Unit 1 - IB Exam prep

Unit 1

1.1 Trade advantages:

Trade Advantages slide show

International business: Exchange of goods and services between countries

Main purpose: To attain what a country lack.

• PAST: Trade has existed for thousands of years

  • There have been periods where nations have created laws to minimize trade,e as it was believed to be in their economic interest

• PRESENTLY: Trade is largely viewed as a positive 

Reasons for trade:

• Meeting our needs and wants

• Lower prices: Multinational corporations may locate in countries that result in cost savings

• Job creation: More than 50% of everything produced in Ontario is exported, leading to 1 out of 3 Canadian jobs depending on exports

• FDI (attracting investments): Foreign companies will invest money in Canada to simplify trade or reduce costs

  • foreign companies with an office with native speakers, or build a warehouse to store goods for large shipments 

• New technology: Businesses attempt to create machines that work better, faster, or cheaper, creating competition, leading to sales in greater numbers 

• Diverse products and services: Foreign trade opens up the world as a market

• Leads to great peace:

1. Economic interdependence: where countries rely on other countries for important goods

2. Avoid financial loss: The loss of a market can lead to lower export sales

3. Increase communication: Humanizing others through interaction

• Leading to greater social progress: Isolated communities learn ways of living that were previously negatively viewed

  • Women’s rights

  • Environmental awareness

  • Minority rights

  • Democratic right

Consumer benefits: 

• Lower prices

• Better qualities

• Functional and innovative designs

1.2 Types of international businesses

Types of International Business

Foreign portfolio investment: Investment in businesses located outside of Canada through stocks, bonds, and financial instruments

Why?

• Increase wealth (Retirement savings)

• Diversification (less risk)

• Greater RIO (return on investment) through more risky

Importing: To bring products or services into a country, for use by another business or for resale

Exporting: To send goods or services to another country, for use by a business or for resale

Global sourcing: The process of a company buying equipment, capital goods (goods used in producing other goods), raw materials, or services from around the world

Value added: The value added to a product at each stage of production

Licensing agreement: Permission to use a company’s brand, product, or patent, for a fee

Exclusive distribution agreement: A licensing agreement giving one company sole distribution rights in a region

Franchise: An agreement that allows individuals to operate under a company’s brand and system.

Joint venture: A business formed by 2 or more parties sharing ownership, risks, and profits

Subsidiary: A parent company that owns and controls other companies

Foreign subsidiary: A company fully or mostly owned by a partner company, operating independently

1.3 Trade Disadvantages

Trade Disadvantages Slideshow

Overview:

• Support of non-democratic systemswhat i

• Loss of cultural identity

• Social welfare

• Loss of security 

• Job loss

Trade Disadvantages Slideshow: Trade can mean prosperity for some, while it can also lead to economic loss, economic exploitation, and loss of cultural identity. 

Support of non-democratic systems: Both Iran and North Korea are nations with deplorable human rights records. Trade generates revenue for these governments.

Cultural identity issues: Culture is a major export of the United States.

• Films, music, television, sports, and books from the United States are popular world-wide

  • Each promotes what it is to live in America, to be American, to live the American lifestyle

Culture consumer: Consumers are often overwhelmed and influenced by the ideals of American society

• Ideals: What life should be like, how leisure time should be spent, how family should interact, the role that men or women play in society, leading to positive and negative views

  • Products carry cultural messages unintentionally or intentionally

Examples of cultural protectionism:

• China bans Google, Facebook, and many other Western media

• France taxes movie ticket sales to pay for French film production

Canadian protectionism:

Foreign ownership: Limiting foreign ownership, such as Canadian recording companies, book publishers

Radio: Content limits with 35% of all music played on private radio stations must be Canadian

CBC: They receive $1.1B annually from the Canadian government

Social welfare issues: Stand related to safety, minimum wages, health, the environment, etc, that add cost to Canadian businesses

• Countries that do not maintain these standards can produce goods more cheaply

Economic loss: Certain economic sectors (manufacturing) are negatively impacted (stagnant wages)

• Developing countries typically benefit; demographic segments of developed nations may be negatively impacted 

Loss of security: Free trade may mean a country may no longer have security in key areas:

• Food, military, technology, health

Complex supply chain: Disruptions in the supply chain can result in loss of key supplies and a sudden change in price

Jeff Rubin elephant chart + globalization and populism

1.4 Barriers to International Trade: 

Trade barriers slideshow:

Protectionism: Shielding a country’s domestic industries from foreign competition is common.

