INTERNATIONAL BUSINESS TRADE

• International trade is the exchange of goods and services between different countries
• International trade activities

  1. International trade operations
  2. Strategic alliances
  3. Foreign direct investment
• Plato

  • "The Republic"
  • Benefits of division labour
• Xenophon - benefit of expanding the trading system internationally
• Aristotle - the rulers must decide which imports and exports are necessary and, not only should they do this, but they should also maintain fairness in these exchanges, possibly by forming some treaties with the countries. 
• Classical or country-based theories

  1. Mercantilism
  2. Absolute advantage theory
  3. Comparative advantage theory
  4. Heckscher-Ohlin Theory (factor proportions theory)
• Mercantilism - accumulation of wealth in the form of gold and silver
• Mercantilism - This theory is often called the protectionist theory because it mainly works on the strategy of protecting oneself.
• Absolute advantage - economic growth in reference to international trade firmly depends on specialization and division of labour.
• Comparative advantage- propounded by David Ricardo
• Comparative Advantage - A situation where one nation can produce a good at lower opportunity cost than another.
• Comparative advantage - theory suggests that it is better if a country exports goods in which its relative cost advantage is greater than its absolute cost advantage when compared with other countries.
• Heckscher-Ohlin theory -countries will import goods whose raw materials are in shorter supply in their own country as compared to the one from which they are Product life cycle theory
• Modern or firm-based theory

  1. Country similarity theory
  2. Product life cycle theory
  3. Global strategic rivalry theory
• Modern or firm based theory - address the needs of companies. Emergence after WW2
• Country similarity theory - Steffan Linder, a Swedish economist, was the founder of this theory.  Linder suggested that countries that are in a similar phase of development will probably have similar preferences. The suggestion proposed by Linder was that companies first produce goods for their domestic consumption and later expand production, thereby exporting those products to other countries where customers have similar preferences.
• Product life cycle theory - has three stages, namely, new product, maturing product, and standardized product.
• Global strategic rivalry - Paul Krugman and Kelvin Lancaster were the founders of this theory. This theory acknowledges the fact that firms will face global competition and prove their superiority. They must surely develop a competitive advantage over each other.
• Porter’s national competitive advantage theory:

  1. Local market resources and capabilities (factor conditions).  2. Local market demand conditions.  3. Local suppliers and complementary industries.  4. Local firm characteristics. 
• Trade agreements occur when two or more nations agree on the terms of trade between them.
• Imports are goods and services produced in a foreign country and bought by domestic residents
• Exports are goods and services that are made in a country and sold outside its borders.
• Tariffs are a form of import taxes, one which governments levy (impose) on imported goods before they are allowed to enter the country.
• Economic system can be defined as any method a nation uses to allocate and manage its resources among its population. The three aspects of any economic system involve production, distribution, and consumption.
• Political systems are defined as the organized set of laws, common values, and institutions
• Multilateral Trade Agreements - These agreements among three countries or more are the most difficult to negotiate. The greater the number of participants, the more difficult the negotiation
• Capitalism refers to the private ownership of the means of production
• free-market economy is one in which individuals and firms control the means of production through private ownership and minimal government interference.
• Command (or planned) economy - is an economic system in which the government or other centralized group determines wages, sets prices, and distributes resources and products to the common group, it also oversees the types of industries it will operate.
• Three critical steps:

  1. Deregulation
  2. Privatization
  3. Legal system
• Deregulation -Removing the legal restrictions
• Privatization – The transfer of ownership of state property to the private sector.
• Legal Systems – The creation of laws that protect private property rights and contract enforcement.
• Mixed economy - a mash up of a command economy, and free market economy.
• Democracy - A system where power is vested in the people, who rule either directly or through elected representatives.
• Direct democracy - citizens have the opportunity to participate directly
• Indirect democracy -elected representatives.
• Dictatorship: A government where power is concentrated in the hands of one individual
• Form of government:

  1. Unitary
  2. Presidential
  3. Federal
  4. Parliamentary
• Unitary - a system in which the ultimate authority and power reside in the central government.