International Business - Ch. 5 - International Trade

international trade

purchase, sale, or exchange of goods and services across national borders

pattern of international trade

dominated by flows among wealthy nations

mercantilism

trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and encouraging imports (works on trade surplus, govt intervention, and colonialism)

zero-sum game

an assumption of mercantilism that states a nation increases its wealth only at the expense of other nations (wealth is a fixed pie)

trade surplus

condition that results when the value of a nation's exports is greater than the value of its imports

trade deficit

condition that results when the value of a nation's imports is greater than the value of its exports

absolute advantage

ability of a nation to produce a good more efficiently than any other nation

positive-sum game

an assumption that states absolute advantage allows a country to produce goods in which it holds an absolute advantage and trade with other nations to obtain goods it needs but does not produce (not a fixed pie)

comparative advantage

inability of a nation to produce a good more efficiently than any other nation, but an ability to produce that good more efficiently than it does any other good.

factor proportions theory

states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources that are in short supply. a country will specialize in products that require labor if cost is low relative to the cos

Leontief paradox

the apparent paradox between predictions of factor proportion theory and actual trade flows

international product life cycle theory

a company will begin exporting its product and later undertake foreign direct investment as the product moves through its life cycle (stages: new product, maturing product, standardized product)

new product stage

the first stage of the international product life cycle when production remains based in the home country

maturing product stage

the second stage of the international product life cycle when production begins in countries with the highest demand

standardized product stage

the third stage of the international product life cycle when production moves to low-cost locations to supply a global market

new trade theory

argues that, as specialization and output increase, companies realize economies of scale that push the unit costs of production lower

first-mover advantage

the economic (economy of scale) and strategic advantage gained by being the first company to enter an industry

national competitive advantage theory

states that a nation's competitiveness in an industry, and trade flows, depends on the capacity of the industry to innovate and upgrade

porter diamond

identifies four elements that form the basis of national competitiveness: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry.