COMMERCE 1E03 Chapter Notes - Chapter 3: Franchising, Absolute Advantage, Comparative Advantage

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28 Jul 2016
Chapter 3-Global Market
Exporting-is selling products (i.e goods and services) to another country.
Importing- is buying products from another country
Global trade enables a nation to produce what it is most capable of producing and to buy what it needs
from others in a mutually beneficial relationship. This happens through the process of free trade.
Free Trade-is the movement of goods and services among nations without political or economic
******Study Figure 3.2 for the pros and cons of free trade*****
Global Trade- is the exchange of goods and services across national borders.
Comparative advantage theory- states that a country should sell to other countries those products that
it produces most effectively and efficiently, and buy from other countries those products it cannot
produce as effectively or efficiently.
In practice, this theory application does not work so neatly. For various reasons, many countries decide
to produce certain agricultural, industrial, or consumer products despite a lack of comparative
advantage. To facilitate this plan, they restrict imports of competing products from countries that can
produce them at lower costs. The net result is that the free movement of goods and services is
A country has an absolute advantage if it has a monopoly on producing a specific product or is able to
produce it more efficiently than all other countries.
Trade with other countries is important because it enhances the quality of life for Canadians and
contributes to our country's economic well being.
In measuring the effectiveness of global trade, nations carefully follow two key indicators: balance of
trade and balance of payments.
The balance of trade is a nations ration of exports to imports.
A favourable balance of trade, or trade surplus, occurs when the value of the country's exports exceeds
that of its imports.
An unfavourable balance of trade, or trade deficit, occurs when the value of the country's imports
exceeds that of its exports.
The is the difference between money coming into a country (from exports) and balance of payments
money leaving the country (for imports) plus money flows coming into or leaving a country from other
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factors such as tourism, foreign aid, military expenditures, and foreign investment. The goal is always to
have more money flowing into the country than flowing out of the country; in other words, a favourable
balance of payments. Conversely, an balance of payments is when more money is flowing unfavourable
out of a country than coming in.
Technological advances in most fields, primarily in the area of transmission and storage of information,
have shattered the archaic notions of how things ought to function, from production and trade to war
and politics.
The new ways of communicating, organizing, and working are inviting the most remote corners of the
world to be actors on the global economic stage. These are enjoying high growth rates, rapid increases
in their living standards, and a rising emerging economies global prominence.
Businesses use many different strategies to compete in global markets. The key strategies include
licensing, exporting, franchising, contract manufacturing, creating international joint ventures and
strategic alliances, and engaging in foreign direct investment. Each of these strategies provides
opportunities for becoming involved in global markets, along with specific commitments and risks.
Strategies of Global Market
A firm (the licensor)may decide to compete in a global market by licensing the right to manufacture its
product or use its trademark to a foreign company (the licensee) for a fee (a royalty).
A licensing agreement can benefit a firm in several ways. First, the firm can gain revenues it would not
otherwise have generated in its home market. Also, foreign licensees must often purchase start-up
supplies, component materials, and consulting services from the licensing firm.
A final advantage of licensing is that licensors spend little or no money to produce and market their
products. These costs come from the licensee's pocket. Therefore, licensees generally work hard to
licensors may also experience some problems. Often, a firm must grant licensing rights to its product for
an extended period, 20 years or longer.
If a product experiences remarkable growth in the foreign market, the bulk of the revenues earned
belong to the licensee. Perhaps even more threatening is that a licensing firm is actually selling its
If a foreign licensee learns the company's technology or product secrets, it may break the agreement
and begin to produce a similar product on its own. If legal remedies are not available, the licensing firm
may lose its trade secrets, not to mention promised royalties.
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