JM Chapter 1 Overview of International Business.pptx

CHAPTER 1: OVERVIEW OF INTERNATIONAL
BUSINESS

Part 1: International Business & Globalization
 Define International Business and concept of globalization
 Differentiate between IB and Domestic Business
 Explain the importance of IB
Part 2: Fundamental of International Trade Theories
 Outline the theories that attempt to explain why certain
goods are traded internationally
 Summarise the theory of mercantilism
 Detail the theories of absolute advantage and comparative
advantage
 Detail the factor proportions theory of trade

 International Business (IB) is any business activity organized
and carried out across national borders by business firms in
pursuit of their stated aims and objectives.

 Domestic business refers to the business where economic
transactions are conducted within the geographical boundaries
of the one country.
 It is limited to territory.
 In domestic business it is very easy to conduct business
research.
 The nature of customers in domestic business is homogeneous.
 In this currency of parent/home country is used for doing
business.

 i.Cultural differences
 ii.Currency differences
 iii.Legal environment differences
 iv.Differences in consumer tastes and preferences
 v.Different factor endowments with different qualities

Every company is trying to expand its business by entering
foreign markets. International business helps in the following
ways:-
 1. Helps as growth strategy: -Geographic expansion may be
used as a business strategy. Even though companies may
expand their business at home.
 2. Helps in managing product life cycle: - every product has to
pass through different stages of product life cycle-when the
product reaches the last stages of life cycle in present market,
it may get proper response at other markets.

 3. Technology advantages: -some companies have outstanding
technology advantages through which they enjoy core
competency. This technology helps the company in capturing
other markets.
 4. New business opportunities: - business opportunities in
overseas markets help in expansion of many companies. They
might have reached a saturation point in domestic market.

 5. Earning foreign exchange:-international business helps in
earning foreign exchange which may be used for strategic
imports .India needs foreign exchange to import crude oil, raw
material and machinery.
 6. Investment in infrastructure: - international business
necessitates proper development of infrastructure.

 Free trade refers to a situation where a govt does not
attempt to influence through quotas or duties what its
citizens can buy from another country or what they can
produce & sell to another country
 The following theories that will be discussed (absolute
advantage, comparative advantage & factors of endowment
theories) show why it is beneficial for a ctry to engage in
international trade even for products it is able to produce for
itself
 International trade allows a ctry to specialise in the
manufacture & export of products that can be produced most
efficiently in that ctry, and import products that can be
produced more efficiently in other countries

 Greater Variety of Goods Available for Consumption
 Efficient Allocation and Better Utilization of Resources
 Promotes Efficiency in Production
 More Employment
 Consumption at Cheaper Cost

 Globalization refers to the shift toward a more integrated and
interdependent world economy.
a. Globalization of market (economies of scale): national
markets are giving way to global markets.
b. Globalization of production: to take advantage of national
differences in the cost and quality of factors of production.
What Is Globalization? Understand Our Interconnected
World | World101 CFR - YouTube

Scenario:
Nobody would suggest that Iceland should grow its own
oranges. Iceland can benefit from trade by exchanging
some of the products that it can produce at a low cost
(fish) for some products that it cannot produce at all
(oranges). Thus, by engaging in international trade,
Icelanders are able to add oranges to their diet of fish
IRELAND
JEJU, SOUTH
KOREA

Internationa
l Trade
Theories
It is still beneficial for a country to
engage in international trade even
for products it is able to produce
itself
The benefits is the result of a
country to specialize in the
manufacture and export of
products that can be produced
most efficiently in other countries

Background
• Emerged in England in the mid 16th century
• At that time, gold & silver were the
currency of trade
Main principle
• It was in a country’s best interests to
maintain a trade surplus (export > import)
• Trade surplus allows a country to
accumulate gold and silver, thus increase its
national wealth, prestige and power
Results
• Advocated government intervention to
achieve surplus of balance of trade
• Recommended policies to maximise exports
(subsidized) and minimize imports (tariff &
quotas)
Critics
• Country A: High inflows of gold & silver
-> inflation -> high prices
• Country B: High outflows of gold &
silver -> money supply would contract ->
low price
• Overall results: Country B buy fewer
Country A’s goods (because they were
becoming more expensive) & Country A
to buy more Country B’s products
(because they were becoming cheaper) ->
Deterioration of Country A’s trade
balance & improvement in Country B’s
trade balance
ZERO-SUM GAME: A gain by one country
results in a loss by another

