OHT 3.1
International Business:
Theory and Practice
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.2
Production possibilities in a two-product,
two-country model
Country
Output of
CDs
Output of
videos
A
B
2,000
1,000
800
200
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.3
Opportunity costs in a two-product, two-country model
Country
Opportunity Opportunity
cost of 1
cost of 1
extra CD
extra video
A
B
0.4 videos
0.2 videos
2.5 CDs
5.0 CDs
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.4
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
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.5
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
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.6
Gains from specialisation and trade (1)
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.7
Gains from specialisation and trade (2)
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.8
Gains from free trade versus no trade
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.9
Sources of comparative advantage
• Factor endowments: Heckscher – Ohlin
• Disaggregated factor endowments
– Efficiency units
– Human capital
• Revealed comparative advantages
• National competitive advantages
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.10
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
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.11
Honda: EU motorcycle networks and supply links
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
OHT 3.12
Effects of a tariff
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004