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Business in A Global Environment:: Why Do Nations Trade?

Countries trade with each other because no single nation can produce all goods and services required to satisfy domestic demand. Absolute advantage refers to the lower cost of producing a good in one country compared to others, while comparative advantage means a country can produce a good at a lower opportunity cost than trade partners. Measuring international trade, countries examine their balance of trade (export-import difference) and balance of payments (total money inflows and outflows). There are various opportunities for international business engagement, including importing/exporting, licensing/franchising, contract manufacturing/outsourcing, strategic alliances/joint ventures, foreign direct investment/subsidiaries, and operating as multinational corporations. Governments implement various

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60 views3 pages

Business in A Global Environment:: Why Do Nations Trade?

Countries trade with each other because no single nation can produce all goods and services required to satisfy domestic demand. Absolute advantage refers to the lower cost of producing a good in one country compared to others, while comparative advantage means a country can produce a good at a lower opportunity cost than trade partners. Measuring international trade, countries examine their balance of trade (export-import difference) and balance of payments (total money inflows and outflows). There are various opportunities for international business engagement, including importing/exporting, licensing/franchising, contract manufacturing/outsourcing, strategic alliances/joint ventures, foreign direct investment/subsidiaries, and operating as multinational corporations. Governments implement various

Uploaded by

ali gohar
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© © All Rights Reserved
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Chapter 3: Business in a Global Environment:

Why Do Nations Trade?


Countries trade with each other when they do not have the resources or capacity to satisfy
their own needs and wants as no national economy produces all the goods and services that
its people need. By developing and exploiting their domestic scarce resources, countries can
produce a surplus and trade this for the resources they need. Countries are importers when
they buy goods and services from other countries; when they sell products to other nations,
they’re exporters

Absolute and Comparative Advantage:


Every country can’t produce the same products. The cost of labour, natural resources, and
the level of know-how vary greatly around the world. Most economists use the concepts of
absolute advantage and comparative advantage to explain why countries import some
products and export others.

Absolute advantage is the ability of a country to produce a good or service at a lower cost
per unit than another entity that produces the same good or service. Entities with absolute
advantages can produce a product or service using a smaller number of inputs or a more
efficient process than another entity producing the same product or service. For example,
China and other Asian countries are known to have an absolute advantage in manufacturing
because they can take advantage of low labour costs. Canada is known to have an absolute
advantage in agricultural production because of its vast areas of low-cost and undeveloped
land.
Comparative advantage refers to the ability to produce goods and services at a lower
opportunity cost than trade partners, not necessarily at a greater volume or quality. For
Example, England was able to manufacture cheap cloth. Portugal had the right conditions to
make cheap wine. England could make more money by trading its cloth for Portugal's wine
and vice versa. It would have cost England a lot to make all the wine it needed because it
lacked the climate. Portugal didn't have the manufacturing ability to make cheap cloth.
Therefore, they both benefited by trading what they produced the most efficiently.

Measuring Trade between the Nations:

To evaluate the international trade, a nation looks at two key indicators balance of trade and
balance of payments
Balance of trade:
Difference between the value of a nation’s imports and its exports during a specified period.
If a country sells more products than it buys, it has a favourable balance, called a trade
surplus. If it buys more than it sells, it has an unfavourable balance or a trade deficit.

Balance of Payments:
The second key measure of the effectiveness of international trade is balance of payments:
the difference over a period of time between the total flow of money coming into a country
and the total flow of money going out

Opportunities in International Business:


Importing and Exporting:

Practice of buying products overseas and reselling them in one’s own country is called
importing. Imports are important for businesses and individual consumers. Countries often
need to import goods that are either not readily available domestically or are available
cheaper overseas. Oftentimes, imported products provide a better price or more choices to
consumers, which helps increase their standard of living

Practice of selling domestic products to foreign customers is called exporting. Exporting helps
grow national economies and expands the global market. the more a country exports, the
more domestic economic activity is occurring. More exports mean more production, jobs and
revenue which ultimately increase the wealth of a country.

Licensing and Franchising:


An international licensing agreement in which the owner of a property gives another party
permission to sell its products or to use its intellectual property (such as patents, trademarks,
copyrights) in exchange for royalty fees while in international franchise agreement, a
company (the franchiser) grants a foreign company (the franchisee) the right to use its brand
name and to sell its products or services.

Contract Manufacturing and Outsourcing:


Contract manufacturing is Practice by which a company produces goods through an
independent contractor in a foreign country while Outsourcing is the business practice of
hiring a party outside a company to perform services and create goods that traditionally
were performed in-house by the company's own employees and staff and usually done as a
cost-cutting measure.
Strategic Alliances and Joint Ventures:
A strategic alliance is an arrangement between two companies that have decided to share
resources to undertake a specific, mutually beneficial project. Each company maintains its
autonomy while gaining a new opportunity. A strategic alliance is less involved and less
binding than a joint venture, in which two companies typically pool resources to create a
separate business entity, generally characterized by shared ownership, shared returns and
risks and shared governance.

Foreign Direct Investment and Subsidiaries:


Foreign direct investment refers to the formal establishment of business operations on
foreign soil—the building of factories, sales offices, and distribution networks to serve local
markets in a nation other than the company’s home country. A common form of FDI is the
foreign subsidiary, a partially or wholly owned company that is part of a larger corporation
with headquarters in another country. Foreign subsidiary companies are incorporated under
the laws of the country it is located.

Multinational Corporations:
Any corporation that is registered and operates in more than one country at a time. Generally,
the corporation has its headquarters in one country and operates wholly or partially owned
subsidiaries in other countries. Its subsidiaries report to the corporation’s central
headquarters.

Trade Controls:
Governments make certain policies to protect its industry from foreign competition by putting
trade restrictions on foreign firms and enabling the local industry to earn higher incomes than
it otherwise would. The use of such control is often called protectionism Governments also
assist industries by giving them subsidies that are either competing with imports or are
potential exporters. The most common types of trade restrictions are as follows:
Tariffs:
Government taxes on imports that raise the price of foreign goods and make them less
competitive with domestic goods
Quotas:
A quota is a government-imposed trade restriction that limits the number or monetary value
of goods that a country can import or export during a particular period. Countries use quotas
in international trade to help regulate the volume of trade between them and other countries.
Embargo:
Extreme form of quota that bans the import or export of certain goods to a country for
economic or political reasons

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