Global Business Today 7e by Charles W.L. Hill Welcome to Global Business Today, Seventh Edition by Charles W.L. Hill.

International Trade Theory Chapter 5 International Trade Theory Chapter 5: International Trade Theory

Introduction International trade theory explains why it is beneficial for countries to engage in international trade helps countries formulate their economic policy explains the pattern of international trade in the world economy You already know that countries trade with each other, but do you know why they trade? U.S. manufacturers know how to make clothing, in fact, much of clothing worn by Americans used to be made in the U.S. Now, however, the U.S. buys a lot of its textiles from places like Honduras and Guatemala. Why does Ford assemble cars made for the American market in Mexico, while BMW and Nissan manufacture cars for Americans in the U.S.? These are questions that economists have tried to answer for many years, and in this chapter we’ll look at patterns of trade and explore some of the theories that have been used to explain those patterns.

An Overview of Trade Theory Question: What is free trade? Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country First though, let’s answer the question of what we mean by free trade. Free trade refers to a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country. In other words, goods and services are allowed to cross borders without any restrictions.

Classroom Performance System Which theory did not suggest that there could be gains from specialization and trade? Mercantilism Absolute advantage Comparative advantage Heckscher-Ohlin theory Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready? Question 1: Which theory did not suggest that there could be gains from specialization and trade? mercantilism absolute advantage comparative advantage Heckscher-Ohlin theory If you picked A, you’re right!

Classroom Performance System Which theory viewed trade as a zero sum game? Mercantilism Absolute advantage Comparative advantage Heckscher-Ohlin theory Question 2: Which theory viewed trade as a zero sum game? mercantilism absolute advantage comparative advantage Heckscher-Ohlin theory If you picked A, you’re correct!

Classroom Performance System Economies of scale and first mover advantages are central to which theory of trade Porter’s diamond of competitive advantage New trade theory Vernon’s product life cycle Comparative advantage Question 3: Economies of scale and first mover advantages are central to which theory of trade? Porter’s diamond of competitive advantage New trade theory Vernon’s product life cycle Comparative advantage The correct answer is B. Did you get it right?

Classroom Performance System Porter’s Diamond is made up of all of the following except Factor endowments Related and supporting industries Firm strategy, structure, and rivalry Supply conditions Question 4: Porter’s Diamond is made up of all of the following except Factor endowments Related and supporting industries Firm strategy, structure, and rivalry Supply conditions Did you pick D? I hope so!