IB International Business and Trade PDF

INTERNATIONAL BUSINESS AND TRADE Long Quiz Pointers Mercantilism o It is in a country’s best interest to maintain a trade surplus, to export more than it imported. o Accumulate gold and silver and, consequently, increase its national wealth, prestige,...

INTERNATIONAL BUSINESS AND TRADE Long Quiz Pointers Mercantilism o It is in a country’s best interest to maintain a trade surplus, to export more than it imported. o Accumulate gold and silver and, consequently, increase its national wealth, prestige, and power. o Zero-sum game, gain by one country results in a loss by another. Absolute Advantage o Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries. o Never produce what you can buy from other countries for a lower cost. Comparative Advantage o Two countries can increase their combined production of main goods, and consumers in both nations can consume more of both goods. o Arises from differences in labor productivity. Heckscher-Olin Theory o Comparative advantage arises from differences in national factor endowments such as land, labor, and capital. o More abundant a factor, the lower its cost. o Countries will export those goods that make intensive use of locally abundant factors while importing goods that make intensive use of locally scarce factors. New Trade Theory o Attaining economies of scale; increase the variety of goods available to consumers and decrease the average cost of those goods. o In industries which output required to attain economies of scale represents a significant portion of total world demand, the global market may be able to support only small number of enterprises. National Competitive Advantage: Michael Porter’s Diamond o Factor endowments – nation’s position in factors of production; skilled labor or the infrastructure o Demand condition – nature of home demand for the industry’s product or service o Related and supporting industries – presence or absence of supplier industries and related industries that are internationally competitive o Firm strategy, structure, and rivalry – conditions governing how companies are created, organized, and managed and the nature of domestic rivalry o Chance and government – additional variables that can influence the national diamond Tariffs o Taxes levied on imports or exports o Specific – fixed charge / Ad valorem – proportion of the value Anti-dumping duties o Method by which firms unload excess production in foreign markets o Selling goods in foreign market below cost The Uruguay Round o 8th round of negotiations to reduce tariffs; member sought to extend GATT rules to cover trade in services and to govern the protection of intellectual property o Agreement was reached on December 15, 1993 after seven years. Effect on July 1, 1995 The World Trade Organization o Umbrella organization that encompasses GATT along with the 2 new sister bodies; services and intellectual property Multilateral and Bilateral Trade Agreements o Reciprocal trade between two or more partners. Currency Conversion o Change of currency to a local currency or a principal currency Main Uses of Foreign Exchange Market o To convert payment or income from a foreign company from the foreign to your local currency o Converting money before paying a foreign country o When investing to a foreign investment o Coverting currency in the hopes of profiting from shifts in exchange rate Forward Exchange Rate o Occurs when two (2) parties agree to exchange currency and execute the deal at some specific date in the future o Exchange rate that governs future transactions Currency Swaps o Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates Currency convertibility o Limiting foreign exchange o Capital flight – converting money in case of hyperinflation Value Creation o Way to increase the profitability of a firm o Value of product to an average consumer – cost of production per unit o Differentiation strategy Michael Porter o Argued that low cost and differentiation are two (2) basic strategies for creating value and attaining a competitive advantage Strategic Positioning o Efficiency frontier (convex curve) – shows all the different positions that a firm can adopt about adding value to a product Primary Activities o R&D o Production o Marketing and Sales o Customer service Support Activities o Information Systems – electronic systems for managing inventory, tracking sales, etc. o Company Infrastructure Logistics o Human Resources Localization Strategy o Focuses on increasing profitability by customizing the firm’s good or services so that they provide a good match to taste and preferences in different national markets. Learning Effect o Cost savings that come from learning by doing