Introduction Part Three

Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment Here are some of the topics we’ll be talking about in this chapter. 2

Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

into the Nature and Causes of the Wealth of Nations. Adam Smith 1723-1790 In 1776 wrote An Inquiry into the Nature and Causes of the Wealth of Nations. Smith is often described as a prototypical absent-minded professor.[45] He is reported to have had books and papers stacked up in his study, with a habit he developed during childhood of speaking to himself and smiling in rapt conversation with invisible companions.[45] Various anecdotes have discussed his absentminded nature. In one story, Smith reportedly took Charles Townshend on a tour of a tanning factory and while discussing free trade, Smith walked into a huge tanning pit from which he had to be removed.[46] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.[45][46] Portrait of Adam Smith by John Kay, 1790 Smith is reported to have been an odd-looking fellow. One author stated that Smith "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".[47] Smith is reported to have acknowledged his looks at one point saying, "I am a beau in nothing but my books."[47] Smith "never" sat for portraits,[48] so depictions of him created during his lifetime were drawn from memory, with rare exceptions. The most famous examples were a profile by James Tassie and two etchings by John Kay.[49] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely off of Tassie's medallion.[50] The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".[67] The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that while human motives were often driven by self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is:[68] It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London edition Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[69] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html

International Trade Theories Adam Smith's Theory of Absolute Advantage From: The Wealth of Nations (1776) When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.

Absolute Advantage France: 1 year of labor = . http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage France: 1 year of labor = 20k liters of wine http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage France: 1 year of labor = 20k liters of wine or http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage Germany: same labor = 15k liters of wine France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage Germany: same labor = 15k liters of wine or France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage Germany: same labor = 15k liters of wine or 3 units of machinery France: 1 year of labor = 20k liters of wine or 2 units of machinery http://z.about.com/d/geography/1/0/1/L/europe.jpg

Absolute Advantage Germany: same labor = 15k liters of wine or 3 units of machinery Germany sells Machinery to France France: 1 year of labor = 20k liters of wine or 2 units of machinery France sells Wine to Germany http://z.about.com/d/geography/1/0/1/L/europe.jpg

Adam Smith 1723-1790 ? Smith is often described as a prototypical absent-minded professor.[45] He is reported to have had books and papers stacked up in his study, with a habit he developed during childhood of speaking to himself and smiling in rapt conversation with invisible companions.[45] Various anecdotes have discussed his absentminded nature. In one story, Smith reportedly took Charles Townshend on a tour of a tanning factory and while discussing free trade, Smith walked into a huge tanning pit from which he had to be removed.[46] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.[45][46] Portrait of Adam Smith by John Kay, 1790 Smith is reported to have been an odd-looking fellow. One author stated that Smith "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".[47] Smith is reported to have acknowledged his looks at one point saying, "I am a beau in nothing but my books."[47] Smith "never" sat for portraits,[48] so depictions of him created during his lifetime were drawn from memory, with rare exceptions. The most famous examples were a profile by James Tassie and two etchings by John Kay.[49] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely off of Tassie's medallion.[50] The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".[67] The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that while human motives were often driven by self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is:[68] It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London edition Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[69] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html 15

Adam Smith 1723-1790 Smith is often described as a prototypical absent-minded professor.[45] He is reported to have had books and papers stacked up in his study, with a habit he developed during childhood of speaking to himself and smiling in rapt conversation with invisible companions.[45] Various anecdotes have discussed his absentminded nature. In one story, Smith reportedly took Charles Townshend on a tour of a tanning factory and while discussing free trade, Smith walked into a huge tanning pit from which he had to be removed.[46] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.[45][46] Portrait of Adam Smith by John Kay, 1790 Smith is reported to have been an odd-looking fellow. One author stated that Smith "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".[47] Smith is reported to have acknowledged his looks at one point saying, "I am a beau in nothing but my books."[47] Smith "never" sat for portraits,[48] so depictions of him created during his lifetime were drawn from memory, with rare exceptions. The most famous examples were a profile by James Tassie and two etchings by John Kay.[49] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely off of Tassie's medallion.[50] The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".[67] The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that while human motives were often driven by self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is:[68] It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London edition Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[69] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html 16

