International Trade Theory
OPENING CASE: The Ecuadorian Rose Industry
AN OVERVIEW OF TRADE THEORY
The Benefits of Trade
The Pattern of International Trade
Trade Theory and Government Policy
Country Focus: Is China a Neo-Mercantilist Nation?
The Gains from Trade
Qualifications and Assumptions
Extensions of the Ricardian Model
Country Focus: Moving U.S. White Collar Jobs Offshore
The Leontief Paradox
THE PRODUCT LIFE CYCLE THEORY
Evaluating the Product Life Cycle Theory
NEW TRADE THEORY
Increasing Product Variety and Reducing Costs
Economies of Scale, First Mover Advantages and the Pattern of Trade Implications of New Trade Theory
NATIONAL COMPETITIVE ADVANTAGE: PORTER’S DIAMOND
Related and Supporting Industries
Firm Strategy, Structure, Rivalry
Evaluating Porter’s Theory
Management Focus: The Rise of Finland’s Nokia
FOCUS ON MANAGERIAL IMPLICATIONS
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Trade in Information Technology and U.S. Economic Growth
1. Understand why nations trade with each other.
2. Be familiar with the different theories explaining trade flows between nations.
3. Understand why many economists believe that unrestricted free trade between nations will raise the economic welfare of all countries that participate in a free trade system.
4. Be familiar with the arguments of those who maintain that government can play a proactive role in promoting national competitive advantage in certain industries.
5. Understand the important implications that international trade theory holds for business practice.
This chapter focuses on the benefits of international trade and introduces several theories that help explain the patterns of international trade that are observed in practice. The discussion begins with an explanation of the theory of mercantilism, and then proceeds to discuss the theories of absolute advantage and comparative advantage. Four additional theories are discussed, including the Heckscher-Ohlin theory, the product life cycle theory, the new trade theory, and the theory of national competitive advantage. Each of these theories helps explain why certain goods are (or should be) made in certain countries. The chapter ends by discussing the link between the theories of international trade and (1) a firm’s decision about where (in the world) to locate its various productive activities, (2) the importance of establishing first-mover advantages, and (3) government trade policies.
Opening Case: The Ecuadorian Rose Industry
The opening case describes Ecuador’s rose industry. In the last 20 years, Ecuador has built its rose industry from virtually nothing to a thriving industry generating $240 million in sales. Today, the industry employs tens of thousands of people at higher wages than the average Ecuadorian receives. Yet, there are concerns that in the quest for perfect flowers, the use of toxic chemicals such as pesticides may be hurting not only the environment, but also the health of the workers. Discussion of the case can revolve around the following questions:
QUESTION 1: Describe the benefits that the rose industry has brought to Ecuador. In your opinion, do the benefits outweigh the disadvantages? Why or why not?
ANSWER 1: Ecuador is now the world’s fourth largest producer of roses. Rose farms in the country support tens of thousands of jobs. Revenues and taxes from the industry have been used to help pave roads, build schools, and construct irrigation systems....
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