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Introduction to Business – Chapter 3

Absolute Advantage
When a country can produce a good or service at a lower cost than other countries
(Examples: South America – coffee, Saudi Arabia – oil production)
Comparative Advantage
A situation in which a country specializes in the production of a good or service at which it is relatively more efficient.
(If a country can maximize in more than 1 area then they must choose).
Items bought from other countries
(Half of fish and crude oil are from other countries. 20-50% account for carpets, sugar, leather gloves, dishes, sewing machines. Without foreign trade, products may be unavailable or provided at a high price).
Goods and services sold to other countries. (Agricultural products, chemicals, fertilizers, medicines, and plastics are exported).
Measuring Trade Relations:
Balance of trade
Balance of payments
1st sell labor wages
Foreign Debt
Amount a country owes to other countries
Balance of Trade
The difference between a country’s total exports and total imports
Trade surplus
Sells more than buys
(Favorable Balance of Trade)
Trade deficit
Buys more than sells
(Unfavorable Balance of Trade)
Balance of Payments
Difference between the amount of money that comes into a country and the amount that goes out of it.
(Other forms take place in addition to goods and services – money, investments, tourism, deposits into banks).
Factors affecting currency values
Balance of payments, economic conditions – interest rates, political disability.
4 main elements of the International Business environment
Geography, cultural influences, economic development, political and legal concerns.
Economic factors of the international business environment
Exchange Rate
(Everybody Thinks Edward is Entertainingly Interesting)
Geographic Factors of the international business environment
Natural Resources
(George Likes Cats That Wear Necklaces)
Cultural factors of the international business environment
(Computers Like Fingers Rapidly Clicking The Functions)
Political and Legal factors of the international business environment
Government system
Political stability
Trade barriers
Business regulations
(People Genuinely Please Their Brothers)
A nation’s transportstion, communication, and utility’s systems
International Trade Barriers
Restrictions to free trade
3 common barriers
To set a limit on quantity (amount) of a product
Reasons for quotas
To keep supply low and prices the same.
(To express displeasure at the policies of the importing country.
To protect themselves.)
A tax on certain goods
Reasons for tariffs
To set the value of a good.
(To set amount per pound, gallon, or other unit.)
Stop the export or import of a product
Reasons for embargoes
To protect a country’s industries from international competition more than the quota or tariff will achieve.
(To prevent sensitive products from falling into the hands of unfriendly groups or nations).
Free – Trade Zones
A selected area where products can be imported daily – free and then stored, assembled, and used in manufacturing.
(Located around a seaport or airport.
Importer pays only when product leaves the zone).
Free – Trade Agreements
Under the NAFTA agreement, countries agree to remove duties (import taxes) and trade barriers.
Common Markets – (Economic Community)
Members do away with duties and trade barriers, invest freely, workers move freely.
(Ex. Europe, Latin America)
Multinational Companies (MNC)
Organizations that do business in several countries
Home country
Where a parent country is placed
Host country
A country in which the MNC places business activities
MNC Strategies
Global Strategy
Multinational Strategy
Global Strategy
Uses the same product and marketing strategy worldwide.
(The same product is sold in essentially the same matter throughout the world.
Ex. Coca-cola)
Multinational Strategy
Treats each country market differently.
(Firms develop products and marketing strategies that adapt to the customs, tastes, and buying habits of a distinct national market.
Ex. Some restaurant chains employ a multinational strategy when they modify their menus to local tastes).
MNC Benefits
Large amount of good available.
Lower prices.
Career opportunities.
Foster understanding, communication, and respect.
Friendly international relations.
MNC Drawbacks
Economic power.
Worker dependence on the MNC.
Consumer dependence.
Political power.
Global market entry modes
Joint Venture
Selling the right to use some tangible property for a fee or royalty.
(Production process, trademark, or brand name.
Low risk and low financial investment.
Ex. Nike, this is made by Nike but not an actual thing you can touch.)
The right to use a company name or business process in a specific way.
(Enter into contracts to set up that business in other countries.
Same marketing elements are used.
Ex. Fast food companies, found all across the world.)
Joint Venture
An agreement between two or more companies to share a business project
(Benefit – sharing of raw materials, shipping facilities.
Concerns – sharing profit, not as much control.
Ex. Manufacturing)
International Trade Organizations
World Trade Organization – WTO.
International Monetary Fraud – IMF.
World Bank.
World Trade Organization
Promotes trade
Settles trade disputes
Enforces free – trade agreements
150 member countries
(Other goals:
Lowering tariffs that discourage free trade.
Eliminating import quotas.
Reducing barriers for banks, insurance companies, and other financial services.
Assisting the poor countries with economic growth.)
International Monetary Fund
Helps to promote economic cooperation.
Maintains an orderly system of world trade and exchange rates.
Includes more than 150 member nations.
World Bank
Created in 1944 to provide loans for rebuilding after World War II.
(Today has more than 180 member countries and 2 main divisions:
International Development Association which makes loans to help developing countries.
International Finance Corporation which provides technical capital and technical help to private businesses in nations with limited resources).

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