INTERNATIONAL BUSINESS

& TRADE

1
 Chapter 1
The International Business
Imperative

2
 Learning Objectives
To understand the history and impact of
international business.
To learn the definition of international
business.
To recognize the growth of global linkages
today.
To understand the Philippines position in world
trade and the impact international business
has on our country.
To appreciate the opportunities and challenges
offered by international business.

3
Need for International Business
More and more firms around the
world are going global, including:
Manufacturing firms
Service companies (i.e. banks, insurance,
consulting firms)
Art, film, and music companies

4
Need for International Business
International business:
causes the flow of ideas, services, and
capital across the world
offers consumers new choices
permits the acquisition of a wider variety
of products
facilitates the mobility of labor,
capital, and technology
provides challenging employment
opportunities
reallocates resources, makes preferential
choices, and shifts activities to a global
level
5
What is International Business?

International business consists of

transactions that are devised and
carried out across national borders
to satisfy the objectives of
individuals, companies, and
organizations.

6
Types of International Business
Export-import trade
Foreign direct
investment

Licensing

Franchising

Management contracts

7
International Business Questions
How will an idea, good, or service fit
into the international market?
Should trade or investment be used
to enter a foreign market?
Should supplies be obtained
domestically or abroad?
What product adjustments are
necessary to be responsive to local
conditions?
What are the threats from global
competitors, and how can these
threats be counteracted?
8
International Business and the
Roman Empire
Pax Romana, or Roman Peace ensured that
merchants were able to travel safely and
rapidly.
Common coinage simplified business
transactions.
Rome developed a systematic law, central
market locations, and an effective
communication system; all of which enabled
international business to flourish in the Roman
Empire.
The growth of the Roman Empire occurred
mainly through the linkages of business
9
International Business and the
Roman Empire (cont.)
The decline of the Roman Empire can be
attributed in part to:
infighting and increasing decadence
the Pax Romana being no longer enforced
the decline of use and acceptance of the common
coinage
declining levels of communication
As a result, former Roman allies
cooperated with invaders.
10
United States: A Global Leader
The United States has developed a
world leadership position due to:
its use of market-based transactions in the
Western world
a broad flow of ideas, goods, and services
across national borders
an encouragement of international
communication and transportation
Pax Americana, an American sponsored and
enforced peace

11
 The Smoot-Hawley Act
The the 1930’s, the U.S. passed the Smoot-
Hawley Act, which raised import duties to
reduce the volume of goods coming into the
U.S.

The act was passed in the hope that it would

restore domestic employment.

The result was a worldwide depression and

the collapse of the world financial system.

12
Expansion of International Trade
In the past 30 years, the volume of
international trade has expanded from
$200 billion to over $7.5 trillion.

The sales of foreign affiliates of

multinational corporations are now
twice as high as global exports.

13
 Global Links Today
International business has created a network
of global links that bind countries,
institutions, and individuals with trade,
financial markets, technology, and living
standards.
For example, a reduction in coffee production in
Brazil would affect individuals and economies
worldwide.

14
 Recent Changes in
International Business
Total world trade declined dramatically
after 2000, but is again on the rise.

The rate of globalization is accelerating.

Regionalization is taking place, resulting

in trading blocs.

The participation of countries in world

trade is shifting.
15
 The Composition of Trade
Between the 1960’s and the 1990’s the
importance of manufactured goods
increased while the role of primary
commodities (i.e. rubber or mining) had
decreased.
More recently, there has been a shift of
manufacturing to countries with
emerging economies.
There has been an increase in the area
of services trade in recent years.

16
 The Current U.S. International
Trade Position
Exports and Imports of Goods and Services per Capita
for Selected Countries

Country Exports per Capita Imports per Capita

Australia $4,296 $4,525
Brazil 379 428
China 222 199
Japan 4,165 3,622
Kenya 91 125
United Kingdom 4,767 5,500
United States 3,472 4,962
17
The Impact of International
Business on the United States
U.S. international business outflows are
important on the macroeconomic level in
terms of balancing the trade account.

On the microeconomic level, participation

in international business can help firms
achieve economies of scale that cannot be
achieved in domestic markets.

