busn chapter 3

3 key reasons for international trade
1. access to factors of production
2. reduced risk
3. inflow of innovation
opportunity cost
the opportunity of giving up the second-best choice when making a decision
-when a country produces more of one good, it must produce less of another good
absolute advantage
the benefit a country has in a given industry when it can produce more of a product than other nations using the same amount of resources
comparative advantage
the benefit a country has in a given industry if it can make products at a lower cost than other countries
balance of trade
a basic measure of the difference in value between a nation’s exports and imports, including both goods and services
trade surplus
when value of exports exceed imports; overage
trade deficit
when value of imports exceeds exports; shortfall
balance of payments
a measure of the total flow of money into or out of a country
what is generally the largest component of balance of payments
balance of trade
balance of payments surplus
more money flows into a nation that out of that nation; overage
balance of payments deficit
more money flows out of a nation that into that nation; shortfall
exchange rate
a measurement of the value of one nation’s currency relative to the currency of other nations
international trade that involves the barter of products for products rather than for currency
foreign outsourcing (contract manufacturing)
contracting with foreign suppliers to produce products, usually at a fraction of the cost of domestic production
buying products domestically that have been produced or grown in foreign nations
selling products in foreign nations that have been produced or grown domestically
foreign licensing
authority granted by a domestic firm to a foreign firm for the rights to produce and market its product or to use its trademark/patent rights in a defined geographical area
foreign franchising
a specialized type of foreign licensing in which a firm expands by offering businesses in other countries the right to produce and market its products *according to specific operating requirements*
key difference between franchising and licensing
franchisees assume the identity of the franchisor
direct investment (foreign direct investment)
when firms either acquire foreign firms or develop new facilities from the ground up in foreign countries
what’s the most basic level of international market development
what is the deepest level of global involvement
direct investment/ foreign direct investment
what is the most costly form of direct investment that involves significant risk
developing new facilities from the ground up in foreign places
two forms that direct investments usually take
1. acquiring foreign firms
2. offshoring
joint ventures
when two or more companies join forces – sharing resources, risks, and profits, *but not actually merging companies* – to pursue specific opportunities
a voluntary agreement under which two or more people act as co-owners of a business for profit; more formal
strategic alliance
an agreement between two or more firms to jointly pursue a specific opportunity without actually merging their businesses
-less formal agreements than a partnership
3 barriers to international trade
1. sociocultural differences
2. economic differences
3. political and legal differences
sociocultural differences
differences among cultures in language, attitudes, and values
ket factors to consider in economic differences (5)
1. population
2. per capita income
3. economic growth rate
4. currency exchange rate
5. stage of economic development
a country’s physical facilities that support economic activity
national policies designed to restrict international trade, usually with the goal of protecting domestic businesses
4 most common trade restrictions
1. tariffs
2. quotas
3. voluntary export restraints (VERs)
4. embargoes
taxes levied against imports
limitations on the amount of specific products that may be imported from certain countries during a given time period
voluntary export restraints (VERs)
limitations on the amount of specific products that one nation will export to another nation
a complete ban on international trade of a certain item, or a total halt in trade with a particular nation
what is the most common form of trade restriction
free trade
the unrestricted movement of goods and services across international borders
General Agreement on Tariffs and Trade (GATT)
an international trade treaty designed to encourage worldwide trade among its members
how many nations establish the GATT
World Trade Organization (WTO)
a permanent global institution to promote international trade and to settle international trade disputes
World Bank
an international cooperative of 188 member countries, working together to *reduce poverty* in the developing world; low-interest loans
International Monetary Fund (IMF)
an international organization of 188 member nations that promotes international economic cooperation and stable growth
trading bloc
a group of countries that have reduced or even eliminated tariffs, allowing for the free flow of goods among the member nations
common market
a group of countries that have eliminated tariffs and *harmonized* trading rules to facilitate the free flow of goods among the member nations
North American Free Trade Agreement (NAFTA)
the treaty among the United States, Mexico and Canada that eliminated trade barriers and investment restrictions over a fifteen-year period starting in 1994
criticism of the NAFTA
increased pollution and worker abuse because companies that move their factories to Mexico to capitalize on lower costs also take advantage of looser environmental and worker protection laws creating major ethical concerns
European Union (EU)
the world’s largest common market, composed of 28 European nations
overarching goal of the EU
to bolster Europe’s trade position and to increase its international, political and economic power