EUN RESNICK BREAN
Canadian Perspectives, Second Edition
IM-1 SUGGESTEDANSWERS AND SOLUTIONS TO
END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 1
GLOBALIZATIONAND THE MULTINATIONALFIRM
SUGGESTEDANSWERS TO END-OF-CHAPTER QUESTIONS
3. Discuss the three major trends that have prevailed in international business during the last two
Answer: The 1980s saw rapid integration of international capital and financial markets. Impetus for
globalized financial markets initially came from major countries where foreign exchange and capital
markets were significantly deregulated. The economic integration and globalization that began in the
1980s accelerated in the 1990s via privatization. Privatization is the process by which the state divests
itself of the ownership and operations while turning to the market system. Lastly, trade liberalization and
economic integration continued to proceed at both the regional and global levels such as the North
American Free Trade Agreement (among Canada, the United States and Mexico) and a strengthened
World Trade Organization (WTO).
4. How is Canada’s economic well-being enhanced through free international trade in goods and
Answer: In the absence of barriers to trade, market forces provide incentives for countries to organize the
production of traded goods to their mutual economic benefit. As per Ricardo’s principle of “comparative
advantage”, free trade goods will be produced where their cost of production is low and they will be
consumed where their value is high. Through trade, two countries can increase their combined production
(relative to the no trade situation), which allows both countries to consume more of both goods. This
argument remains valid even if one country can produce both goods more efficiently than the other.
International trade is not a ‘zero-sum’ game in which one country benefits at the expense of another
country. Rather, international trade is an ‘increasing-sum’ or “win-win” situation at which both countries
gain. The output and earnings that are unleashed by trade are referred to as “gains from trade”.
Canada’s ratio of trade to GDP is one of the highest in the world, reflecting Canada’s wealth-enhancing
commercial integration with the rest of the world.
5. What is Canada’s comparative advantage?
2 Answer: First, in a classical sense, “comparative advantage” as described by Ricardo abstracts from
many of the factors that underlie trade. In Ricardo’s framework, with its focus on only two countries and
two products, the incentive for trade derives from differences in productive efficiency without explicit
regard for why one country is more or less efficient. In a practical sense, indications of a country’s
comparative advantage are found in the mix of goods that it exports (indicating comparative advantage)
and imports (indicating comparative disadvantage). Therefore it would seem that Canada has a clear
comparative advantage in natural resources. The natural resources themselves are an endowment for
Canada and are not derived from our productive efficiency. However, we ought to be more efficient than
other countries (comparative advantage) in production that is based on our natural resources, such as
petroleum refining, aluminum smelting, or manufacturing of wood products. Canada also has comparative
advantage in certain skilled and research-intensive labour manufac