CBM 321: Int’l Trade — SECOND EXAM Summary

Chapter 2: Global and International Business

Differentiation: Global businesses operate without geographical

limitations, while international businesses adapt their strategies to
specific regions or countries.

Significance: International business boosts economic growth by enabling

countries to specialize in areas of comparative advantage. It fosters cultural
exchange, diversifies consumer choices, and promotes global collaboration.

Roles of MNCs: Multinational corporations (MNCs) drive international trade by

establishing operations worldwide, accessing foreign markets, and promoting
economic integration. MNCs must be adept in cross-cultural management,
legal compliance, and adaptive marketing strategies to succeed globally.

Additional

1. Global vs. International Concepts

 Global relates to the entire world; international pertains to two or

more nations.
 Internationalization adapts products for specific regions, while
globalization integrates economies and cultures worldwide.

2. Internationalization

Focus: Preparing products to meet local cultural and technical needs

without structural changes.

Advantages: Expands reach, improves efficiency, saves costs, enhances

customer satisfaction.

Challenges: Complex development, higher costs, scalability, and cultural

suitability issues.

3. Globalization
Focus: Making products accessible worldwide by addressing economic
and cultural factors.

Benefits: Economic growth, efficiency, market access, increased competition,

cultural exchange.

Drawbacks: Inequality, cultural homogenization, environmental harm, job

shifts.

4. International Business Overview

 Involves transactions across borders, driven by goals like

expanding markets, accessing resources, gaining competitive edge,
and diversifying risks.
 Economic importance: fosters trade, innovation, job creation, and
enhances profitability.

5. Types of International Business Activities

Movement of Goods: Exporting, importing, and trade create demand and

revenue.

Contractual Agreements: Licensing and franchising allow expansion without

ownership.

Facility Formation: Setting up sales offices, factories, and R&D centers

abroad.

6. Strategies for Success. Includes market research, product adaptation,

partnerships, and segmentation based on local needs.

Chapter 3: International Business Differences

 Legal Differences. Businesses face diverse legal standards on issues

like product safety, labor conditions, and intellectual property rights.
These variations influence compliance costs and risks.
 Cultural Dimensions. Cultural norms impact marketing, communication,
management, and consumer preferences. For example, direct
 advertising styles may work in the U.S. but not in Japan, where a subtle
approach is preferred.
 Economic Factors: Exchange rate volatility, inflation, and interest rates
affect pricing strategies, cost structure, and profitability. Companies
must adjust to economic cycles in different markets.
 Political Risks: Businesses face political risks such as expropriation,
nationalization, and trade restrictions, which can disrupt operations.
Stable governments with pro-business policies are more conducive to
foreign investment.

Additional: Social, Environmental

Practical Implications:

 Firms must conduct thorough risk assessments, adapt strategies to

local economic conditions, and navigate complex political climates.
 Success in diverse markets requires cultural sensitivity, regulatory
compliance, and agile economic management.

Chapter 4: Globalization

Practical Implications:

 Firms need strategies to mitigate the risks of economic fluctuations,

such as hedging against currency risks or diversifying supply chains.
 Businesses should evaluate the local market’s acceptance of foreign
products, adapt offerings, and consider joint ventures or partnerships
for smoother entry.

1. Understanding Globalization: Defined as the accelerated interaction

and integration of people, goods, and ideas globally, affecting cultural,
economic, and political domains.

2. Historical Development: Key phases include the Silk Road, Age of

Exploration, Industrial Revolution, and 20th-century technological and
economic expansions, culminating in digital globalization today.
3. Drivers of Globalization

Technology: Enhances communication and trade efficiency.

Economic Policies: Facilitate trade and foreign investments.

Multinational Corporations (MNCs): Operate across borders, fostering

economic and cultural integration.

Political, Sociocultural Factors: Shape international cooperation and

cultural exchange.

4. Types of Globalization

Geographic/Ecological: Trade, consumer preferences, and environmental

impacts.

Cultural: Spread of ideas, fashion, cuisine, media, blending cultures

worldwide.

Political: Global governance structures like the UN.

Economic: Increased trade, investments, and growth in multinational

markets.

Financial: Cross-border investments and global financial interdependence.

Sociological: Awareness of global issues, social media, and migration.

Technological: Real-time global communication and e-commerce.

5. Pros and Cons of Globalization

Pros: Larger markets, reduced costs, enhanced innovation, cultural

exchange.

Cons: Economic inequality, cultural loss, environmental issues.

6. Real-World Examples

Examples include multinational supply chains and global cultural

phenomena, such as the worldwide influence of K-pop.
7. Geography’s Role in Globalization

Geographic factors like natural resources and trade barriers impact economic
integration and development.

8. Ecological Globalization

Focuses on sustainability challenges and consumer demand for eco-

friendly practices in a global context.

Chapter 5: Basic Theory Using Demand and Supply in Trade

Demand and Supply Dynamics: These economic principles determine pricing

and production levels in open markets. Demand represents consumer desire,
while supply reflects producer capacity and willingness to sell.

