CHAPTER 6: International trade and Factor-Mobility TheoryLaissez Faire Vs. Interventionist Approaches to Exports and Imports:Countries enact policies to influence which countries can produce a given product more efficiently and whether countries will permit imports to compete against their domestically produced goods and services.Helps managers focus on what products to export/import, how much to trade, and with whom to trade with.Some nations take laissez faire approach (allows market forces to determine trading relations)Free Trade Theories (absolute advantage and comparative advantage) take a laissez faire approach because they prescribe the governments should not intervene directly to affect trade.Mercantilism and Neomercantilism - prescribe great deal of government intervention in trade.DEMAND REASONS:Import:High quality productsLower priced productsProducts not produced domesticallyTo provide consumer with varietyTo reduce the risk of supply shortagesSUPPLY REASONSExport to:Use excess capacityAchieve economies of scaleSpread sales riskIncrease profitabilityIncrease market shareADAM SMITH’S THEORY- The Wealth of Nations (1776)A country’s wealth is based on its available goods and services rather than goldTheories of Trade Patterns: includes examining theories of country size, factor proportions, and country similarity. Also consider theories dealing with the dynamics of countries trade competitiveness including product life cycle theory and diamond of national competitive advantage theory.Trade Theories and Business:MercantilismNeo- MercantilismNatural AdvantageAcquired AdvantageAbsolute AdvantageComparative AdvantageFactor ProportionsFactor Mobility Theory: stability and dynamics of countries depend largely on land, labor, capital, technology these factors remain very important.Interventionist Theories:1. Mercantilism- holds that a countries wealth is measured by its holdings of treasure, usually meaning its gold. *Countries should export more than they import and if successful, receive gold from countries that run deficitsNation states emerged from this time period and gold empowered central governments to raise armies and invest in national institutions to solidify peoples primary allegiances to new nations.Government policies- to export more than import, governments restricted imports and subsidized production that otherwise couldn’t be compete in domestic of export markets.Favorable Balance of trade-( or trade surplus) still indicates that a country is exporting more than it importsUnfavorable balance of trade- (or trade deficit) indicates a country imports more than it exports.2. Neomercantilism- describes the approach of countries that try to run favorable balances of trade in an attempt to achieve some social or political objective.Free Trade Theories:1. Absolute Advantage: different countries produce some goods more efficiently than others, and questions why the citizens of any country should have to buy domestically produced goods when they can buy them more cheaply abroad.If trade were unrestricted, a country would specialize in those products that gave it a competitive advantage. Resources would shift to the efficient industries because it couldn't compete in inefficient ones. It can increase its efficient for three reasons:1. Labor become more skilled by repeating tasks2. Labor wouldn't lost time in switching production from one kind of product to another3. Long production runs would provide incentives for developing more effective working method’s.The country then uses its excess specialized production to buy more imports than otherwise could’ve produced.A) Natural advantage: in creating a product or service comes from climatic conditions, access to certain natural resources, or availability of certain labor forces. The more two countries natural advantages differ, the more likely they will favor trade with one another.B) Acquired Advantage: countries that are competitive in manufactured goods, usually in either product or process technology.Product technology-it enables a country to produce a unique product or one that is easily distinguished from those of competitors.Process technology- a country’s ability to efficiently produce a homogenous product (one not easily distinguished by competitors). Countries that develop distinctive or less expensive products have acquired advantages, until producers in another country match them successfully.Through technology it has created new products, displaced old ones and altered trading partner relationships. Technology may be used to overcome natural advantages.Resource Efficiency: specialization increases the production of both products, by trading with each other, global efficiency is optimized, and the two countries can have more coffee and more wheat than they would without trade.2. Comparative Advantage: global efficiency gains may still result from trade if a country specializes in what it can produce most efficiently-regardless of whether other countries can product the same products more efficiently.Theories of Specialization: Assumptions and Limitations:While the theories of specialization (absolute advantage and comparative advantage) offer policymakers a greater understanding of free trade, they are based on a number of assumptions that may not always be valid.Specifically, the theories assume that full employment exists, that economic efficiency is the primary goal of countries, that the division of gains is acceptable to both countries, that the world is composed of only two countries and two products, that there are no transportation costs, that advantages are static, products and services, and that while resources can move freely within a country, they are immobile internationally.Keep in mind that the theories can apply to trade in services as well as trade in products and that they apply to situations in which multi-country production takes place.Trade Patterns Theory: must deal with the amount, product composition, or partners a country will have if it follows a free trade policy.Non-tradable goods: products and services that are seldom practical to export because of high transportation costs(produced in very country)Theory of Country Size: large countries usually depend less on trade than small ones, countries with large land areas are more apt to have varied climates and assortment of natural resources.Large countries (Brazil, US, China, India) import much less of consumption needs than