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GLOBALIZATION: process of world shrinkage, of distances getting shorter, things
moving closer. It pertains to the increasing ease
with which somebody on one side of the world can interact,
to mutual benefit, with somebody on the other side.
->Integration (opening up world trade via merging with companies from other
countries)
->Specialization (gaining competitive advantage)
>Competition ( from MNCs)
>Comparitive Advantage (producing at lower cost than other countries)
->Connectivity (buying & selling products worlwide)
>Better Access (Market/Investments)
>Price Discoveries
>Employment Generation
>Global Supply Chain
>Diversification
>No Barriers
->Higher Effeciency (producing more at low costs)
>Outsourcing
>Cost Effectiveness
>Resource Allocation
->Cultural Heterogenity
->Policies (legal and trade restrictions)
->Political Relations
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DEGLOBALIZATION: Opposite of globalization. A process of reversing or decreasing
interdependence and integration among the countries.
Globalization Impacts
->Positives
>New Cultures
>Tech & Innovation
>Lower Costs
>Higher Standards of Living
>New Markets
>New Talent
->Negatives
>Local Job Loss
>Global expansion problems
>Foreign worker exploitation
>Tarrifs & other barriers
>International recruiting problems
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Modes of Entry in International Business
>Exporting
>>Direct Exporting: directly exporting to another country via own
exporting network
>>Indirect Exporting: hiring an export intermediary or third party in
return for commission
>>Advantages:
-Helps in distribution of surplus
-Less Risky
-control over selection of market (direct exporting)
-market access
>>Disadvantages:
-
>Foreign Investments
>>Direct
>>Indirect
>Merger & Acquisition
>>Combining 2 or more entities into one
>Joint Ventures
>>Forming a 3rd Seperate Legal Entity (50/50)
>Contract Manufacturing
>Licensing & Franchising
>>LICENSING
>Advantages
-Less Investment
-Low Labour Cost
>Disadvantages
-Time Consuming
-Inter-Dependancy of Reputation
>>FRANCHISING
>Semi-interdependent busines
>Advantages
-Less Risky
-Expertise of Franchisers
-Highly Motivated Employees
>Disadvantages
-Trade Secrets
-Future Competitions
>Strategic Alliance
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MODULE 2: International Trade Theories
MERCANTILISM
>Prevailed in Europe
>Govt should do everything to max exports and min imports
>Nation's wealth is reflected in Metals, Gold and Silver
>They were used as currencies
>Large trade surplus is what matters
>imports are restricted by Tariffs & Quotas
>Zero Sum Game (one doing better, the other does worse)
>enhancement of state power was inherent in mercentiles
>bulionism (wealth is ammased with gold & silver)
>FLAWS
>>favourable trade balance in short-run
>>Positive Sum Game
Q) Relevance of Mercantilism in the 21st century.
Ans)
>dumping of subsidies products
>undervaluing personal currencies
>trade restrictions leading to trade war
>immigration barriers
>moving towards self-reliance
ABSOLUTE COST ADVANTAGE
>theorized by Adam Smith
>countries will trade only if they enjoy absolute difference in the cost of
production of the commodity they specialize in
COMPARATIVE COST ADVANTAGE
>as per Ricardo, even if a country had absolute advantage in production of
both the commodities, it is better to specialise
in one which has better comparitive advantage or the lesser comparitive
disadvantage
>ASSUMPTIONS
>>Labour is the only homogenous production
>>2 country-2 commodity-1 factor
>>Laissez Faire Economy
>>Labour cost is the only cost of production measurement
>>Labour is perfectly mobile within a country, but immobile between
nations
>>Absense of tariffs and quotas
Portugal> Wine:80hrs and Cloth:90hrs
> Domestic Xchange (as per wine): 80/90=1:0.88
England> Wine: 120h and Cloth: 100hrs
> Domestic Xchange (as per wine): 120/100=1:1.2
Gains for Portugal: I Cloth for 1 Wine, therefore gain by 0.12 (1.0-0.88)
Gains for England: 1 Wine for 1 Cloth, therefor gain by 0.2 (1.2-1.0)
Opportunity Cost Theory
>termed by Gottfried Haberler has attempted to restate the comparitive costs
in terms of opportunity cost
>determines the cost of production in terms of the alternative production
that has to be foregone for producing the commodity in
>what has been given up to have the same quantity of another thing
>if one additional unit of one commodity has to be produced, the productive
resources are to be diverted from the production of
some other commodity to the given commodity
>measures the ratio of marginal cost of the two commodities
>ASSUMPTIONS
>NUMERICALS
1. Korea can make 3 cars/9 motorcycles in a day. Germany can make 4
cars/8 motorcycles in a day. Calculate the abosulte
advantage and comparitive advantage for both commodities.
