Chapter 2 Tools of Analysis for International Trade Models

Important Trade Questions Why does international trade occur? Mention the three levels of international trade? What are the benefits gained, and cost incurred from trade? What goods will a country export/import? What impose countries to move from one location to another? What are the forms of entering other markets? What is the effect of trade on payments to factors of production?

Important Trade Questions What are the benefits that free areas provide for countries conduct trading? What are the benefits gained, and cost incurred from trade? Is offshoring similar to outsourcing? Licensing is a very effective tool that is enabling economies to grow, comment?

Three levels of international trade markets

What Do We Trade? (cont.) Low- and middle-income countries have also changed the composition of their trade. – In 2001, about 65% of exports from low- and middle-income countries were manufactured products, and only 10% of exports were agricultural products. – In 1960, about 58% of exports from low- and middle-income countries were agricultural products and only 12% of exports were manufactured products. More than 90 percent of the exports of China, the largest developing country and a rapidly growing force in world trade, consist of manufactured goods.

Service Outsourcing Service outsourcing (or offshoring) occurs when a firm that provides services moves its operations to a foreign location. – Service outsourcing can occur for services that can be transmitted electronically. A firm may move its customer service centers whose telephone calls can be transmitted electronically to a foreign location. – Other services may not lend themselves to being performed remotely.

Service Outsourcing (cont.) Service outsourcing is currently not a significant part of trade. – Some jobs are “tradable” and thus have the potential to be outsourced. – Most jobs (about 60%) need to be done close to the customer, making them nontradable.

A management contract is an arrangement under which operational control of an enterprise is vested by contract in a separate enterprise that performs the necessary managerial functions in return for a fee. Management contracts involve not just selling a method of doing thingsenterprise (as with franchising or licensing) but involve actually doing them. A management contract can involve a wide range of functions, such as technical operation and of a production facility, management of personnel, accounting, marketing services and training.franchisinglicensing

License A license or license is an official permission or permit to do, use, or own something. A license may be granted by a party to another party as an element of an agreement between those parties.

Free zones Free economic zones (FEZ), free economic territories (FETs) or free zones (FZ) are a class of special economic zone (SEZ) designated by the trade and commerce administrations of various countries. The term is used to designate areas in which companies are taxed very lightly or not at all to encourage economic activityspecial economic zone