The trade theory that says a country should export
more than it imports is known as ________.
A) mercantilism
B) absolute advantage
C) comparative advantage
D) import substitution

Under mercantilism, governments sought to influence
trade by ________.
A) establishing bilateral trading agreements with
other countries
B) limiting exports
C) limiting imports and subsidizing exports
D) encouraging the development of manufacturing in
their colonies

Which of the following undesirable results will most
likely occur for a country running a favorable balance
of trade?
A) higher unemployment
B) higher domestic interest rates
C) fewer funds to invest abroad
D) granting credit that may be risky

Countries should specialize in the production of goods for which
they have an absolute advantage and then trade these for goods
produced by other countries
A country has an absolute advantage in the production of a product
when it is more efficient than any other country in producing it
More efficient refers to when a country can produce a larger
amount of a good or service for the same amount of inputs as can
another country;
Or
When it can produce the same amount of a good or service using
fewer inputs than could another country

Resources Required to produce 1 Ton of Cocoa
and Rice
Cocoa Rice
Ghana 10 20
South Korea 40 10
Assumptions:
• Both countries have the same amount of
resources
• These resources can be used to produce
either rice or cocoa
• 200 units of resources are available in each
country
Production and Consumption without Trade
Cocoa Rice
Ghana 10.0
(=100/10)
5.0
(=100/20)
South Korea 2.5
(=100/40)
10.0
(=100/10)
Total
Production
12.5 15.0
Assumptions:
• Each country devotes half of its resources to
the production of rice, and half to the
production of cocoa.
• Each country must also consume what it
produces
A
B

Production with Specialisation
Cocoa Rice
Ghana 20.0
(=200/10)
0.0
South Korea 0.0 20.0
(=200/10)
Total
Production
20.0 20.0
Assumptions:
• Each country specializes in producing the
good for which it has an absolute advantage
• Both countries trade with each other
Increase in Consumption as a Result of Specialisation
Cocoa Rice
Ghana &
South Korea
7.5
(=20.0 – 12.5)
5.0
(=20.0 – 15.0)
C
D

Consumption after Trade
Cocoa Rice
Ghana 14.0
(=20.0 - 6.0)
6.0
(=0.0 + 6.0)
South Korea 6.0
(=0.0 + 6.0)
14.0
(=20.0 – 6.0)
Assumptions:
• Ghana & South Korea swap coca and rice on
a one-to-one basis
• The price of one ton of cocoa is equal to the
price of one ton of rice
• Ghana decided to export 6 tons of cocoa to
South Korea and import 6 tons of rice in
return
Increase in Consumption as a Result of
Specialisation & Trade
Cocoa Rice
Ghana 4.0
(=14.0 - 10.0)
1.0
(=6.0 – 5.0)
South Korea 3.5
(=6.0 – 2.5)
4.0
(=14.0 – 10.0)
E
F What if one country
has an absolute adv.
in the production of
both products?
What if a country
lacks any absolute
adv.?

 Assume the following conditions: In the United States it
takes 5 units of resources to produce a ton of potatoes and 10
to produce a ton of coal. In Canada it takes 6 units of
resources to produce a ton of potatoes and 4 to produce a ton
of coal. According to the theory of absolute advantage,
________.
 A) the United States should export potatoes to Canada and
import coal from Canada
 B) the United States should export coal to Canada and
import potatoes from Canada
 C) the United States should import both potatoes and coal
from Canada, while concentrating on production of more
valuable goods
 D) there would be no basis for trade

Two countries, Foodland and Drinkland, produce food and drinks. In
Foodland, one resource unit produces 20 tons of food and one resource
unit produces 10 tons of drinks. In Drinkland, one resource unit
produces 12 tons of food and one resource unit produces 24 tons of
drinks.
Food Drinks
Foodland 20 10
Drinkland 12 24
Based on the above scenario, which of the following statements is true?
A) Foodland has an absolute advantage in producing food.
B) Foodland has an absolute advantage in producing drinks.
C) Drinkland has an absolute advantage in producing both food and
drinks.
D) Drinkland has an absolute advantage in producing food.

