Source: Image of globe, dollar bill, t-shirt, red car, wine, blue car, man at laptop on phone, box, handshake, crowd of people, images by Video Scribe, License held by Jeff Carroll; Image of oil pump, Public Domain, http://bit.ly/1pHpQoF; Image of peanut, Public Domain, http://bit.ly/ULZvM4; Image of trade balance sheet, Public Domain, http://bit.ly/1r7ftL5.
Hi, I'm Jeff, and in this lesson, we'll discuss the basis for international trade, and we'll learn about international business, globalization, and its impact on business. So let's get started.
The basis of international trade is often driven by absolute or comparative advantage. And absolute advantage is the capacity to produce a higher number of goods or services using the same production resources as competitors. This can be at the company or at the national level. An example of the absolute advantage at the national level is Saudi Arabia and crude oil. Because of their history and their large reserves of oil, Saudi Arabia has a strong absolute advantage over other nations.
Some countries, though, have better management systems to handle production, and this provides an absolute advantage. For example, China, because of their tight partnership between business and government, has an advantage in clothing manufacturing.
Some companies or nations have a comparative advantage, which is a trading advantage achieved over another company due to lower opportunity cost. This is due to a combination of factors, demand conditions, supporting industries, and strategies in place. Japan, for example, has a comparative advantage with automobile production since they have spent decades optimizing the manufacturing process and sharing that information between companies. In some cases, a country can have an absolute advantage over another country for multiple goods but still have a different comparative advantage.
Now let's talk about the trade of products between nations. Products that move in and out of a country are called imports and exports. Imports are goods domestically sold that were produced in a foreign nation. Exports are goods produced domestically and sold to a foreign nation.
For example, the United States has a large amount of farm land. We produce products such as peanuts which we export to other countries. And though we also produce products such as wine and cheese, we also import a large number of these from countries such as France. Automobiles from companies such as Toyota and Mazda also account for a large number of the United States's imports.
The difference in the monetary value between exports and imports is called the balance of trade. If we export more than we import, that is known as a trade surplus. But if we import more than we export, that's called a trade deficit.
Here's a graph showing the trade balance for the United States over the last 10 years. Note that over that time, we have always had a trade deficit.
Now let's talk about globalization. Globalization is the expansion of business into international markets. This has happened due to technology allowing for greater connectivity between nations. Also governments have placed less restrictions on both physical and non-physical products moving between nations. And now thanks for this ease of product movement worldwide and incredible communications, consumers can purchase products easily from just about anywhere.
Also since World War II, international trade has increased due to the high number of trade agreements. The journalist Thomas Friedman called this a flattening world, and it has been good for international business, which is business conducted between two or more nations. We'll discuss this more in it later lesson.
Now let's discuss business and trade. When a company is involved in international business, management has many more requirements. They need to consider how demand changes in different nations and how a product is adapted for different national markets.
Management must consider all options for entry into the market such as whether to use independent agents who might know more about the local culture, if a strategic alliance with a local company would be useful, if licensing is required, whether to open additional offices in the new market, and the legal barriers that may be locally in place such as business practice laws or local content laws. Finally, it must be determined if the products would be made domestically, offshore, or as a combination of both.
Good job. In this lesson, we were introduced to the global economy. We discussed the basis of trade and the advantages different companies or nations have. We talked about imports and exports and how they affect trade balance. We learned about globalization and why it is increased. And we discussed the unique management needs required when doing business internationally. Thanks for your time and have a great day.