AFM131 Lecture Notes - Foreign Direct Investment, Quanta Computer, Multinational Corporation
SchoolUniversity of Waterloo
DepartmentAccounting & Financial Management
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Chapter 3: Globalization
Reading: Borderline Insanity
Video: Globalization Effects on the Global Poor
Purpose: Global businesses and its many challenges
- Global Trade: The exchange of goods and services across national borders
- Exporting: Selling goods and services to another country
- Importing: Buying goods and services from another country
Why Trade With Other Nations?
1. No country can produce all the products its people need and want
2. Even if a country was self-sufficient, other countries would still want to trade with that
country to meet the needs of their own people
3. Allows nations to produce what it is most capable of producing and buy what it needs
form others in a mutually beneficial exchange relationship. (Technology: China & Russia;
Natural Resources: Japan & Switzerland)
- Free Trade: is the movement of goods and services among nations without political or
economic trade barriers
- The global markets contain more than 6
billions consumers for trade
- Productivity grows when country
produce goods and services with a
- Free trade inspires innovation for new
products and keeps firms competitively
- Domestic workers can lose their jobs
due to increased imports shifted to
lower-waged global markets
- Workers can be forced to except pay
- Moving operations overseas often
means the loss of service jobs and white
Comparative and Absolute Advantages
1. Comparative Advantage: states that a country should sell to other countries the products
that it produces most effectively and efficiently, and buy from other countries the
products it cannot produce as effectively or efficiently.
2. Absolute Advantage: the ability to produce a particular good or service using fewer
resources (lower cost) than another country. Example: Zambia has an absolute advantage
over many countries in the production of copper due to its copper ore reserves.
Measuring Global Trade
Two key indicators measure the effectiveness of global trade: balance of trade & balance of
- Balance of Trade: is a nation’s ratio of exports and imports. A favorable balance of trade
occurs when the value of the country’s exports exceed their imports.
- Balance of Payments: is the difference between money coming into a country (from
exports) and money leaving the country (for imports) plus money coming into or leaving
the country from other factors such as tourism. A favorable balance of payments occurs
when more money is flowing in than out.
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