business in a global economy lesson 5-6

• Absolute advantage


  When a firm can produce a particular good more efficiently than any other firm
• Absolute advantage


  • Country A can produce one widget using one unit of labor
  • Country B uses 22 units of labor
  • Country A has an absolute advantage
• Comparative advantage


  • When a firm produces goods at a lower cost than another firm ($$$) better at doing 2 products in another country
  • What you do best while giving up the least
• Comparative advantage


  • If you're both a great plumber and a great babysitter, you should become a plumber because you make more money
  • Even if are the best babysitter in the world, you'll be able to buy fewer goods and services
• Embargo


  A ban on imports from a specific country (and/or exports to it)
• Factors of Production


  • Land
  • Labor
  • Capital
• Land


  Includes acres of ground and natural resources like oil or minerals; a factor of production
• Labor


  Work done by people; is a factor of production
• Capital


  Refers to human-made goods that are retained over time and used in producing other goods and services
• GATT


  General Agreement on Tariffs and Trade
• In 1947, many countries came together to form a trade organization called GATT. It was a multilateral agreement, which means it was an agreement among many different countries worldwide.
• Purpose of GATT


  To promote free trade, encourage trade worldwide and improve the economies of the countries involved
• Forms of protectionism in international trade

  • Tariffs
  • Quota
  • Embargo
  • Subsidies
  • Regulatory
  • Illegal
  • Environmental and safety
  • Content
• Export subsidy


  Governmental financial support to an industry to help it stay competitive
• Quota


  Limit on how much of an item is allowed to be imported
• Specialization


  When firms in a country concentrate on producing a product they have advantages in producing, allowing these firms, and the country in which they are located, to become the most efficient producers of the product
• Government regulations often contribute to specialization
• WTO


  World Trade Organization
• In the 1990s, the members of GATT created a new organization to replace GATT, called the World Trade Organization (WTO).
• Purpose of WTO


  • To continue creating and administering new trade agreements
  • To prevent trade issues between member nations and help solve such problems if they do arise
• Non-tax trade barriers


  • Quota
  • Embargo
  • To further their political and economic goals
• Economies of scale


  Occur when the cost per unit of production decreases as the volume of production increases
• Economies of scale


  • If a factory produces 1,000 T-shirts, the cost per T-shirt might be high because the factory is not running at full capacity. But if the factory produces 10,000 T-shirts, the cost per T-shirt decreases because the factory can operate more efficiently.
• Diseconomies of scale


  Occur when the cost per unit of production increases as the volume of production increases
• Diseconomies of scale


  • If you try to make 1,000 cups of lemonade, you might run into problems like having no room in the fridge to hold all the lemons, etc. These problems can make it harder and more expensive to make lemonade.
• Factors of production as advantages in international trade

  • Land: quantity, climate, availability, and ease of extraction
  • Labor: cost of labor, greater expertise, availability (size of the workforce)
  • Capital: modern technology and infrastructure, expansion into new markets
• Factors of production can be an advantage in international trade
• Types/forms of FDI


  • Joint Venture
  • Physical investment
  • Greenfield
  • Brownfield
  • Merger
  • Acquisition
• Joint Venture


  When two companies join together for mutual gain in a collaborative business venture they own jointly
• Physical investment


  When an investor directly funds the purchase, building, or improvement of a physical asset rather than just putting money into a company
• Greenfield


  When a company from one country invests in a completely new business in a host country
• Brownfield


  When a company from one country invests in an existing business in a host country
• Merger


  A transaction that combines one company with another to form a single, larger new company
• Acquisition


  A transaction in which one company buys another company
• Benefits of FDI to home country (developed nation)


  • Opens new markets and marketing channels
  • Brings new capital and financing opportunities
  • Changes exporting to local sales
  • Helps circumvent trade barriers
• Benefits of FDI to host country (developing nation)

  • Provides less expensive factors of production
  • Raises per capita income
  • Adds additional manufacturing capacity
  • Creates local jobs; reduces unemployment
  • Gives locals more choice of goods and services
  • Provides access to new technology, products, and skills (spillover effect)
• Negatives of FDI to home country (developed nation)


  • Displaces local jobs; raises unemployment
  • Shuts down local manufacturing
  • Requires greater reliance on imports in the home country
• Negatives of FDI to host country (developing nation)

  • Displaces local jobs; raises unemployment
  • Places smaller economies at risk of domination by foreign companies
  • Reduces local competition
  • Reduces wages of local workers
  • Shuts down local manufacturing
• Spillover effect


  A nonfinancial benefit of FDI, such as a transfer of knowledge, technology, or management technique
• Spillover effect


  • Trained employees moving to host country businesses (knowledge and skill)
  • Becoming knowledgeable about technology and applying it
  • Import and export strategies for local firms
  • Productivity improvement strategies
  • Infrastructure improvements