs as if wages rise in Country B gA/gB Country A X* exports X** Country B X Nontraded exports 28 WA/WB* .
Effect of lowering costs of trade Increases specialization of countries ± for given technology Reduces the range of nontraded goods Increases the range of traded goods Improves national incomes and increases total production These effects define globalization! 29 .
Summary and take-away points Managers should understand how gains from trade create value in international business The product mix is as much about demand patterns as it is about production patterns Managers should consider costs of trade in determining the product mix 30 .