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

2. International Trade Theory
Chapter 5
International
Trade Theory
Chapter 5: International Trade Theory

3. 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.

4. 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.

5. 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!

6. 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!

7. 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?

8. 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!