Merchandise of Trade

Merchandise trade includes all trade in goods

trade in services is excluded

International Business Activities International Trade includes exports and imports

Foreign Direct Investment (FDI) International companies must make FDI to establish and expand their overseas operations

Foreign Sourcing

is the overseas procurement of raw materials, components, and products

Volume of Trade In 1990,

volume of international trade in goods and services surpassed $4 trillion

In 2003, international trade in goods and services exceeded $9 trillion One-fourth of everything grown or produced in the world is now exported

By 2008

exports of goods and services had nearly quintupled, exceeding $19.5 trillion

Increases in exports to developing countries, especially Latin America Central and Eastern Europe Middle East Asia

Quadrupling of world exports in less than 31 years demonstrates that the opportunity to increase sales by exporting is a viable growth strategy

Merchandise and Services Trade as a Percentage of Gross Domestic Product

10 Leading Exporters and Importers in World Merchandise and Service Trade, 2009 (billions of dollars)

Direction of Trade

Largest exporters and importers of merchandise are

generally developed countries

Among largest 25 exporters emerging economies of

China, Mexico, Malaysia, Thailand, Brazil

Among largest merchandise importers

China, Mexico, Malaysia, Thailand, India, Turkey

Some Newer Explanations for the Direction of Trade

Differences in Resource Endowments Some countries have an abundance of resources, when compared to the endowments of other nations. For example, the United States has a large supply of fertile farmland, Chile has abundant supplies of copper, and Saudi Arabia has extensive amounts of crude oil. These differences in endowments can result in differences across countries in the opportunity cost of producing these resources. Overlapping Demand In contrast to resource endowmentbased theory, Swedish economist Stefan Linder theorized that customers tastes are strongly affected by income levels, and therefore a nations income per capita level determines the kinds of goods its people will demand. Because an entrepreneur will produce goods to meet this demand, the kinds of products manufactured reflect the countrys level of income per capita. Goods produced for domestic consumption will eventually be exported, due to similarity of income levels and therefore demand in other countries

Direction of Trade -The Exceptions

Reasons the United States exports more to developing nations

The U.S. has significantly more subsidiaries in developing countries than Japanese companies

Some customers prefer to buy from American firms

Reasons Japan exports more to developing nations

Japan established extensive distribution in developing nations since early 1900s

Uses sogo shosha to import raw materials and components necessary for the Japanese industry, due to lack of local sources for raw materials

Other industrialized nations have imposed import restrictions on Japanese exports to protect their home industries

Major Trading Partners

Major U.S. Trading Partners Mexico and Canada

Share common border with the U.S. Freight charges lower Delivery times shorter Contacts easier and less expensive

Nations from East and Southeast Asia have become important trading partners

China, South Korea, Taiwan, Malaysia and Singapore supply U.S. with huge quantities of electronic components and manufactured goods

Major Trading Partners of the United States, 2009 ($ billions)

EXPLAINING TRADE: INTERNATIONAL TRADE THEORIES

Mercantilism

Mercantilism, the economic philosophy Smith attacked, evolved in Europe between the 16th and 18th centuries. A complex political and economic arrangement, mercantilism traditionally has been interpreted as viewing the accumulation of precious metals as an activity essential to a nations welfare. These metals were, in the mercantilists view, the only source of wealth. Because England had no mines, the mercantilists looked to international trade to supply gold and silver. In balance of-payments accounting, an export that brings dollars to the country is called positive, but imports that cause dollar outflow are labeled negative

Theory of Absolute Advantage Adam Smith argued against mercantilism by claiming that market forces, not government controls, should determine the direction, volume, and composition of international trade. He argued that under free, unregulated trade, each nation should specialize in producing those goods it could produce most efficiently (for which it had an absolute advantage, either natural or acquired). Theory of Comparative Advantage David Ricardo demonstrated in 1817 that even though one nation held an absolute advantage over another in the production of each of two different goods, international trade could still create benefit for each country (thus representing a positivesum game, or one in which both countries win from engaging in trade). The only limitation to such benefit-creating trade is that the less efficient nation cannot be equally less efficient in the production of both goods.