Introduction to Global Business 1e - Cengage

Introduction to Global Business 1e - Cengage

1. Briefly explain why trade and foreign investment are good for society as a whole. 2. Describe the major international trade theories and how they operate. 3. Evaluate trade policy, the main instruments of trade policy, and their impact on business, consumers, and governments. 4. Explain the rationale behind a countrys choice of managing trade. 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Terms Terms International Business All commercial transactions, both private and public between nations of the world Trade The two-way flow of exports and imports of goods (merchandise trade) and services (service trade) Foreign Direct Investment Inflows of capital from abroad for investing in domestic plant and equipment for the production of goods and/or services and for buying domestic firms 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23

EXHIBIT 2.3 NET INFLOWS OF FOREIGN DIRECT INVESTMENT BY REGION AND INDUSTRIALIZATION 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 EXHIBIT 2.3 NET INFLOWS OF FOREIGN DIRECT INVESTMENT BY REGION AND INDUSTRIALIZATION (contd) 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Benefits Benefits of of International International Trade Trade A A greater greater amount amount of of choice choice in in the the availability availability of of goods goods and

and services services Competition Competition results results in in lower lower prices prices for for goods goods and and services services consumed consumed Increased Increased quality quality of of life life and and higher higher living living standards standards 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 EXHIBIT 2.1 WORLDS TEN LARGEST ECONOMIES: PURCHASING POWER PARITY (PPP) BASIS* (US$2009) *PPP conversion factor is the number of units of a countrys currency that is required to buy the same

amount of goods and services in the domestic market that a U.S. dollar would buy in the United States. **GNI is the total value of goods and services produced by a country plus net receipts of employee compensation and property income from abroad. 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 EXHIBIT 2.2 WORLD TRADE PATTERNS 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 Major Major Theories Theories of of International International Trade Trade Mercantilism Mercantilism Specialization Specialization The Thepremise premisethat thataanation nation could

couldonly onlygain gain (accumulate (accumulatewealth) wealth)from from external externaltrading tradingififitithad hadaa trade tradesurplus surplus Free Freetrade tradeencourages encourages countries countriesto tospecialize specializein in the theproduction productionof ofthose those goods goodsand andservices servicesthat that they theymost mostefficiently

efficiently produce produce 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Factor Factor Endowments Endowments Nations Nationsprimarily primarilyexport export goods goodsand andservices servicesthat that intensely use their intensely use their abundant abundantfactors factorsof of production production 29 Trade Trade Theory Theory Terms Terms

Factors Of Production Endowments used to produce goods and services: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality) Trade Surplus When the value of exports exceeds the value of imports; the opposite of a trade deficit 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 210 Specialization Specialization as as aa Basis Basis for for Trade Trade Theory Theory Absolute Advantage The ability of one country to produce a good or service more efficiently than another Comparative Advantage The ability of one country that has an absolute advantage in the production of two or more goods (or services) to produce one of them relatively more efficiently than the other 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

211 Factor Factor Endowments Endowments as as aa Basis Basis for for Trade Trade Theory Theory The Heckscher-Ohlin (H-O) Theory Attributes the comparative advantage of a nation to its factor endowments: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality). Key assumptions of the H-O theory: Perfect competition in the marketplace Perfect immobility of factors of production among countries. 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 212 Factor Factor Endowments Endowments as as aa Basis Basis for for Trade Trade Theory Theory (contd) (contd)

Factor Price Equalization Theory When factors are allowed to move freely among trading nations, efficiency increases, which leads to superior allocation of production of goods and services among countries. Free mobility of factors will lead to efficient reallocation of resources (factors of production) until price equilibrium is reached. 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 213 Porters Diamond Model of National Competitive Advantage Chance Firm strategy, structure and rivalry Factor conditions Demand conditions Related and supporting industries 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Government

214 The The Practice Practice of of Trade Trade Policy Policy Trade Policy All government actions that seek to alter the size of merchandise and/or service flows from and to a country Instruments of Trade Policy Tariffs (custom duties) Preferential duties Most Favored Nation status Nontariff Barriers 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 215 Inbound Inbound Goods: Goods: Taxes Taxes on on Imports Imports Tariffs Tariffs Customs Customs duties duties on on imports

imports that that are are collected collected by by aa designated designated government government agency agency responsible responsible for for regulating regulating imports imports Specific Specific Tariff Tariff An An import import tax tax that that assigns assigns aa fixed fixed dollar dollar amount amount per per physical physical unit unit Ad Ad Valorem Valorem Tariff

Tariff A Atax tax on on imports imports levied levied as as aa constant constant percentage percentage of of the the monetary monetary value value of of one one unit unit of of the the imported imported good good Preferential Preferential Duties Duties An An import import tariff tariff established established by by aa nation nation for for goods

goods of of certain certain countries countries and and not not applied applied to to the the same same goods goods of of other other countries countries Generalized Generalized System System of of Preferences Preferences (GSP) (GSP) An An agreement agreement where where aa large large number number of of developed developed countries countries permit permit duty-free

duty-free imports imports of of aa selected selected list list of of products products that that originate originate from from specific specific countries countries 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 216 Outbound Outbound Goods: Goods: Taxes Taxes on on Exports Exports Export Export Subsidy Subsidy Export Export Taxes Taxes A Anegative negative tariff

tariff or or tax tax aimed aimed at at boosting boosting exports exports Taxes Taxes meant meant to to raise raise export export cost cost and and divert divert production production for for home home consumption consumption 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 217 International International Trade Trade Organizations Organizations Bretton Bretton Woods Woods International

International Monetary Monetary Fund Fund (IMF) (IMF) General General Agreement Agreement on on Tariffs Tariffs and and Trade Trade (GATT) (GATT) World World Bank Bank World World Trade Trade Organization Organization (WTO) (WTO) 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 218 Nontariff Nontariff Barriers

Barriers Import Import Quotas Quotas Quantitative Quantitative Restrictions Restrictions (QRs) (QRs) limit limit the the amount amount or or number number of of units units of of products products that that can can be be imported imported to to aa country country Voluntary Voluntary Export Export Restraint Restraint (VER) (VER) An

An arrangement arrangement under under which which an an efficient efficient exporting exporting nation nation agrees agrees to to limit limit exports exports of of aa product product to to another another country country for for aa temporary temporary period period Domestic Domestic Content Content Provisions Provisions Regulations Regulations requiring requiring that that aa certain certain percentage percentage of of the

the value value of of import import be be sourced sourced domestically domestically 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 219 Current Current Practice Practice of of Managed Managed Trade Trade Socio-Economic Socio-Economic Rationale Rationale Geo-Political Geo-Political Rationale Rationale Countertrade National security Export cartels Protection of critical (strategic) industries

Protection of infant industries Questionable labor practices Environmental considerations Embargoes International commerce Health and safety 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 220 KEY KEY TERMS TERMS international business preferential duties trade foreign direct investment outsourcing mercantilism factors of production generalized system of preferences (GSP) export subsidy export taxes most favored nation (MFN) import quotas trade surplus absolute advantage

comparative advantage trade policy tariffs custom duties specific tariff ad valorem tariff voluntary export restraint (VER) domestic content provisions managed trade countertrade export cartel infant industry argument embargoes 2014 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 221

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