THARAKA DIASMBA(USA), BBA(USA), Dip in Mgt, ACIM(UK), FAEA(Dip in AEA-UK),

FinstSMM(UK), CPM(Asia), MSLIM, PM(Sri-Lanka) 1

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-of-

payments 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.

Describe common trade restrictions and explain their impact on international marketers.

Compare the four different forms of economic integration.

2

International trade overview Basic theories of world trade Balance of payments Exchange rates International agencies for promoting economic and

monetary stability Protectionism and trade restriction Economic integration as a means of promoting trade The globalization controversy

3

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

4

Michael Porter argues that the theory of comparative advantage is limited by its focus on the elements of production:

Land Labor Natural resources Capital

5

Elements of production Nature of domestic demand Presence of appropriate suppliers or

related industries The conditions in the country that govern

how companies are created, organized, and managed

Nature of domestic rivalry

6

Technology has created a global market for skilled workers

No national winners or losers Losses and benefits accrue differently to

different groups

7

(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

8

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 £

9

Imports/exports Inflation rate Investors and speculators Government actions

10

Currencies of smaller, less developed countries

Rates can be determined by the governments of these countries

Governments must eventually respect supply and demand; currencies often face significant devaluations

11

When the currency of a foreign market devalues against an exporter’s home currency, marketers must consider 2 options:

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

12

The devaluation of a foreign market currency against the home currency will translate into lower earnings in the home currency

Similarly, licensing and franchising fees from that export market will translate into lower amounts when translated into the home currency

13

Sometimes exporters decide to leave markets if a devaluation causes their products to be priced out of that market

However, such a currency devaluation makes buying foreign-market assets cheaper in the home currency

14

International Monetary Fund Prevention of economic instability in emerging

markets World Bank

Long-term loans to developing countries Group of 7(8)

Finance ministers/Central Bank governors of USA, Japan, Germany, France, Britain, Italy, Canada (Russia)

15

Tariffs Quotas Orderly marketing arrangements

(voluntary export restrictions) Non-tariff barriers

16

Formed in 1947 by 23 nations Offers Reciprocity and reduction or

elimination of duties between members. Non discrimination

Most favored nation (MFN) status Helped simplify trade documentation Replaced in 1996 by the World Trade

Organization 17

Created as final act of GATT Based in Geneva with 153 member

countries Members agree to a set of rules to

improve world trade WTO is forum to resolve trade disputes Unlike GATT, WTO decisions can only be

overturned by consensus and not by vetoThe website is: http://www.wto.org

18

Provides financial and technical assistance to developing countries

Founded in 1944 in Washington, D.C. Main mission to fight poverty Provides low interest loans, no interest loans,

and guarantees local government bonds. Contributes to global sustainability and care

for the environment

19

Free Trade Area Customs Union Common Market Complete Economic Integration

20

Two or more countries agree to eliminate trade barriers and tariffs between their countries

Countries continue to have individual agreements with other countries

The North American Free Trade Agreement is between Mexico, Canada, and the U.S. The website: www.naftanow.org

21

A trade agreement between 2 or more countries

Elimination of the internal barriers and tariffs Establishment of common external barriers

and tariffs to other countries Mercosur, referred to as the Southern

Common Market, includes the countries of Argentina, Brazil, Paraguay and Uruguay

22

Elimination of the internal barriers and tariffs between 2 or more countries

Establishment of common external barriers to trade

Free movement of the factors of production, including labor, capital and information

The European Union is a common market 23

24