2

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Distinguish among the basic theories of world trade: absolute advantage, comparative advantage, and competitive advantage.
• Discuss the pros and cons of global outsourcing.
• List and explain the principal parts of the balance-ofpayments statement.
• Describe how and why exchange rates fluctuate.
• List and describe the major agencies that promote world trade, as well as those that promote economic and monetary stability.
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Describe common trade restrictions and explain their impact on international marketers.
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Compare the four different forms of economic integration.

• International trade overview
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Basic theories of world trade
• Balance of payments
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Exchange rates
• International agencies for promoting economic and monetary stability
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Protectionism and trade restriction
• Economic integration as a means of promoting trade
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The globalization controversy

Absolute advantage
• Trade is based on each country selling what it is best at producing
Comparative advantage
• Trade can occur between two countries even if one of the countries has no absolute advantage in any product

Michael Porter argues that the theory of comparative advantage is limited by its focus on the elements of production:
– Land
– Labor
– Natural resources
– Capital

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Elements of production
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Nature of domestic demand
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Presence of appropriate suppliers or related industries
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The conditions in the country that govern how companies are created, organized, and managed
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Nature of domestic rivalry

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Technology has created a global market for skilled workers
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No national winners or losers
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Losses and benefits accrue differently to different groups

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(BOP): an accounting record of the transactions between the residents of one country and the residents of the rest of the world over a given period of time

An exchange rate measures the value of one currency in terms of another currency
US $ = 0.5 £
One currency can appreciate or depreciate against another
US $ =
0.75 £
US $ =
0.30 £

Determined by Supply and Demand
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Imports/exports
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Inflation rate
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Investors and speculators
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Government actions

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Currencies of smaller, less developed countries
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Rates can be determined by the governments of these countries
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Governments must eventually respect supply and demand; currencies often face significant devaluations

Currency Fluctuations: Impact on
Export Markets
When the currency of a foreign market devalues against an exporter’s home currency, marketers must consider 2 options:
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Raise prices in the export market in order to preserve margins - Can your brand command a higher price?
• Keep prices steady in hopes of sustaining or increasing market share
- Cost containment might help to maintain margins somewhat

Currency Fluctuations: Impact on
Foreign Earnings
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The devaluation of a foreign market currency against the home currency will translate into lower earnings in the home currency
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Similarly, licensing and franchising fees from that export market will translate into lower amounts when translated into the home currency

Currency Fluctuations: Reevaluating
Market Participation
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Sometimes exporters decide to leave markets if a devaluation causes their products to be priced out of that market
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However, such a currency devaluation makes buying foreign-market assets cheaper in the home currency

Agencies Promoting Economic and
Monetary Stability
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International Monetary Fund
– Prevention of economic instability in emerging markets
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World Bank
– Long-term loans to developing countries
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Group of 7(8)
– Finance ministers/Central Bank governors of USA, Japan, Germany, France, Britain,
Italy, Canada (Russia)

Protectionism and Trade
Restrictions
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Tariffs
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Quotas
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Orderly marketing arrangements
(voluntary export restrictions)
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Non-tariff barriers

General Agreement on Tariffs and Trade (GATT)
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Formed in 1947 by 23 nations
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Offers Reciprocity and reduction or elimination of duties between members.
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Non discrimination
– Most favored nation (MFN) status
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Helped simplify trade documentation
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Replaced in 1996 by the World Trade
Organization

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Created as final act of GATT
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Based in Geneva with 153 member countries
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Members agree to a set of rules to improve world trade
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WTO is forum to resolve trade disputes
• Unlike GATT, WTO decisions can only be overturned by consensus and not by veto
The website is: http://www.wto.org

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Provides financial and technical assistance to developing countries
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Founded in 1944 in Washington, D.C.
• Main mission to fight poverty
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Provides low interest loans, no interest loans, and guarantees local government bonds.
• Contributes to global sustainability and care for the environment

Different Types of Regional
Economic Integration
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Free Trade Area
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Customs Union
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Common Market
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Complete Economic Integration

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Two or more countries agree to eliminate trade barriers and tariffs between their countries
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Countries continue to have individual agreements with other countries
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The North American Free Trade
Agreement is between Mexico, Canada, and the U.S. The website: www.naftanow.org

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A trade agreement between 2 or more countries
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Elimination of the internal barriers and tariffs
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Establishment of common external barriers and tariffs to other countries
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Mercosur, referred to as the Southern
Common Market, includes the countries of Argentina, Brazil, Paraguay and
Uruguay

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Elimination of the internal barriers and tariffs between 2 or more countries
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Establishment of common external barriers to trade
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Free movement of the factors of production, including labor, capital and information
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The European Union is a common market