They exist to protect a country from the trade disadvantages. To protect domestic industries, nations utilize trade barriers.

Tariffs: A tax imposed by the local government on goods and services coming into a country. Tariffs give a price advantage to locally-produced goods over similar goods that are imported

Trade quotas: A government-imposed limit on the amount of product that can be imported in a certain period of time.

Trade embargo: A government imposed a complete ban on trade with a specific country

Trade sanctions (partial embargoes): Limiting trade of specific products or with specific companies or individuals.

Both embargoes and sanctions are often imposed to pressure foreign governments to change their policies or change their human rights record.

Foreign Investment Restrictions: Investments Canada Act is a law to ensure certain foreign investments are in Canada’s interest

• It applies to investments of over $1B for World Trade Organization (WTO) members and for investments of over $5M fo non-WTO members

Foreign Investment Restrictions: Many laws are put in place to ensure Canadian companies are protected against foreign ownership

• I.e. Bank Act, Transportation Act, etc.

Standards: Countries have different product or performance standards requiring products/services to fit the regulations of the importing country

• Voltage

• Health and safety

• Fuel efficiency

• Labeling

• Manufacturing 

  • The ISO (International Organization for Standardization) is a network of standardization groups from over 170 countries, established to set quality regulations 

Canadian protectionism:

• Even though trade has benefits, Canada protects certain industries it sees as essential (economically, culturally, stability, reelection)

• Tools used: Tariffs, ownership, restrictions, regulation

• Trade off: Stability for producers vs higher costs and less choice for consumers

1.5 Currency as trade barriers

Currency as a Trade barrier

Purpose of money:

1. Money is a Medium of Exchange (Can be exchanged for goods and services)

2. Money is a Measure of Value (allows us to give value to a good or service)

3. Money is a Store of Value (can be saved for future use)

Foreign exchange: Foreign exchange is the process of converting the currency of one country into the currency of another country.

Exchange rate: The amount of one country’s currency that can be traded for one unit of currency of another country

Foreign exchange and IB: When trading with another country, you must use their currency. Currency fluctuations create uncertainty in pricing goods and services accurately.

Foreign exchange winners and losers: The Canadian $ is low, meaning it requires more Canadian dollars to buy one US dollar.

Fluctuating exchange rates:

Floating/Flexible Exchange rate: Currency fluctuates (rises and falls) over time

• Currency appreciates and depreciates, which depends on supply and demand

Fixed (pegged) exchange rate: The rate is fixed to another currency (USD or Euro) or to another measure of value (i.e., gold)

Why? Stability 

How? A country’s Central Bank buys and sells its own currency against the currency it’s pegged (fixed) to

Factors affecting currency value:

1. Inflation (the rate at which the prices of goods/services rise)

• Low inflation symbolizes stability, which increases demand

2. Unemployment

• A high unemployment rate represents instability

3. Gross domestic product (GDP)

• A stable or rising GDP demonstrates stability 

4. Interest Rate

• A high interest rate attracts foreign investors

Foreign exchange: Foreign exchange is the process of converting the currency of one country into the currency of another country.

Exchange rate: An Exchange rate is the amount of one country’s currency that can be traded for one unit of currency of another country

Balance of Trade

1. Trading between countries: The more favourable the terms of trade (comparison of exports to imports), the higher the currency exchange rate

2. Political stability

3. Psychological factors: Some currencies are considered Hard currencies because they are easily converted to other currencies. On the other hand, soft currencies are not easily converted. 

Balance of trade: 

Key terms:

Balance of trade = difference in → exports - imports

Surplus = Strong currency

Deficit = Weaker currency

Trade surplus = exports > imports

Countries with large trade surplus: China, Germany, Iceland

Trade deficit = imports > exports

Countries with large trade deficits: United States, India, United Kingdom

Currency depreciation:

How: Lower interest rates, market intervention, polciies use to weaken currency

Why: Boost exports, discourage imports, cut deficits, ease debt, encourage domestic production

Canadian trade trend:

Trade surplus effect on currency: Leads to appreciation because of more demand for currency from foreign buyers who want to export