BUS X100 1nd Edition Lecture 2Outline of Last LectureFree Enterprise and Economic SystemsI. Businessa. definitionII. Resourcesa. human, material, informational, and financial III. Economic Systemsa. definitionIV. Types of Economic Systemsa. capitalismb. socialismc. communismV. Key Features of the U.S ‘Free Enterprise’ Systema. consumer’s freedom of choiceb. private ownership of land and real propertyc. competitiond. supply and demande. circular flowf. business cyclesVI. Types of Competitiona. definitionb. pure competitionc. monopolistic competitiond. oligopolye. monopolyVII. The Basis For International Businessa. absolute advantageb. comparative advantageOutline of Current LectureGlobal Business in a Global EconomyI. The Basis for International Businessa. definitionb. absolute advantagec. comparative advantageII. Artificial Restrictions on International Tradea. Tariff barriersi. import dutyii. dumpingb. Non-tariff Barriersi. embargoii. import quotaiii. foreign exchange controliv. currency devaluationv. bureaucratic ‘red tape’c. Trade restrictionsi. advantagesii. disadvantagesIII. GATT Reductions in Trade Tariffs and Barriersa. definitionsb. The Kennedy Roundc. The Tokyo Roundd. The Uruguay Rounde. The Doha RoundIV. International Economic Communitiesa. North American Free Trade Agreementb. European Unionc. Organization of Petroleum Exporting Countriesd. Association of Southeast Asian Nationse. Organization for Economic Cooperation and DevelopmentV. Methods of Entering International Businessa. Trading Companiesb. Exporting and Importingc. Counter Traded. Foreign Licensinge. Franchisingf. Strategic Alliancesg. Production Agreementsh. Joint Venturesi. Totally Owned Facilitiesj. Multinational CorporationVI. Joint Venturesa. advantagesb. disadvantagesCurrent LectureGlobal Business in a Global EconomyThe Basis for International Business Absolute and Comparative Advantageo Absolute advantage- the ability to produce a specific product more efficiently than any other nationo Comparative advantage- the ability to produce a specific product more efficiently than other products.*Every nation has a comparative advantage but not all nations have absolute advantages. Exporting and Importingo Exporting- selling and shipping raw materials or products to other nations.o Importing- purchasing raw materials or products in other nations and bringing them into one’s own country.  Types of Trade RestrictionsTariffso Import Duty (tariff)- tax that is levied on products entering the country. Raises the price.o duty=tax – “political weapons”o Dumping- exportation of large quantities of products at a price lower than same product in home market. Drives down the price. Nontariff Barrierso Embargo- complete halt to trading of a product. Often used as a political weaponfrom one country to anothero Import Quota- limits the amount that may be importedo Foreign Exchange control- limits amount of foreign currency that can be purchased. Has effect of limiting imports. o Currency devaluation- reduction of the value of nation’s currency. Increases cost of foreign sourced goods.o Bureaucratic ‘Red Tape’- frustrates tradeReasons For Trade Restrictions Reasons Against Trade RestrictionsBalance of Trade Higher Prices for ConsumersProtect New or Weak Industries Restrictions of Consumers’ ChoicesProtect National Security Misallocation of International ResourcesProtect the Health of Citizens Loss of JobsRetaliate for Another Nations Trade RestrictionsProtect Domestic JobsThe General Agreement on Tariffs and Trade (GATT)-Originally established in 1947 after WWII. It is known as the WTO or World Trade Organization, an international organization of 150 nations that are dedicated to reducing or eliminating tariffs and other barriers of trade.  The Kennedy Round (1964-1967)- reduced US tariffs by as much as 50% as a result of the US Trade Expansion Act The Tokyo Round (1973-1979)- approximately 100 nations agreed to tariff cuts of up to 35% implemented over an eight-year period starting in 1979.  The Uruguay Round (1986-1993)- created the WTO and extended GAAT treaty to include textiles, agricultural products, business services and intellectual property rights. The Doho Round (2001-2012)- further reduction in trade barriers on agriculture and services. International Economic CommunitiesEconomic community- organization of nations formed to promote the free movement of resources and products among its member via common economic policies North American Free Trade Agreement (NAFTA)- joined US, Canada and Mexico, its first and second largest trading partners.  European Union (EU)- “Common Market,” formed in 1957 by 6 European countries (now 27). Organization of Petroleum Exporting Countries (OPEC)- founded in 1960 to provide 11 majoroil-producing countries with some control over crude oil prices. Association of Southeast Asian Nations (ASEA)- created ASEAN Free Trade Area (AFTA) in 1992, currently 10 countries. Organization for Economic Cooperation & Development (OECD)- group of 30 industrialized market economy countries in NA, Europe, the Far East and South Pacific. China is the #1 Major Trading Partner for the United States for imports and is #3 largest for export.Exports1. Canada2. Mexico3. China4. Japan5. United KingdomImports1. China2. Canada3. Mexico4. Japan5. GermanyMethods of Entering International Business1. Trading Companies- buy in one country at the lowest price and sell to customers in another country at a higher price.2. Exporting and Importing- firm manufactures products in home country and exports them for sale in foreign markets.3. Countertrade- international barter transaction in which goods and services are exchanged for other goods and services. 4. Foreign Licensing- contractual agreement to market product or use brand name in returnfor royalty or other compensation5. Franchising- contractual agreement in which a “franchisee” purchases the right to sell the “franchiser’s” products and use brand names under arrangements agreed in the contract. 6. Strategic Alliances- cooperative ‘partnerships’ formed to share or pool resources to create competitive advantages. Often used to share technology or penetrate geographic markets.7. Product Agreements- subcontracting of manufacturing to foreign firms for lower cost and sale or sale into foreign regions. 8. Joint Ventures- (similar to strategic alliance) separate entities formed to achieve