Ans.
Absolute (wherever the output is higher)
Cars: Germany
Motorcycles: Korea
Comparitive (where opportunity cost is lower)
Korea->3:9=1:3 for cars or 9:3=1:0.33 for motorcycles
Germany->4:8=1:2 for cars or 8:4=1:0.5 for motorcycles
Cars: Germany
Motorcycles: Korea
2. Japan can produce 4 laptops/ 12 phones. Brazil can produce 1 laptop/
5 phones. Calculate the abosulte
advantage and comparitive advantage for both commodities.
Ans.
Absolute (wherever the output is higher)
Laptop: Japan
Phones: Japan
Comparitive (where opportunity cost is lower)
Japan->4:12=1:3 for laptops or 12:4=1:0.33 for phones
Brazil->1:5 for laptops or 5:1=1:0.2 for phones
Laptops: Japan
Phones: Brazil
3. In cuba a unit of labour can produce 1 TV in 4 hours or 1 Salsa in
12 hours. In mexico a unit of labour can produce 1 TV
in 1 hour or 1 Salsa in 5 hours. Assume there are only 2 units of
labour, one in each country working for 60 hrs in a week.
Calculate the absolute advantage and comparitive advantage for both
commodities.
Ans.
Cuba-> either 15 TVs or 5 Salsa
Mexico-> either 60 TVs or 12 Salsa
Absoulte (wherever the output is higher)
TV: Mexico
Salsa: Mexico
Comparitive (where opportunity cost is lower)
Cuba: 1:3 for Salsa and 1:0.33 for TV
Mexico: 1:5 for Salsa and 1:0.2 for TV
TV: Mexico
Salsa: Cuba
4. France takes 2 hrs for each worker to harvest green beans and 2 hrs
to harvest a tomato. Tunisia takes 1 hr for each worker
to harvest green beans and 4 hrs to harvest a tomato. Assume there are
only 2 workers, one in each country working for 40 hrs.
Calculate the absolute advantage and comparitive advantage for both
commodities.
Ans.
France-> either 20 Tomatos or 20 Beans
Tunisia-> either 40 Tomatos or 10 Beans
Absoulte (wherever the output is higher)
Tomatos: Tunisia
Beans: France
Comparitive (where opportunity cost is lower)
France: 1:1 for Tomatos and 1:1 for Beans
Tunisia 1:0.25 for Tomatos and 1:4 for Beans
Tomatos: Tunisia
Beans: France
Heckscher Ohlin Model
International Trade is nothing but a special case of inter-regional trade
1) Factor Endowment: combination of factors of production available in a certain
country
>countries rich in capital should export capital intensive goods
>countries rich in labour should export labour intensive goods
>a nation will export the commodity whose production requires the intensive
use of the nation's relatively abundant & cheap FOP
>a nation will import the commodity whose production requires the intensive
use of the nation's relatively scarce & expensive FOP
2) Factor Intensity: intensity is always used when comparing production of
commodities
>commodity Y is considered to be capital intensive if the Capital/Labour
Ratio (K/L) is higher for Y in comparison to commodity X.
3) Factor Abundance: abundance is always used in respect to nations.
>a country is said to be abundant in capital if the total amount of capital
to total amount of labour is higher in a country in relation to the other country
>abundance can also be measured in terms of price;
>>the price of capital (PK) is measure in terms of rent
>>the price of labour (PL) is measured in terms of wages
>>if PK/PL is less for a country, then the country is said to be in
abundance of capital
>>the more the ease of supply for a factor, the lower will be the cost
of acquiring it
>abundance can also be measured in terms of physical units
>>the units of capital (TK)
>>the units of labour (TL)
>>if TK/TL is less for a country, then the country is said to be in
abundance of capital
Competitive Advantage of Nations
>also called as the diamond model
>explains why certain industries within a particular nation are competitive
internationally
New Trade Theory also called as "Krugman Model", it talks about intra-industry
trade
> It refers to countries exporting and importing similar goods from the same
industry.
> Given by Paul Krugman in 1980.
> Intra-Industry trade increase the variety of products in the same industry
which is beneficial to both, businesses and consumers.
> Secondly, businesses benefit from economies of scale because they can
capture a bigger demand by diversifying internationally
> Intra-industry trade stimulates innovation. In Krugman's model, there is a
special role of first movers advantage. Usually they are the ones to be very
dominant, because of their ability to capture a bigger market demand and how the
get the benefit of economies of scale.
> Trough which, trade can increase the variety of goods available to
consumers and decrease the average cost of those sold
>in a world without trade, lesser variety and lesser scale
> Imperfect Competition
>Oligopolistic Model-Subsatncial Economies of Scale-High Entry Barriers
>Monopolistic Model