A country should specialize in the production of those
goods that it produces most efficiently and to buy the
goods that it produces less efficiently from other
countries, even if this means buying goods from other
countries that it could produce more efficiently itself
Resources Required to produce 1 Ton of Cocoa
and Rice
Cocoa Rice
Ghana 10 13.33
South Korea 40 20
Assumptions:
• Both countries have the same amount of
resources
• These resources can be used to produce
either rice or cocoa
• 200 units of resources are available in each
country
• Ghana is more efficient in the production of
both products i.e. Ghana has an AA in the
production of both products
A

Production and Consumption without Trade
Cocoa Rice
Ghana 10.0
(=100/10)
7.5
(=100/13.33)
South Korea 2.5
(=100/40)
5.0
(=100/20)
Total
Production
12.5 12.5
Assumptions:
• Each country devotes half of its resources to the
production of rice, and half to the production of
cocoa.
• Each country must also consume what it produces
B
• Ghana can produce 4 times as much cocoa as South
Korea
• But Ghana can produce only 1.5 times as much rice
as South Korea
• Thus, Ghana is comparatively more efficient at
producing cocoa than it is at producing rice
Production with Specialisation
Cocoa Rice
Ghana 15.0 3.75
South Korea 0.0 10.0
Total
Production
15.0 13.75
Assumptions:
• Ghana increase its output of cocoa from 10 tons to
15 tons
• South Korea specializes in the production of rice,
producing 10 tons
C

D
Consumption after Trade
Cocoa Rice
Ghana 11.0
(=15.0 - 4.0)
7.75
(=3.75 + 4.0)
South Korea 4.0
(=0.0 + 4.0)
6.0
(=10.0 – 4.0)
Assumptions:
• Ghana & South Korea swap coca and rice
on a one-to-one basis
• The price of one ton of cocoa is equal to the
price of one ton of rice
• Ghana decided to export 4 tons of cocoa to
South Korea and import 4 tons of rice in
return
Increase in Consumption as a Result of
Specialisation & Trade
Cocoa Rice
Ghana 1.0
(=11.0 - 10.0)
0.25
(=7.75 – 7.5)
South Korea 1.5
(=4.0 – 2.5)
1.0
(=6.0 – 5.0)
E Potential world production is greater with
unrestricted free trade than it is with
restricted trade
Trade is a positive-sum game in which all
countries that participate realise economic gains

Assume the following conditions: In the United States it
takes 4 units of resources to produce a ton of potatoes and 5
to produce a ton of coal. In Canada it takes 6 units of
resources to produce a ton of potatoes and 10 to produce a ton
of coal. According to the theory of comparative advantage,
________.
A) there would be no basis for trade
B) the United States should import potatoes from Canada
and export coal to Canada
C) the United States should export both potatoes and coal to
Canada
D) the United States should export potatoes to Canada and
import coal from Canada

The comparative advantage theory holds that a country will
gain from trade ________.
A) when it exports products for which it has an acquired
advantage and imports products for which another country
has a natural advantage
B) if it exports goods it can produce more efficiently than other
countries and imports goods other countries can produce more
efficiently than it can
C) even though it can produce all goods more efficiently than
other countries
D) if it exports products using its abundant production factors
in exchange for products for which it has scarce production
factors

(1) A simple world in which there are only two countries and two goods
 In the real world, there are many countries and many goods
(2) No transportation costs between countries
 Different distribution methods means different costs applied
(3) Stability in exchange rate
 No differences in the prices of resources in different countries
 Assume that prices are comparable across countries & exchange rate effect
was not part of the picture
(4) Perfect mobility of labour sector
 Resources can move freely from the production of one good to another within a
country
 Labours can move from one industry to another, but not always the case
because of different expertise needed in different industry, also the suffering of
the closed-down industry has to be taken into consideration as well

(5) Productivity of labour constant for both products, in both countries
(constant returns to scales)
 Specialization has no effect on the amount of resources required in
production
 Diminishing returns to specialization occurs when more units of
resources are required to produce each additional unit, because (i) not
all resources are of the same quality & (ii) different goods use resources
in different proportions
(6) Each country has a fixed stock of resources and that free trade does
not change the efficiency with which a country uses its resources
 Free trade increases a ctry’s stock of resources – labour/capital from
abroad become available
 Free trade increases ctry’s efficiency - economies of scale & better
technology

Which of the following assumptions was made in the
original theories of absolute and comparative
advantage?
A) Specialized labor seeks efficiency.
B) Labor resources are fully employed.
C) Countries pursue objectives other than economic
efficiency.
D) Production networks enable countries to
concentrate on particular functions.

