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Summary of chapter 3 business management
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- Business Management 113
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- Stellenbosch University (SUN)
Summary of chapter 3
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CHAPTER 3THE BASIS FOR INTERNATIONAL BUSINESS
International business: All business activities that involve exchanges across
national borders.
ABSOLUTE AND COMPARATIVE ADVANTAGE
Some countries are better equipped than others to produce particular goods or
services. The reason may be their resources. Such a country would be best off if
it could specialise in the production of the products it can produce most
efficiently.
Absolute advantage: The ability to produce a specific product more efficiently
than another nation.
Comparative advantage: The ability to produce a specific product more
efficiently than any other product.
EXPORTING AND IMPORTING
Countries trade when they each have a surplus of the product they specialise in
and want a product other countries specialise in.
Exporting: Selling and shipping raw materials or products to other nations.
Importing: Purchasing raw materials or products in other nations and bringing
them into one’s own country.
Importing and exporting are the principal activities in international trade. They
give rise to an important concept called the balance of trade. A nation’s balance
of trade is the total value of its exports minus the total value of its imports over
some period of time.
If imports > exports the balance of trade is negative (unfavourable).
A trade deficit is a negative balance of trade.
If exports > imports the balance is favourable.
A nation’s balance of payments is the total flow of money into a country minus
the total flow of money out of that country over some period of time. It includes
imports, exports, and investments, money spent by foreign tourists, payments
by foreign governments, aid to foreign governments and all other receipts and
payments.
A continuous deficit in a countries balance of payments can cause other nations
to lose confidence in that nation’s economy. Alternatively, a continual surplus
, may indicate that the country encourages exports but limits imports by imposing
trade restrictions.
Suppose that the United States specializes in producing corn. It then will produce
surplus of corn, but perhaps it will have a shortage of wine. France, on the other
hand, specializes in producing wine but experiences a shortage of corn. To
satisfy both needs- for corn and for wine-the two countries should trade with
cach other The United States should export corn and import wine. France should
export wine and import corn.
Exporting is selling and shipping raw materials or products to other nations.
The Boeing Company, for example, exports its airplanes to a number of countries
for use by their airlines.
Importing is purchasing raw materials or products in other nations and
bringing them into one's own country. Thus, buyers for Macy's department stores
may purchase rugs in India or raincoats in England and have them shipped back
to the United States for resale. Importing and exporting are the principal
activities in international trade. They give rise to an important concept called the
balance of trade.
A nation's balance of trade is the total value of its exports minus the total
value of its imports over some period of time. If a country imports more than it
exports, its balance of trade is negative and is said to be unfavourable. (A
negative balance of trade is unfavourable because the country must export
money to pay for its excess imports.) In 2016, the United States imported $2,713
billion worth of goods and services and exported $2,208 billion worth. It thus had
a trade deficit of $505 billion,
A trade deficit is a negative balance of trade. However, the United States
has consistently enjoyed a large and rapidly growing surplus in services. For
example, in 2016, the United States imported $504.7 billion worth of services
and exported $752.4 billion worth, thus creating a favourable balance of $247.7
billion
RESTRICTIONS TO INTERNATIONAL BUSINESS
The reasons for restricting international trade ranges from internal political and
economic pressures to simple mistrust of other nations.
TYPES OF TRADE RESTRICTIONS
Nations generally are eager to export their products. They want to provide
markets for their industries and to develop a favourable balance of trade.
Therefore most trade restrictions are applied to imports from other nations.
Tariffs (import duty)
Perhaps the most commonly applied trade restrictions is the customs (or import)
duty. An import duty is a tax levied on a particular foreign product entering the
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