18
 Average Plant Salary and Wages
(per worker, dollars per hour)
30

25

20
$ per hour

15

10

0
All Plants Small Plants Large Plants

Non-Exporters Exporters
19
 Globalization
Because of globalization, for the first
time in history, the availability of
international products and services can
be accessed by individuals in many
countries, from diverse economic
backgrounds.

20
 Incomes and Growth Around the World

Since growth rates vary, the country

rankings can change over time:
Poor countries are not necessarily doomed to
poverty forever – e.g., Singapore, incomes
were low in 1960 and are quite high now.
Rich countries can’t take their status for
granted: They may be overtaken by poorer
but faster-growing countries.

21
 Incomes and Growth Around the World

Questions:
• Why are some countries richer than
others?
• Why do some countries grow quickly while
others seem stuck in a poverty trap?
• What policies may help raise growth rates
and long-run living standards?

22
 Productivity
Recall one of the Ten Principles from Chap. 1:
A country’s standard of living depends
on its ability to produce g&s.
This ability depends on
productivity, the average quantity of g&s
produced per unit of labor input.
Y = real GDP = quantity of output produced
L = quantity of labor
so productivity = Y/L (output per worker)

23
Why Productivity Is So Important
When a nation’s workers are very
productive, real GDP is large and
incomes are high.
When productivity grows rapidly, so do
living standards.
What, then, determines productivity
and its growth rate?

24
 Physical Capital Per Worker
Recall: The stock of equipment and structures
used to produce g&s is called [physical]
capital, denoted K.
K/L = capital per worker.
Productivity is higher when the average worker
has more capital (machines, equipment, etc.).
i.e.,
an increase in K/L causes an increase in Y/L.

25
Human Capital Per Worker
Human capital (H):
the knowledge and skills workers acquire
through education, training, and experience
H/L = the average worker’s human capital
Productivity is higher when the average worker
has more human capital (education, skills,
etc.).
i.e.,
an increase in H/L causes an increase in Y/L.

26
 Natural Resources Per Worker
Natural resources (N): the inputs into production that
nature provides, e.g., land, mineral deposits
Other things equal,
more N allows a country to produce more Y.
In per-worker terms,
an increase in N/L causes an increase in Y/L.
Some countries are rich because they have abundant natural
resources
(e.g., Saudi Arabia has lots of oil).
But countries need not have much N to be rich
(e.g., Japan imports the N it needs).

27
 Technological Knowledge
Technological knowledge: society’s
understanding of the best ways to produce g&s
Technological progress does not only mean
a faster computer, a higher-definition TV,
or a smaller cell phone.
It means any advance in knowledge that boosts
productivity (allows society to get more output
from its resources).
E.g., Henry Ford and the assembly line.

28
Tech. Knowledge vs. Human Capital
Technological knowledge refers to
society’s understanding of how to
produce g&s.
Human capital results from the effort
people expend to acquire this
knowledge.
Both are important for productivity.

29
 The Production Function
The production function is a graph or equation
showing the relation between output and inputs:
Y = A F(L, K, H, N)
F( ) – a function that shows how inputs are
combined to produce output
“A” – the level of technology
“A” multiplies the function F( ),
so improvements in technology (increases in “A”)
allow more output (Y) to be produced from any
given combination of inputs.

30
 The Production Function
Y = A F(L, K, H, N)
The production function has the property
constant returns to scale: Changing all inputs
by the same percentage causes output to change
by that percentage. For example,
Doubling all inputs (multiplying each by 2)
causes output to double:
2Y = A F(2L, 2K, 2H, 2N)
 Increasing all inputs 10% (multiplying each
by 1.1) causes output to increase by 10%:
1.1Y = A F(1.1L, 1.1K, 1.1H, 1.1N)
31
 The Production Function
Y = A F(L, K, H, N)
If we multiply each input by 1/L, then
output is multiplied by 1/L:
Y/L = A F(1, K/L, H/L, N/L)
This equation shows that productivity
(output per worker) depends on:
the level of technology (A)
physical capital per worker
human capital per worker
natural resources per worker

32