INTERNATIONAL TRADE

LECTURE#2 (CHAPTER 2)

Why countries trade? and, if successful, receive gold from

countries that run deficits.
There are two basic types of trade between
countries: Mercantilism is an economic theory that
emphasizes self-sufficiency through a
 the first in which the receiving country
favorable balance of trade. It is also
itself cannot produce the goods or viewed as a form of economic
provide the services in question, or protectionism.
where they do not have enough.
Neomercantilism
 the second, in which they have the
capability of producing the goods or  has emerged to describe the
supplying the services, but still import approach of countries that try to run
them. favorable balances of trade in an
attempt to achieve some social or
However, the reasons for importing this
political objective. For instance, a
category of product generally fall into three
country that may try to achieve full
classifications:
employment by setting economic
1. the imported goods may be cheaper policies that encourage its
than those produced domestically; companies to produce in excess of
demand at home and to send the
2. a greater variety of goods may be surplus abroad.
made available through imports;
3. the imported goods may offer THEORIES EXPLAINING TRADE
advantages other than lower prices PATTERNS
over domestic production – better
quality or design, higher status (eg  What types of products does a
prestige labelling), technical features, country trade?
etc.
 How much does a country trade?
 With whom do countries trade?
INTERVENTIONIST THEORIES
Mercantilism
THE CONCEPT OF ECONOMICS
 is a trade theory that formed the
The three economic questions:
foundation of economic thought from
about 1500 to 1800. Mercantilism 1. What commodities and in what
held that a country’s wealth was quantities?
measured by its holdings of treasure,
2. How are good produced?
which usually meant its gold.
According to the theory, countries 3. For whom are the goods produced?
should export more than they import
Why does a country export or import a his Principles of Political Economy and
particular good? Taxation (Ricardo, 1951)

 It also involves what international Ricardo stated: “It will appear. . . that a
economists call the Gains from country possessing very considerable
Trade, which benefit both countries. advantages in machinery and skill, and
These gains are what motivate which may therefore be enabled to
countries to take part in trading manufacture commodities with much less
relationships labour than her neighbors, may, in return for
such commodities, import a portion of its corn
required for its consumption, even if its land
were more fertile, and corn could be grown
with less labour than in the country from
ABSOLUTE ADVANTAGE which it was imported”
The idea of absolute advantage was first
stated in Adam Smith’s Wealth of Nations,
published in 1776. Adam Smith (1937) stated
the following:
“If a foreign country can supply us with a
commodity cheaper than we ourselves can
make it, better buy it of them with some part
of the produce of our own industry, employed
in a way in which we have some advantage”
Absolute advantage

 refers to the possibility that, due to

COMPARATIVE ADVANTAGE
differences in supply conditions, one
country can produce a product at a The difference has an immediate and
lower price than another country. important implication: a country can have a
comparative advantage in a good in which it
has an absolute disadvantage.
In the real world, international trade is
This is one reason why the comparative
actually determined by comparative
advantage concept is more powerful than
advantage rather than absolute advantage.
the absolute advantage concept.
Autarky refers to a situation in which a
As with our analysis of absolute advantage,
country does not engage in either imports or
it is important to remember that the gains
exports. It is a rare situation. More
from trade arising from comparative
commonly, countries engage in both
advantage are for countries as a whole and
importing and exporting relationships with
not for all individuals and groups within a
other countries of the world economy.
country. Within any country, there can be
both winners and losers from international
trade.
COMPARATIVE ADVANTAGE

The concept of comparative advantage was

first introduced in 1817 by DavidRicardo in
INTRA-INDUSTRY TRADE businessman can import a
consignment of a product from a
British producer. He needs not to
INTRA-INDUSTRY AND INTER-INDUSTRY know anything about the business
TRADE environment of Britain. But opening
an International Business is more
Therefore, you should have the following involving. The operator must study
associations in mind when distinguishing and understand the international
intra-industry trade from inter-industry trade: business environment such as
culture, a legal, economic factor
which prevails in the environment he
Inter-industry trade ⇔ either / or would want to locate his business.
Intra-industry trade ⇔ both / and PREVAILING PROBLEMS OF
INTERNATIONAL TRADE
Intra-industry trade and its sources are
different, and there are actually two types of 1. Cultural differences: Deep cultural
intra-industry trade. The horizontal intra- differences like social expectations, manners
industry trade and has its source in product and methods of doing business can be
differentiation. The term horizontal refers to persistent problems to a country who is about
the fact that the products exchanged are at to enter into a bilateral or multilateral
the same level of processing. agreement.
The second type of intra-industry trade is 2. Currency problem: Trading between
vertical intra-industry trade and has its sovereign nation creates financial
source in fragmentation complications because currencies are not of
equal value and the rate of exchange
between currencies are not fixed.
3. Legal protection: countries often limit
International trade by legal means. Example
tariff, quota and embargo. This protective
tariffs and quotas is to encourage the growth
of domestic industries and to protect them
from price competition from foreign
companies.
4. Foreign political climates: these are
often unpredictable. For example, terrorism
and foreign tax structures may be favour to
INTERNATIONAL TRADE AND business.
INTERNATIONAL BUSINESS COMPARED

International trade

 is a business transaction between

the nationals of two different
countries. For example, a Nigerian
BARRIERS TO INTERNATIONAL • In China, Kentucky Fried Chicken’s slogan
MARKET SUCCESS “Finger Lickin’ Good” translated to “Eat
Your Fingers Off”
 Language: Does your brand name
and advertising translate into Religions
meanings that could be
 Buddhism: Refrain from meat,
embarrassing?
vegetarian diet is desirable,
 Non-Verbal Language: Are any moderation in all foods
cultural norms violated with respect
 Eastern Orthodox: Restrictions on
to numbers, color, and symbols?
meat and fish, fasting on religious
 Religion & Values: Does your brand holy day
or advertising offend religious beliefs
 Hinduism: Beef is prohibited, all
and/or cultural values?
other meat and fish restricted or
 Political Stability: The degree that a avoided, alcohol avoided
country is socially and economically
 Islam: Pork and certain birds
stable.
prohibited, alcohol prohibited, coffee,
 Laws & Regulations: The degree teas, stimulants avoided
that foreign business regulated and
 Judaism: Pork and shellfish
allowed to operate in a country.
prohibited, meat and dairy at same
 Market Infrastructure: The degree meal prohibited
roads, utilities, transportation,
 Mormonism: Alcohol and beverages
banking, media and retail are in
containing caffeine prohibited
place.
 Protestantism: Few restrictions of
Examples of Barriers to International
Markets food or fasting observations,
moderation in eating and drinking
 Rastafarianism: Meat & fish
restricted, vegetarian diets only,
alcohol, coffee, soft drinks prohibited
 Roman Catholicism: Meat restricted
on certain days, fasting practiced
 Seventh-day Adventist: Pork
prohibited and meat and fish avoided,
alcohol, coffee, and tea prohibited
STARBUCKS LOGO ADAPTATION
• Colgate once marketed Cue toothpaste in BASED ON RELIGIOUS AND
France not knowing Cue was a well-known CULTURAL VALUES
pornographic magazine.

• Italy's Traficant mineral water in Spanish

translated to “trafficker”, since "Traficant"
means "trafficker.”