The economic benefits of trade The reasons companies export and import The development of exporting and internationalization

on within the firm The growing impact of concerns regarding social responsibility

Overall benefits in the form of increased overall consumer welfare Exports provide money to finance imports Trade has impact on consumption and production for individual countries

Wide choice available to consumers

Access to technological advancements (Direct, license and FDI)

Lower cost to consumers

Lower cost to producers

Supply in domestic market may not be enough to meet the demand

Necessary to import certain goods

IMPORTANT TO CONSIDER THE IMPACT OF IMPORTS ON THE DOMESTIC ECONOMY

High volume can help achieve economies of scale

Lower prices to the domestic consumers

Effects of recession may be avoided (business cycles differ in each country)

Positive effect on the balance of payments offsets the effect of imports

IMPORTANT TO CONSIDER THE EFFECT OF EXPORTS ON THE DOMESTIC ECONOMY

What determines the nature and amount of goods that any country buys or sells in the international market?

Countries tend to specialize in those products in which they have an advantage, mainly lower cost of production.

Export items that it can make more cheaply as compared to other countries

Import items that it can get more cheaply from abroad

Absolute advantage where country A produces one product more cheaply and country B produces another more cheaply. Comparative advantage where country A produces both products more cheaply, and country B produces one of them at a much greater cost and the other at only a little greater cost. No advantage (or equal advantage) where the ratio of production costs of the two are the same in both countries.

Assumes that supply price is the same as the cost of production

In the practical world, situation is different as marketing and transport costs also have to be considered.

Firms profit motive is also important to consider

food
Northland Southland 50 200 50 100

clothes

Exchange Ratio: Northland: Southland:

F:C 1:1 2:1

In order to produce one unit of clothes, northland has to forgo one unit of food In order to produce one unit of clothes southland has to forgo two units of food

NORTHLAND HAS A LOWER OPPURTUNITY COST IN PRODUCING CLOTHES WHEREAS SOUTHLAND HAS A LOWER OPPURTUNITY COST IN PRODUCING FOOD

Setting a trading price at F : C (1 : 2/3) or C : F ( 1 : 3/2) , both countries will gain from trade and overall world production will also increase. AFTER TRADE:
FOOD NORTHLAND SOUTHLAND 0 (-50) 300 (+100) CLOTHES 100 (double) 50 (-50)

FOOD
NORTHLAND SOUTHLAND 75 225

CLOTHES
50 100

Northland will give 50 units of clothes to southland and in return will get 75 units of food from southland.
Exchange ratio: C : F ( 1 : 1.5) Therefore, giving 50 units of clothes will give northland 75 units of food based on the above exchange ratio. BOTH COUNTRIES ENJOY GREATER QUANTITIES OF FOOD AND OVERALL WORLD PRODUCTION HAS ALSO INCREASED.

Factor productivities and factor endowment in different countries form the basis of international trade Resources are distributed unevenly internationally.

A nation will export products that use a large amount of the factors of production of which it has an abundance, and are thus cheap. It will import products that use large amounts of factors of production which are scarce, and therefore expensive, in the country.

Explains the trade patterns of manufacturers and multinational expansions of sales and production subsidiaries FDI

TRADING CYCLE STAGES Introduction, maturity, standardized,decline

INTRODUCTION STAGE:~ Innovator company has a technological breakthrough in the production of a manufactured item
MATURING STAGE:~ Innovator manufacturer begins to export its product into foreign markets STANDARDIZED STAGE:~ Innovating manufacturer opens up foreign subsidiaries followed by production subsidiaries

DECLINING STAGE:~ Innovating manufacturer loses its monopoly position ~ production process becomes standardized to such an extent that it can easily be imitated by all other firms. Hence, the innovator firm loses no comparative advantage.

PROACTIVE MOTIVES :~ motivators that act as a stimuli for strategy change, based on the firms interest to incorporate changes ( technological advancement) REACTIVE MOTIVES:~ arise as a result of a threat or oppurtunity that the firm reacts to (pull / push factors)

Profit / growth motives

Managerial urge

Technology competence / unique product

Foreign market oppurtunities/ market information

Economies of scale

Tax benefits

Competitive pressures

Domestic market / small and saturated

Overproduction / excess capacity Extend sales of seasonal products

Unsolicited foreign orders

Proximity to international customers / psychological distance