Inter MKTG Chap2

Chapter 2
Theories and Concepts In International Marketing
Mercantilism – is the oldest International Trade Theory that found during 1500-1600.
Mercantilism is an economic theory that holds a country’s treasure primarily in the form of gold
constituted its wealth. This theory says that countries should export more than they import, so
they can receive the value of trade surplus in the form of gold fro the countries that experience
Trade Deficit.
ABSOLUTE ADVANTAGE
A country has an absolute advantage over another in producing a good, if it can produce that
good using fewer resources than another country.
For example if one unit of labor in Taiwan can produce 80 units of wool or 20 units of wine;
while in Hong Kong one unit of labor makes 50 units of wool or 75 units of wine, then Taiwan
has an absolute advantage in producing wool and Hong Kong has an absolute advantage in
producing wine.
Taiwan can get more wine with its labor by specializing in wool and trading the wool for Hong
Kong wine, while Hong Kong can benefit by trading wine for wool.
Example:
Country A can produce one bag using one unit of labor.

Country B can produce one bag using two units of labor.
Country A has an absolute advantage over Country B in producing bags.
COMPARATIVE ADVANTAGE
The theory of comparative advantage, which says that nations should specialize in producing
the good in which they have the lowest opportunity cost. In the end, people would not only look
at absolute advantage, but they would also consider comparative advantage when deciding
what goods to produce and for whom to produce them.
When we look at international trade, we see that a nation can have an absolute advantage in
the production of every good, but they will not have a comparative advantage in everything.
Absolute advantage is an important first step in this process, and that's why it's very helpful to
learn how to identify it.
Example:
Columbia produces 30 million motorcycles and ten million speed boats each year, while Japan
produces 25 million motorcycles and 2.5 million speed boats during the same time period. While
Columbia has an absolute advantage in producing both motorcycles and speed boats, it only
has a comparative advantage in producing speed boats.
When we compare how skilled Columbia and Japan are at producing each of these products,
we see that Columbia is 1.2 times better than Japan at producing motorcycles and 4 times
better than Japan at producing speed boats. This means that Columbia can produce speed
boats at a much lower opportunity cost than Japan can since they have less to give up by
allocating more of their resources toward speed boat production and less of their resources
toward motorcycle production. Columbia chooses to channel their resources into producing
speed boats and in return Japan channels their resources into producing motorcycles.
Protectionism and Trade Barriers
Although trade generally benefits a country as a whole, powerful interests, within

countries, frequently put obstacles to protect their own interest. Protectionism is the economic
policy of restraining trade between nations, through methods such as, high tariffs on imported
goods, restrictive quotas, and anti-dumping laws, in a particular nation, from foreign takeover or
competition.
The term is mostly used in the context of economics, where protectionism refers
to policies or doctrines which “protect” businesses and living wages by restricting or regulating
trade between foreign nations. The following are protection methods.
1. Subsidies- to protect existing businesses from risk associated with change,

such as costs of labor, material, etc.
2.
3. Tariffs- is a form of tax which is applied to imported goods that would
overwhelm the market.
4. Quotas- to prevent dumping of cheaper foreign goods that would overwhelm

the market.
5. Tax Cuts- alleviation of the burdens of social and business costs.
6. Intervention- the use of state power to bolster an economic entity.
7. Embargo- this is complete ban on the import of certain goods.
8. Voluntary Export Restraints- these are not official quotas, but involve
agreements made by countries, to limit the amount of goods they export to an
importing country.
9. Non-Tariff- such as differential standards in testing foreign and domestic

products for slow processing of imports at ports of entry or arbitrary laws
which favor domestic manufacturers.
Protectionism is frequently associated with economic theories such as mercantilism, the

belief that it is beneficial to maintain a positive trade balance and import substitution. There are
2 main variants of protectionism:
1. Traditional ( i.e. sales tax )
2. Modern ( i.e. imposition of restrictive certification procedures on imports)
Advantages of Protectionism
Protectionism occurs when one country reduces the level of its import because
of:
1. Protection of Infant Industry- if local firm producing technology

goods are to survive against established-foreign producer’s then
temporary tariffs or quotas may be needed.
2. Resistance to Unfair Foreign Competition- foreign companies

may receive subsidies or other government benefits, they may be
dumping (selling goods abroad at below cost price to capture a
market).
3. Balance of Payments- reducing imports improves the balance of

trade.
4. Preservation of Vital Domestic Industry- protect the

manufacture of essential goods.
5. Maintenance of Domestic Living Standards and

Preservation of Jobs- imports restrictions can temporarily protect
domestic jobs and can in the long run protect specific jobs.
6. Retaliation- the proper way to address trade disputes is now through

WTO.
Disadvantages of Protectionism
The following are the disadvantages of protectionism:
1. Prevents countries enjoying the full benefits of international specialization and

trade.
2. Invites retaliation from foreign governments.
3. Protects inefficient home industries from foreign competition. Consumers pay

more for interior produce.

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Chapter 2

Theories and Concepts In International Marketing

Country A can produce one bag using one unit of labor.

Protectionism and Trade Barriers

Although trade generally benefits a country as a whole, powerful interests, within

1. Subsidies- to protect existing businesses from risk associated with change,

4. Quotas- to prevent dumping of cheaper foreign goods that would overwhelm

5. Tax Cuts- alleviation of the burdens of social and business costs.

6. Intervention- the use of state power to bolster an economic entity.

7. Embargo- this is complete ban on the import of certain goods.

9. Non-Tariff- such as differential standards in testing foreign and domestic

Protectionism is frequently associated with economic theories such as mercantilism, the

1. Protection of Infant Industry- if local firm producing technology

2. Resistance to Unfair Foreign Competition- foreign companies

3. Balance of Payments- reducing imports improves the balance of

4. Preservation of Vital Domestic Industry- protect the

5. Maintenance of Domestic Living Standards and

6. Retaliation- the proper way to address trade disputes is now through

The following are the disadvantages of protectionism:

1. Prevents countries enjoying the full benefits of international specialization and

2. Invites retaliation from foreign governments.

3. Protects inefficient home industries from foreign competition. Consumers pay

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