Chapter 3 | Exploring Global Business
The Basis and Benefits of International Trade
International business – all business activities that involve exchanges across national boundaries
Absolute advantage – the ability to produce a specific product more efficiently than any other nation
- Example: The United States’ natural resources is wheat which makes it long specialized in the
production of it.
Comparative advantage – the ability to produce a specific product more efficiently than any other
product
Exporting for Growth
Exporting – selling and shipping raw materials or products to other nations
- Example: The Boeing Company exports its airplanes to a number of countries for use by their
airlines.
- With exporting, there are more potential customers and increased jobs and income. Without
exporting, there is a limited number of customers.
- More jobs and income in the country exporting the goods, leading to a healthy, growing economy.
Importing – purchasing raw materials or products in other nations and bringing them into one’s own
country
- Example: Buyers for Macy’s department stores purchase rugs in India and have them shipped
back to the United States for resale.
- Without importing: countries would face shortages of key natural resources, price driven by local
cost of production.
- With importing: we have access to all the resources we need, access to lower priced goods.
- While the United States does have resources of its own, importing additional energy resources
provides an efficient means of fueling economic growth.
The Impact of Currency Valuations
+ Trading was done by barter before money (a system of exchange in which goods. The trouble
with the barter system is that the two parties in the exchange must need each other’s products at
the same time, and the two products must be roughly equal in value.
Foreign-exchange control: A restriction on the amount of a particular foreign currency that can be
purchased or sold.
+ By limiting the amount of foreign currency importers can obtain, a government limits the amount
of goods importers can purchase with that currency. This has the effect of limiting imports from
the country whose foreign exchange is being controlled.
Currency value decrease - increase export - more people will buy our goods - International investor will
invest in your markets
Drawbacks: importing from other countries is more expensive for buyers - imports decrease
Currency value increases - decreases export - increases imports.
1
,Restrictions to International Business
Balance of trade – the total value of a nation’s exports minus the total value of its imports over some
period of time
- If a country imports more than it exports, its balance of trade is negative and is said to be
unfavorable.
Trade deficit – a negative balance of trade
+ Tariffs - A tax on a particular foreign product being imported into a country.
+ Revenue tariffs - imposed solely to generate income for the government.
+ Protective tariffs - imposed to protect a domestic industry from competition by keeping
the price of competing imports level with or higher than the price of similar domestic
products. Because fewer units of the product will be sold at the increased price, fewer
units will be imported.
Nontariff barrier – a non tax measure imposed by a government to favor domestic over foreign suppliers
Nontariff barriers include:
Quotas - A limit on the amount of a particular good that may be imported into a country during a
given period of time.
+ The size of the tariffs and quotas will impact the level of trade. Larger tariffs and lower
quotas will decrease imports, but lowering tariffs and increasing quotas will increase
imports.
Dumping – exportation of large quantities of a product at a price lower than that of the same
product in the home market
Embargo - A complete halt of trading with a particular nation or of a particular product.
+ The challenge with embargos is that they can be difficult to enforce, which creates a
black market for certain goods. The embargo has been used most often as a political
weapon.
+ When customers are unfamiliar with particular products from another country, their
general perceptions of the country itself affect their attitude toward the product and help
determine whether they will buy it.
2
, Balance of payments – the total flow of money into a country minus the total flow of money out of that
country over some period of time
+ Includes:
•Imports and exports
•Investments
•Money spent by foreign tourists
•Payments by foreign governments
•Aid to foreign governments
•All other receipts and payments
Contractual Agreements
Licensing – a contractual agreement in which one firm permits another to produce and market its product
and use its brand name in return for a royalty or other compensation
Example: Yoplait yogurt is a French yogurt licensed for production in the United States. The U.S.
producer pays Yoplait a percentage of its income from sales of the product.
Advantage:
- It provides a simple method for expanding into a foreign market with virtually no
investment.
Disadvantages:
3
The Basis and Benefits of International Trade
International business – all business activities that involve exchanges across national boundaries
Absolute advantage – the ability to produce a specific product more efficiently than any other nation
- Example: The United States’ natural resources is wheat which makes it long specialized in the
production of it.
Comparative advantage – the ability to produce a specific product more efficiently than any other
product
Exporting for Growth
Exporting – selling and shipping raw materials or products to other nations
- Example: The Boeing Company exports its airplanes to a number of countries for use by their
airlines.
- With exporting, there are more potential customers and increased jobs and income. Without
exporting, there is a limited number of customers.
- More jobs and income in the country exporting the goods, leading to a healthy, growing economy.
Importing – purchasing raw materials or products in other nations and bringing them into one’s own
country
- Example: Buyers for Macy’s department stores purchase rugs in India and have them shipped
back to the United States for resale.
- Without importing: countries would face shortages of key natural resources, price driven by local
cost of production.
- With importing: we have access to all the resources we need, access to lower priced goods.
- While the United States does have resources of its own, importing additional energy resources
provides an efficient means of fueling economic growth.
The Impact of Currency Valuations
+ Trading was done by barter before money (a system of exchange in which goods. The trouble
with the barter system is that the two parties in the exchange must need each other’s products at
the same time, and the two products must be roughly equal in value.
Foreign-exchange control: A restriction on the amount of a particular foreign currency that can be
purchased or sold.
+ By limiting the amount of foreign currency importers can obtain, a government limits the amount
of goods importers can purchase with that currency. This has the effect of limiting imports from
the country whose foreign exchange is being controlled.
Currency value decrease - increase export - more people will buy our goods - International investor will
invest in your markets
Drawbacks: importing from other countries is more expensive for buyers - imports decrease
Currency value increases - decreases export - increases imports.
1
,Restrictions to International Business
Balance of trade – the total value of a nation’s exports minus the total value of its imports over some
period of time
- If a country imports more than it exports, its balance of trade is negative and is said to be
unfavorable.
Trade deficit – a negative balance of trade
+ Tariffs - A tax on a particular foreign product being imported into a country.
+ Revenue tariffs - imposed solely to generate income for the government.
+ Protective tariffs - imposed to protect a domestic industry from competition by keeping
the price of competing imports level with or higher than the price of similar domestic
products. Because fewer units of the product will be sold at the increased price, fewer
units will be imported.
Nontariff barrier – a non tax measure imposed by a government to favor domestic over foreign suppliers
Nontariff barriers include:
Quotas - A limit on the amount of a particular good that may be imported into a country during a
given period of time.
+ The size of the tariffs and quotas will impact the level of trade. Larger tariffs and lower
quotas will decrease imports, but lowering tariffs and increasing quotas will increase
imports.
Dumping – exportation of large quantities of a product at a price lower than that of the same
product in the home market
Embargo - A complete halt of trading with a particular nation or of a particular product.
+ The challenge with embargos is that they can be difficult to enforce, which creates a
black market for certain goods. The embargo has been used most often as a political
weapon.
+ When customers are unfamiliar with particular products from another country, their
general perceptions of the country itself affect their attitude toward the product and help
determine whether they will buy it.
2
, Balance of payments – the total flow of money into a country minus the total flow of money out of that
country over some period of time
+ Includes:
•Imports and exports
•Investments
•Money spent by foreign tourists
•Payments by foreign governments
•Aid to foreign governments
•All other receipts and payments
Contractual Agreements
Licensing – a contractual agreement in which one firm permits another to produce and market its product
and use its brand name in return for a royalty or other compensation
Example: Yoplait yogurt is a French yogurt licensed for production in the United States. The U.S.
producer pays Yoplait a percentage of its income from sales of the product.
Advantage:
- It provides a simple method for expanding into a foreign market with virtually no
investment.
Disadvantages:
3