Market Equilibrium: Trade creates an equilibrium point where quantity

demanded equals quantity supplied at a certain price. This point shifts with
changes in demand (e.g., increased consumer income) or supply (e.g.,
improved production methods).

Trade and Equilibrium: International trade affects domestic equilibrium by

introducing new sources of supply and demand. For instance, imports
increase competition and can lower domestic prices, while exports create
additional demand for domestic products.

Chapter 6: Basic Theories of International Trade

1. What is International Trade?

Definition: The exchange of goods and services across international

borders. It allows countries to:

 Access products they cannot produce domestically.

 Obtain goods/services at a lower cost than producing them
locally.

Underlying Principle: Operates on economic principles of supply and

demand, much like local markets, but across countries.
2. Key Components of Trade

1. Exports: Goods and services produced domestically and sold abroad.

Example: Philippine bananas exported to Japan.

2. Imports: Goods and services produced abroad and purchased

domestically.

Example: Smartphones imported by the Philippines from South Korea.

3. Theories of International Trade

Comparative Advantage. A country benefits by specializing in goods it

produces at a lower opportunity cost, even if it is less efficient overall.

Key Benefits:

1. Specialization: Focus on efficient production areas.

2. Increased Output: Trade allows countries to access a larger total

production pool.

3. Lower Prices: Producers can price goods competitively in global markets.

Example.

Country A: Efficient at making computers (10 hours/unit) but slow at textiles

(20 hours/unit).

Country B: Efficient at textiles (10 hours/unit) but slow at computers (15

hours/unit).

Trade Strategy:

Country A exports computers and imports textiles.

Country B exports textiles and imports computers.

Result: Both countries have more computers and textiles than producing
everything themselves.

Absolute Advantage. A country has an absolute advantage if it produces a

good more efficiently than another country (using fewer resources).
Key Benefit: Highlights natural efficiencies and establishes trade patterns
based on productivity.

Example: Japan, skilled labor and technology make it highly efficient in

producing electronics.

Argentina: Vast pastures and favorable climate make it the best for beef
production.

Trade Outcome: Japan focuses on electronics, Argentina on beef, leading to

global efficiency.

Ricardian Model

Developed by David Ricardo, this theory expands on comparative advantage.

Key Insight: Even if a country is inefficient in producing all goods (absolute

disadvantage), it can still benefit from trade by focusing on goods with the
lowest opportunity cost.

Example: A low-tech country focuses on simple agricultural goods while

importing machinery from an industrialized nation.

Heckscher-Ohlin (H-O) Model

A country’s trade patterns depend on its relative abundance of production

factors (e.g., labor, capital, land).

Application:

Labor-rich countries export labor-intensive goods (e.g., textiles from

Bangladesh).

Capital-rich countries export capital-intensive goods (e.g., machinery from

Germany).

Gravity Model of Trade

Trade flows depend on economic size (GDP) and proximity between

countries.

Example: The USA trades heavily with Canada and Mexico because of their
large economies and geographical closeness.
4. Trade Balances

Net Exports: The difference between a country’s exports and imports:

 Positive (Trade Surplus): Exports > Imports.

 Negative (Trade Deficit): Imports > Exports.

Balance of Trade

The value difference between exports and imports over time.

Impacts:

 A trade surplus indicates strong exports, often boosting GDP.

 A trade deficit may signal heavy reliance on foreign goods, potentially
weakening domestic industries.

5. Determinants of Trade

1. Foreign Exchange Rates:

 Affects the relative prices of imports and exports.

 Example: A weaker currency makes exports cheaper but imports more
expensive.

2. Domestic and Foreign Income:

 Rising domestic income increases imports due to higher purchasing

power.
 Rising foreign income boosts demand for a country’s exports.

3. Foreign Price Levels:

 Competitiveness in international markets depends on price levels

relative to competitors.
Example: If foreign goods are cheaper, they dominate global demand.

6. Exchange Rate Systems

 Flexible Exchange Rate: Determined by market supply and demand.

Advantages:
  Automatically adjusts to economic changes.
 Allows monetary policy independence.

Disadvantages: Volatile, creating risks for exporters and importers.

 Fixed Exchange Rate. Government maintains a set exchange rate

using monetary policy (e.g., currency reserves).
Advantages:
 Stability attracts foreign investment.
 Controls inflation.

Disadvantages:

 Loss of monetary policy flexibility.

 Vulnerable to external shocks.

 Managed Flexible Exchange Rate. A hybrid system where rates

fluctuate but with occasional government intervention.
Advantages: Balances stability and flexibility.
Disadvantages: Risks of inconsistent policy and uncertainty.

7. Balance of Payments (BOP)

Tracks all economic transactions between a country and the rest of the world.

Components:

1. Current Account: Goods/services trade, income flows.

2. Capital Account: Investments and asset transfers.

3. Financial Account: Foreign investment flows.

Equilibrium: Achieved when total inflows (exports, investments) equal

total outflows (imports, payments).

8. Impact of Trade

Winners:

1. Consumers in importing nations (access to cheaper goods).

2. Producers in exporting nations (increased market access).

Losers:

1. Producers in importing nations (increased competition).

2. Consumers in exporting nations (higher local prices due to exports).