MGTA01H3 Chapter Notes - Chapter 5: Absolute Advantage, Currency Crisis, Comparative Advantage

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25 Apr 2012
The rise of international business
More firms are engaging in international business, the world economy is
becoming a single interdependent systemprocess called globalization
Importsproducts that are made or grown abroad and sold in Canada
Exportsproducts made or grown in Canada that are sold abroad
The contemporary global economy
Trade between nations have been going on since 2000 BCE
MIT professor points out that imports now represent only a slightly higher
proportion of GDP than they did 100 years ago, and that capital mobility is about the
same as it was in 1914
But international trade is becoming increasingly central to the fortunes of
most nations of the world, and their largest businesses
More countires are now aggressively encouraging international trade
opening their borders to foreign businesses, offering incentives for domestic business to
expand internationally
As industries and markets become global firms that compete in them are
also going global
Forces that combined to spark and sustain globalization
Governments and businesses have become more aware of the
benefits of globalization to their countries and shareholders
New technologies make international travel, communication and
commerce increasingly easier, faster and cheaper
There are competitive pressures: sometimes a firm simply must
enter foreign markets to keep up with its competitors
The major world marketplaces
There are three major market placesNorth America, Europe and Asia-
Pacifichome to worlds largest economies, biggest multi-national corps, influential
financial markets and highest income consumers
World bank uses per capita income to divide countries into four groups
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High income countriesper capita greater than 10,065 USD
Canada, Canada, most in Europe, oceana, japan, south korea, etc
Upper middle income countriesper capital between $ 3255-
10065northern Europe, countries that made up soviet bloc, Greece, mexico, etc
Low middle income countriesper capita between 825- 3255
USDThailand, India, China
Low income countries (often called developing)per capital of
less than 825 USD annually. Due to low literacy, weak infrastructures, unstable
governments and related problems, these countries are less attractive to
international businesseg. East African nationis
North America
US dominates the NA business regionsingle largest marketplace and
enjoys the most stable economy in the world
US and Canada are each others largest trading partners
Mexico has also become a major manufacturing center, esp along the US
border, where cheap labour and low transportation costs have encouraged many
international and US firms to build manufacturing plants
Divided into twoWest and East Europe
Western Europe is dominated by germany, UK, France and Italy
The formation of the European union in 1992 unified the marketplace and
further increased the regions importance
Ecommerce and technology have also become increasingly important in
this region
Eastern Europe, once primarily communist has gained in importanceas
marketplace and consumer
But government instability has hampered economic development in
Russia, Bulgaria and other countries in that region
Asia- Pacific
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Consists ofJapan, China, Thailand, Malaysia, Singapore, Indonesia,
south Korea, Taiwan, the Philippines, Australia and new Zealand
Fuelled by strong entries in the automobile, electronics and banking
industries, the economies of these countries grew rapidly in 70’s and 80’s—but a
currency crisis in the 90’s slowed growth
It is an important force in the world economy and a major source of
competition for North American firms
Most indicators suggest that the Chinese economy is now the world’s 3rd
largest after the US and Japan
Technology places an increasingly important role in this regionbut the
emergence of technology firms has been hampered by poorly developed electronic
infrastructure, slower adoption of computers and information technology
The southeast Asian nations countries of Asia- Pacific (ASEAN)
founded in 67 is an organization for economic, political, social and cultural cooperation
Today it has a population of over 500 milli and a GNP of ~ 800 billi
Forms of competitive advantage
There are high levels of importing, exporting and other international
business activities because no country can produce all the goods and services its people
Countries tend to export products that they can produce better or less
expensively than other countries, using the proceeds to import products that they can’t
produce as effectively
Absolute advantage
Absolute advantageexists when a country can produce something more
cheaply and/or of higher quality than any other country
Saudi oil, Brazilian coffee and Canadian timber are absolute advantages
But examples of true absolute advantages are rare, in reality “absolute”
advantages are always relative
Comparative advantage
Comparative advantagesa nations ability to produce some products
more cheaply or better than other goods
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