2. OHT 3.1 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 International Business: Theory and Practice

3. OHT 3.2 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 CountryOutput of CDs Output of videos ABAB 2,000 1,000 800 200 Production possibilities in a two-product, two-country model

4. OHT 3.3 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 CountryOpportunity cost of 1 extra CD Opportunity cost of 1 extra video ABAB 0.4 videos 0.2 videos 2.5 CDs 5.0 CDs Opportunity costs in a two-product, two-country model

5. OHT 3.4 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Comparative advantage In a two-product, two-country model, a country has a comparative advantage in that product: –In which its absolute advantage is greatest or its absolute disadvantage least –In which it has a lower opportunity cost than the other country

6. OHT 3.5 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Terms of Trade Refers to the rate at which the product(s) exported exchange for the product(s) imported. If the terms of trade are ‘appropriate’ both countries can gain from specialisation and trade ‘Appropriate’ terms of trade must lie between the slopes of the respective production possibility frontiers

7. OHT 3.6 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Gains from specialisation and trade (1)

8. OHT 3.7 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Gains from specialisation and trade (2)

9. OHT 3.8 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Gains from free trade versus no trade

10. OHT 3.9 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Sources of comparative advantage Factor endowments: Heckscher – Ohlin Disaggregated factor endowments –Efficiency units –Human capital Revealed comparative advantages National competitive advantages

11. OHT 3.10 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Sources of national competitive advantages Porter identified six key sources Demand conditions Factor conditions Firm strategies: structures and rivalries Related and supporting industries Government policies Chance

12. OHT 3.11 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Honda: EU motorcycle networks and supply links

13. OHT 3.12 Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004 Effects of a tariff