International Trade

and Factor-Mobility
Theory

4-1
 Introduction
Learning Objective:
Understand how different approaches to
international trade theories help policy
makers achieve economic objectives

5-2
Laissez-Faire vs. Intervention
 Trade theory helps answer
 What products should we import and export?
 How much should we trade?
 With whom should we trade?
 Laissez-faire approach
 Free trade theories – absolute advantage and
comparative advantage
 Intervention approach
 Mercantilism and neomercantilism

5-3
 Factor Mobility Theory
 A country’s competitiveness depends on
 quality and quantity of production factors
 Land

 Labor

 Capital

5-4
 Interventionist Theories
 Theories that support government
intervention in the flow of trade
 Mercantilism
 Neomercantilism

5-5
Mercantilism and Neomercantalism
 Mercantilism countries should export
more than they import
 Maintain a favorable balance of trade
 trade surplus
 Avoid an unfavorable balance of trade
 trade deficit

 Neomercantilism run an export surplus

to achieve social or political objectives

5-6
 Free Trade Theories
 Two theories that support free trade
 Absolute advantage theory
 Comparative advantage theory
 Market forces should determine trade
 specialization

5-7
 Theory of Absolute Advantage
 Theory of absolute advantage
 different countries produce some goods more
efficiently than others
 Free trade brings
 Specialization
 natural advantage
 acquired advantage

 product technology
 process technology
 Greater efficiency
 Higher global output
5-8
Theory of Comparative Advantage
 Theory of comparative advantage
 free trade can increase global output even if
one country has an absolute advantage in the
production of all products

5-9
How Much Does A Country Trade?
 Theory of country size
 large countries depend less on trade than
small countries
 Large countries usually
 export a smaller portion of output and import a
smaller part of consumption
 have higher transportation costs for foreign
trade

5-10
 What Types of Products Does A
Country Trade?
 Factor proportions theory
 factors in relative abundance are cheaper than
factors that are relatively scarce
 But
 production factors are not homogenous
 Labor skills

5-11
What Does A Country Trade?
Worldwide Trade by Major Sectors

5-12
 With Whom Do Countries Trade?
 Country similarity theory
 most trade occurs among developed countries
 share similar market characteristics

 produce and consume much more than

developing countries
 Trading partners are affected by
 Cultural similarity
 Political relations between countries
 Distance

5-13
 Product Life Cycle Theory
 The product life cycle theory
 the production location of certain
manufactured products shifts as they go
through their life cycle
 Four stages
 Introduction
 Growth
 Maturity
 Decline

5-14
Product Life Cycle Theory
Life Cycle of the International Product

5-15
 Why Production Factors Move
 Factor mobility theory
 focuses on why production factors move, the
effects of that movement on transforming
factor endowments, and the impact of
international factor mobility on world trade
 Capital and labor move internationally to
 gain more income
 flee adverse political situations

5-16
Effects of Factor Movements
 Factor movements can be substantial for
some countries, and insignificant for
others
 The movement of labor and capital are
intertwined
 Pros and cons of outward and inward
migration
 Brain drain
 Remittances

5-17
 Trade and Factor Mobility
 There are pressures for the most abundant
factors to move to areas of scarcity
 The lowest costs occur when trade and
production factors are both mobile

5-18
 Trade and Factor Mobility
 Factor mobility through foreign investment
often stimulates trade because of
 the need for components
 the parent’s ability to sell complimentary
products
 the need for equipment for subsidiaries

5-19
 In What Direction
Will Trade Winds Blow?
 Issues to consider
1. Displacement of jobs as developed countries
shift production to more rapidly developing
countries
2. Relationships among land, labor, and capital
will continue to evolve
3. Continued trend toward a more finely tuned
specialization of production among countries

5-20