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Chapter 5

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McGill University
Management Core
MGCR 382
John Saba

International trade and investment Motivation for international trade Both parties to the transaction who happen to reside in different countries believe they benefit from the voluntary exchange 4/5 of world trade are goods, 1/5 are services The QUAD countries make up more than 50% of the merchandise world export. China passed US to become work’s biggest trading country and world’s biggest exporter Classical country-based theories of international trade (figure 5 p.136)  They are the first theories of internthional trade that developed with the ruse of European nation-states during 16 century focusing on : individual country (patterns of export, import) and trade in commodities (standardized undifferentiated goods on the basis of price rather than name), interindustry trade th Firm based theories developed as MNCs rose to power in the mid 20 century (attention shifted to the firm’s role in promoting international trade)  These theories are useful to describe patterns of trade in differentiated goods for which brand name is an important part of the customer’s purchase decision Country based trade theories:  Mercantilism – a country’s wealth is measured statitically by the stock of precious metals the country possesses o Trade is a zero-sum game (a gain in 1 country necessarily means a loss in the 2 country )  Favors trade protectionism o The nation-building depends on a country enlarging its holdings of gold and silver. A country seeks trade surplus (import less and export more) o A country uses the accumulated gold/silver to pay off deficits with countries it has an unfavorable trade balance and t invest surplus revenues in nation building activities (armies, national construction) to consolidate control over country Supporters of mercantilism  Export oriented manufacturers  Domestic manufacturers threatened by foreign imports (favoring policies imposing tariffs/quotas)  These firms’ workers (unions), their suppliers, and their communities, politicians Opponents of mercantilism  Consumers pay for higher prices/ less choice of products  Taxpayers must pay higher taxes to cover governmental subsidies  Absolute cost advantage o Trade theory toda
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