InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Instructor Manual
Chapter 5: Trading Internationally
to accompany Mike Peng & Klaus Meyer: International Business, Cengage Learning
Prepared by Klaus Meyer
version February 2011
Introduction to the Topic
Learning Objectives
1. use the resource-based and institution-based views to explain why nations trade
2. understand classical and modern theories of international trade
General Teaching Suggestions
This chapter introduces the foundation of international trade theory, along with a few
institutional/political issues arising in international trade. In many institutions, trade theory is
likely to have been covered in an (international) economics course – if so you may want to
just summarize the main insights as a review. If students do not have any grounding in
economics, they may find it a bit hard going. However, no pain no gain. Communicate to
your students that it is necessary to understand some basic theories to gain deeper
appreciation of IB. Thus, they have to get through this chapter (and chapter 7) and then more
exciting topics will be discussed.
Opening Case Discussion Guide
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
The opening case outlines the trading activities in the Port of Rotterdam, Europe’s largest. It
provides the most visible evidence of the scope of international trade. Emphasize the scale of
Chapter Outline, Section by Section
Section 1: Why do nations trade?
Key Ideas
This section introduces some of the basic concept along with data on the scale of
international trade worldwide.
Key Concepts
exporting
Selling abroad.
trade surplus
An economic condition in which a nation exports more than it imports.
Section 2: Theories of International Trade
Key Ideas
To structure a complex set of materials, we distinguish classical and modern trade theories.
Classical theories include (1) mercantilism, (2) absolute advantage, and (3) comparative
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
advantage. Modern theories include (1) product life cycles, (2) strategic trade, and (3)
“diamond.”
Key Concepts
classical trade theories
The major theories of international trade that were advanced before the 20th century, which consist of
mercantilism, absolute advantage, and comparative advantage.
protectionism
The idea that governments should actively protect domestic industries from imports and vigorously
promote exports.
free trade
trade uninhibited by trade barriers
theory of absolute advantage
A theory that suggests that under free trade, each nation gains by specializing in economic activities in
which it has absolute advantage.
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Relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with
other nations.
factor endowment theory (or Heckscher-Ohlin theory)
A theory that suggests that nations will develop comparative advantage based on their locally abundant
factors.
product life cycle theory
A theory that accounts for changes in the patterns of trade over time by focusing on product life cycles.
theory of national competitive advantage of industries (or “diamond” model)
A theory that suggests that the competitive advantage of certain industries in different nations depends
on four aspects that form a “diamond.”
Section 3: National Institutions and International Trade
Key Ideas
Institutions change the incentives for firms to engage in international trade. In this section, we
focus on institutions created in individual nation states – multilateral institutions are
discussed in Chapter 9.
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The net impact of various tariffs and NTBs is that the whole nation is worse off while certain
special interest groups (such as certain industries, firms, and regions) benefit. Economic
Key Concepts
tariff barrier
Trade barriers that rely on tariffs to discourage imports.
nontariff barrier (NTB)
Trade barriers that rely on nontariff means to discourage imports.
subsidy
Government payments to (domestic) firms.
import quota
Restrictions on the quantity of imports.
Section 4: Debates and Extensions
Key Ideas
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Key Concepts
No new concepts
Section 5: Implications for Practice
Key Ideas
Managers should discover and leverage the comparative advantage of world-class locations.
Monitor and nurture current comparative advantage of certain locations and take advantage of
Review Questions
Review questions are provided to students on the website accompanying the book. They
directly ask to summarize the material provided in the text. Instructors may also use the
questions to structure their lectures or review sessions.
Review Questions
(as provided to students on the website)
Material in the Book
1. What do the key terms in international trade mean?
2. What is the central idea of mercantilism?
5. How can the product life cycle explain the patterns
of international trade?
6. Why can government intervention in certain
industries, at least theoretically, improve a countries
trade position?
Pages 132, 134
Page 134-35
Page 139-41
Page 141-43
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theories of international trade?
11. Why do governments use non-tariff barriers rather
than tariffs?
12. What are key economic arguments against free
trade?
13. What are key political arguments against free trade?
Page 148-50
Page 150, 151-53
Page 152-53
Critical Discussion Questions
At the end the chapter, we provide discussion questions that aim to stimulate students
thinking beyond memorizing the material learned in the chapter. They are designed to be
used at a basis for in-class discussions, group work, or individual assignments. Below,
provide some indicative answers of issues that may be raised in response to these questions.
Discussion Questions
(as provided in the book)
Indicative Responses
1. After the 2008-09 crisis, is the trade
2. What is the ratio of total volume of
international trade (exports + imports) to
GDP in your country? How about the
ratio for the following: the USA, the
European Union, Japan, Russia, China,
All these are question in which the conclusion
understanding of the key concepts and
arguments.
1. The key concepts here are “trade
policy” and “protectionist.”.
2. It should be noted that nations vary as
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foreign governments. But they also
cause a great deal of misery among the
population (such as shortage of
medicine and food). Are embargoes
ethical?
in international relations and another
involves the use of military force. The
question might be asked as to which is
less likely to cause misery. Sometimes
military power may be targeted toward
Closing Case
The closing case provides further opportunities to apply ideas and concepts learned in this
chapter in a real world setting. The Closing Case for this Chapter is “INSERT” and focuses
on “INSERT”. Below are some indicative responses to the case discussion questions.
Case Discussion Questions
(as provided in the book) Indicative Responses
1. Why do Canada and the United States
have the largest bilateral trading
relationship in the world?
1. The lengthy shared border with
relatively free trade permitted
between the two developed nations
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Further Learning Activities
In addition to the cases and discussion questions provided in the book, instructors may want
to use any of the following activities to further engage students with the material.
1. Cities worldwide differ considerably along many dimensions. However, one facet
of trading internationally is to identify global cities to base a network of
operations. Choose one dimension on which to measure different cities. Then,
develop a report that discusses your findings in detail.
One resource which can be used is “Global Cities Index”. This website can be
2. At times, corporate tax rates in specific locations can be considered a trade barrier
to business development. As a result, locations that have lower tax rates may be
trying to encourage corporations to conduct operations or relocate headquarters
there. Find a list of tax rates for a variety of locations. If you were part of a
company seeking to relocate its operations, which location(s) would you
recommend, and why?
InstructorManualtoMikePeng&KlausMeyer(2011):InternationalBusiness,CengageLearning.
Errors and Corrections
Apologies to Professor Steve Globerman. We greatly appreciate your helpful discussions
with Mike Peng. Only by accident you were named as the author of the Closing Case. We did
not intend to suggest that any of the views expressed were yours.
Further Readings
At the end the chapter, suggested further readings are provided. The primary aim is to
provide students a starting point for further work, for example when preparing a class
assignment or dissertation. These references also are recommended for instructors not
familiar with the topic and wishing to ‘get ahead of the students’ before lecturing on a topic.
J. Bhagwati, A. Panagariya, & T. Sribivasan, 2004, The muddles over outsourcing, Journal of Economic
Perspectives, 18, 93–114 – a recent statement of the benefits of free trade, applied to the question of
outsourcing.
P. Rivoli, 2005, The Travels of a T-shirt in the Global Economy, Hoboken: Wiley – an economist is tracing
and explaining the interdependencies of international trade using the case of a T-shirt.