Adam Smith 1723-1790 Smith is often described as a prototypical absent-minded professor.[45] He is reported to have had books and papers stacked up in his study, with a habit he developed during childhood of speaking to himself and smiling in rapt conversation with invisible companions.[45] Various anecdotes have discussed his absentminded nature. In one story, Smith reportedly took Charles Townshend on a tour of a tanning factory and while discussing free trade, Smith walked into a huge tanning pit from which he had to be removed.[46] Another episode records that he put bread and butter into a teapot, drank the concoction, and declared it to be the worst cup of tea he ever had. In another example, Smith went out walking and daydreaming in his nightgown and ended up 15 miles (24 km) outside town before nearby church bells brought him back to reality.[45][46] Portrait of Adam Smith by John Kay, 1790 Smith is reported to have been an odd-looking fellow. One author stated that Smith "had a large nose, bulging eyes, a protruding lower lip, a nervous twitch, and a speech impediment".[47] Smith is reported to have acknowledged his looks at one point saying, "I am a beau in nothing but my books."[47] Smith "never" sat for portraits,[48] so depictions of him created during his lifetime were drawn from memory, with rare exceptions. The most famous examples were a profile by James Tassie and two etchings by John Kay.[49] The line engravings produced for the covers of 19th century reprints of The Wealth of Nations were based largely off of Tassie's medallion.[50] The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".[67] The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that while human motives were often driven by self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is:[68] It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London edition Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.[69] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can. http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html 17

International Trade Theories Ricardo's Theory of Comparative Advantage Political Economy and Taxation (1815) Nations trade with one another when they can produce certain goods relatively more efficiently than one another. Most international trade today is explained by the Theory of Comparative Advantage.

International Trade Theories Theory of Comparative Advantage Illustration The UK can make 25 tons of wheat or 5 units of machinery using one year of labor. Brazil can make 21 tons of wheat or 3 units of machinery using the same amount of labor. The UK has an absolute advantage in machinery and wheat. However, in the UK, the “relative price” of a unit of machinery is 5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons of wheat. If the UK decides to grow wheat, it has to “give up” 1/5 of a piece of machinery. If it can find wheat at a lower price than 1/5 of a piece of machinery, it finds it advantageous.

International Trade Theories Theory of Comparative Advantage Illustration If Brazil decides to make machinery, it has to “give up” 7 units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous. The UK will sell its machinery to Brazil at the price of 6 tons of wheat. The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it can make it (6 tons of wheat). Both nations gain from this trade.

International Trade Theories Factor Endowment Theory Developed by Hecksher and Ohlin (1933) A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship. Explains why certain countries specialize in the production of certain products.

International Trade Theories Factor Endowment Theory Countries with an abundance of land will specialize in the production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans). Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming). Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance). Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for example, United States and intellectual property).

International Trade Theories International Product Life Cycle Developed by Raymond Vernon (1966) Over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.

International Trade Theories International Product Life Cycle First Stage A new product is launched in a country, called the country of innovation, to satisfy market need. Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there. Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries.

International Trade Theories Porter's Cluster Theory A firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity. The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient. Such a grouping of companies is called a cluster.

International Trade Theories Porter's Cluster Theory Examples Silicon Valley, California, is a cluster for information technology. Sassuolo, Italy, is a cluster for ceramic tiles. Limoges, France, is a cluster for porcelain. Genève, Switzerland, is a cluster for watches. Yiwu, China, is a cluster for socks and hosiery.

Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

The International Business Environment Culture Demographics Economics Regulations and Laws Infrastructure Communications .....much of the international business environment is different from the domestic environment.

Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment Here are some of the topics we’ll be talking about in this chapter.