Comparative advantage differs from absolute advantage
in that the former ________, whereas the latter ________.
A) holds that countries should specialize their production;
does not
B) holds that trade should be kept as nearly in balance as
possible; says countries should seek a favorable balance of
trade
C) bases trade on natural advantages; bases trade on
acquired advantage
D) states that there is a basis of trade even if one country
can produce everything more efficiently than another
country; does not deal with this issue

Factor endowments: The extent to which a country is endowed with such
resources as (i) land and (ii) labour and capital
The more abundant a factor, the lower its cost
Countries will export those goods that make intensive use of factors that are
locally abundant, while importing goods that make intensive use of factors
that are locally scarce
• Basic factors: Natural resources, climate, location & demographic
• Advanced factors: communication infrastructure, sophisticated and skilled
labour, research facilities & technological know-how
It is RELATIVE, NOT ABSOLUTE, endowments that are important
• A country will specialize in products that require land and capital
equipment if their cost is low RELATIVE to the cost of labour
• Factors in great supply RELATIVE to demand will be less costly than
factors in short supply RELATIVE to demand

Deduction: Comparing the land size data (only),
one would deduce that USA has an absolute
adv. in FOP-land.
However, with additional data (population size),
AUS has adv. in FOP-land because relative to
its population, AUS has a bigger land area
compared to USA
Population: Approx. 25m (2019)
https://www.worldometers.info/world-population/australia-
population/
Population: Approx. 329m (2019)
https://www.worldometers.info/world-population/us-population/
Land area: Approx. 2.9 million square mile
https://www.nationmaster.com/country-
info/stats/Geography/Land-area/Square-miles
Australia
USA
Land area: approx. 3.8 million square miles
https://www.nationmaster.com/country-
info/stats/Geography/Land-area/Square-miles

Theory of Absolute &
Comparative
Advantage
Factor Endowments
Theory
Comparative
advantage arises from
differences in
Labour productivity National factor
endowments
Assumptions 6 assumptions (refer
slide)
• Technologies are
the same across
countries
• Production factors
to be homogeneous
Similarity • Assume no restrictions on trade, but in real
life restrictions come in the form of tariff &
non-tariff barriers
• Argues that free trade is beneficial for both
countries & the economy as a whole

The trade theory that says countries should
concentrate production on those products using their
most abundant production factors is the ________.
A) factor proportions theory
B) theory of comparative advantage
C) theory of absolute advantage
D) theory of nontradable goods

El Salvador has a population density of about 620 people per
square mile and neighboring Honduras a population density
of about 115 people per square mile. According to the factor
proportions theory of trade, one would expect El Salvador's
exports to Honduras to ________.
A) have a lower labor-to-land ratio than its imports from
Honduras
B) have a higher labor-to-land ratio than its imports from
Honduras
C) embody more capital per square mile than its imports
from Honduras
D) embody more capital per worker than its imports from
Honduras

 International trade occurs primarily because of differences in
production costs due to:
1. Differences in the endowments of the FOP
2. Differences in the level of technology that determine the factor
intensities used
3. Differences in the efficiencies with which these factor
intensities are utilized
4. Foreign exchange rates
 International trade theory shows that nations will attain a
higher level of living by specializing in goods which they possess
a comparative advantage and importing those for which they
have a comparative disadvantage.

EXTERNAL TRADE
AND CREDIT RISK

𝐶𝐿𝐴𝑆𝑆 𝐴𝐶𝑇𝐼𝑉𝐼𝑇𝑌
A DEBATE ON
GLOBALISATION
The students are to debate on globalization.
The class shall be divided into two groups of students: students who
are focused on pros and students who focused on cons.
Both the two groups shall debate the issue. The students back up
any statements with factual information from reliable resources from
the library books/e-books or internet resources (No Wikipedia or
blogs).

 The Pros and Cons of Globalization – SmartAsset

JM Chapter 1 Overview of International Business.pptx

JM Chapter 1 Overview of International Business.pptx

Recommandé

Recommandé

Contenu connexe

Similaire à JM Chapter 1 Overview of International Business.pptx

Similaire à JM Chapter 1 Overview of International Business.pptx (20)

Plus de Jesilin James

Plus de Jesilin James (11)

Dernier

Dernier (20)

JM Chapter 1 Overview of International Business.pptx