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Global Business ch 5

by: aomztro

Global Business ch 5 BUSN 3304

GPA 3.64

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CH 5
Global Business Environment
Dr. Laird R. Smith
Class Notes
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This 4 page Class Notes was uploaded by aomztro on Wednesday February 24, 2016. The Class Notes belongs to BUSN 3304 at University of Texas at El Paso taught by Dr. Laird R. Smith in Summer 2015. Since its upload, it has received 24 views. For similar materials see Global Business Environment in Business at University of Texas at El Paso.


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Date Created: 02/24/16
CHAPTER 5 Trading internationally WHY DO NATIONS TRADE? In general, nations trade in order to achieve some benefit Typically, firms within nations are trading internationally, although governments sometimes engage in trade as well Key Terms in International Trade Exporting Selling abroad Importing Buying from abroad INTERNATIONAL TRADE Trade deficit When a nation imports more tbat it exports Trade surplus When a nation exports more than it imorts Balance of trade Whether a country has a trade surplus or deficit INTERNATIONAL TRADE THEORIES Classical trade theories 1. Mercantilism 2. Absolute Advantage 3. Comparative Advantage Modern trade theories 1. Product life cycles 2. Strategic trade 3. “Diamond” MERCANTILISM Theory of mercantilism Wealth of the world (measured in gold and silver) is fixed and that a nation that exports more and import less would enjoy the net inflows of gold and silver and thus become richer: international trade is viewed as a zero-sum game Protectionism Idea that governments should actively protect domestic industries from imports and vigorously promote exports ABSOLUTE ADVANTAGE Free trade Buying and selling of goods and services with little or no government intervention Theory of absolute advantage Nation gains by specializing in economic activities in which that nation has absolute COMPARATIVE ADVANTAGE Nation A has an absolute advantage in production of all goods compared to Nation B As long as Nation B is not equally less efficient in the production of both goods, Nation B can still choose to specialize in the production COMPARATIVE ADVANTAGE Comparative advantage Relative (not absolute) advantage in one economic activity that on nation enjoys in comparison SOURCE OF ABSOLUTED AND COMPARATIVE ADVANTAGE Factor endowment Extent to which different countries possess various factors of production such as labor, land and technology Factor endowment theory (Heckscher-Ohlin theory) Nations will develop comparative advantage based on their locally abundant factors PRODUCT LIFE CYCLE Product life cycle The first dynamic theory to account for changes in the patterns of trade over time STRATEGIC TRADE Strategic trade theory Strategic intervention by governments in certain industries can enhance their odds for international success First-mover advantage Advantages that first entrants enjoy and do not share with late entrants MODERN THEORES REALITIES OF INTERNATIONAL TRADE Tariff barrier Means of discouraging imports by placing a tariff (tax) on imported good Import tariff Tax imposed a good brought in from another country Deadweight cost Net losses that occur when import tariffs are imposed NONTARIFF BARRIERS (NTBs) Import quota Restriction on the quantity of a good that can be brought into a country Voluntary export restrains (VER) Exporting countries voluntarily agree to restrict their exports Local content requirement Rules stipulating that a certain proportion of the value of the goods made in one country must originate from that country Administrative policy Bureaucratic rules that make it harder to import foreign goods Antidumping duty Costs levied on imports that have been “dumped” (selling below costs to “unfairly’ drive domestic firms out of business) Subsidy A government payment to a domestic producer. ARGUMENTS AGAIST FREE TRADE Infant industry argument Young domestic firms need government protection because they stand no chance of surviving and will be crushed by mature foreign rivals


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