CHAPTER THREE

Competing in Global
Environments

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 LEARNING OUTCOMES

In this chapter, you will learn to:

 Define international trade, free trade, globalization
and trade liberalization.
 Highlight the differences between absolute
advantage and comparative advantage, and explain
how nations measure international trade.
 Explain why nations trade, and list the advantages
and disadvantages of international trade.

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 LEARNING OUTCOMES (cont.)

 Define trade protectionism, and identify the tools

used and explain the economic arguments behind
the restricting of trade among nations.
 Explain the emergence of trading blocks and
elaborate on the role of World Trade Organization
(WTO) in promoting free trade.
 Identify six different strategies that may be taken to
reach the global market.

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 FUNDAMENTALS OF
INTERNATIONAL TRADE

• International trade refers to transactions made

between countries.
• Simply, it is the export of goods and services
among nations.
• Basis of international trade – no single nation can
produce all the goods and services that are needed
by the society.

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 ADVANTAGES OF
INTERNATIONAL TRADE

1. Increase in the country’s total output.

2. Aggressive competition among businesses results
in lower prices of goods and services.
3. Greater variety of goods and services for
consumers to choose.
4. Increase efficiency in local production to
match with the quality of imported products.
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 ADVANTAGES OF
INTERNATIONAL TRADE (cont.)

5. It promotes businesses to specialize and reap

economies of scale.
6. It enables countries to produce what they can
and buy the rest from trading partners in a
mutually beneficial exchange.

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 HOW DOES A NATION KNOW
WHAT TO PRODUCE AND WHAT
GOODS TO TRADE FOR?

Understanding the theories of:

1. Absolute advantage
2. Comparative advantage

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 Why Nations Trade

Refers to the ability of a party (an

individual, or firm, or country) to
Absolute
Advantage produce more of a good or service than
competitors, using the same amount of
resources.

refers to the ability of a party to produce

Comparative a particular good or service at a
Advantage lower marginal and opportunity cost over
another.

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8
 ABSOLUTE ADVANTAGE

• Refers to the ability of a party (an individual,

or firm, or country) to produce more of a good
or service than competitors, using the same
amount of resources
• A nation is said to have an absolute advantage
in the production of a good if it can produce
more efficiently than all other countries.

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 ABSOLUTE ADVANTAGE (cont.)

1. Before Specialization 2. After Specialization

Country Goods X Goods Y Country Goods X Goods Y
A 40 100 A 0 200
B 80 40 B 160 0
Total 120 140 Total 160 200

3. After Trade
Country Goods X Goods Y
A 60 130
B 100 70
Total 160 200

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 ABSOLUTE ADVANTAGE (cont.)

Goods Y Goods Y
International Trade International Trade
200 Curve Curve

130 80
100 70
40

0 40 60 80 Goods X 0 80 100 160 Goods X

Country A Country B

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 THEORY OF COMPARATIVE
ADVANTAGE

• Propounded by David Ricardo in the late 18th

century.
• This theory supported the idea of free economic
exchange and explains gains from specialization.
• The advantage in the production of a good
enjoyed by one country over another when that
good can be produced at lower cost in terms of
other goods than it could be in the other country.

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 COMPARATIVE ADVANTAGE
(cont.)

1) Before Specialization 2) COMPARATIVE ADVANTAGE

Country Goods X Goods Y Country Opportunity Opportunity
A 80 100 cost for 1 unit cost for 1 unit
B 40 160 of Goods X of Goods Y

Total 120 260 A 1.25 Y 0.8 X

B 4Y 0.25 X
 Question

• Using the Figure above for Australia and New Zealand

determine which country has the comparative advantage in
the production of cotton and which the comparative
advantage in the production of wheat.
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 Answer

• The opportunity cost of cotton in Australia is 1/3 or 0.33 of a ton

of wheat for each ton of cotton.
• The opportunity cost of cotton in New Zealand is 3 tons of
wheat.
• Therefore, Australia enjoys a comparative advantage in the
production of cotton.
• The opportunity cost of wheat in Australia is therefore 1 wheat =
3 tons of cotton. The opportunity cost of wheat in New Zealand is
1 wheat = 1/3 cotton.
• Therefore, New Zealand enjoys a comparative advantage in the
production of wheat.

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 MEASURING INTERNATIONAL
TRADE

• Balance of trade – the ratio of total value of

exports to imports.
• If exports are more than imports, there is
favourable balance of trade or trade surplus.
• If imports are more than exports, the nation is said
to have unfavourable balance of trade or trade
deficit.

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 BALANCE OF TRADE—MALAYSIA
JAN–DEC 2007

(RM billion)
Total exports – 55.1
Total imports – 46.0
-------------------------------------
Balance of trade * + 9.1

* Favourable balance of trade

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 BALANCE OF TRADE—MALAYSIA
JAN–OCT 2011

(RM billion)
Total exports – 63.6
Total imports – 50.3
-------------------------------------
Balance of trade * + 13. 3

* Favourable balance of trade

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 MEASURING INTERNATIONAL
TRADE (cont.)

• Balance of payments – the difference between

money flowing into the country and money
flowing out of the country over a specified
period of time.
• Malaysia’s balance of payments – divided into
two major accounts:
– current or goods and services account
– capital and financial account.

Transfer payment All Rights Reserved

 LIMITATIONS OF INTERNATIONAL
TRADE

• The danger of economic specialization – limit

innovation
• Economic and political interdependence
among trading partners.

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 TRADE PROTECTIONISM

• Government policies implemented to restrict

foreign competition from affecting local industries
apart from fulfilling other social interests.
• They may come in many forms, as follows:
1. Tariffs or taxes
2. Quotas
3. Embargoes- partial or complete prohibition of commerce
and trade with a particular country
4. Subsidies and grants
5. Restrictive import standards and licenses

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 WHY DO NATIONS ADOPT
PROTECTIONIST POLICIES?

1. To protect industries in infancy

2. To diversify the economy
3. To correct a temporary unfavourable balance of
payment position
4. To protect declining industries
5. To prevent dumping

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 FREE TRADE

• The movement of goods and services amongst

nations without political or economic barriers.
• In simple terms, do away with protectionist
policies.

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 TRADING BLOCKS

• Organizations of nations that remove trade

barriers among member nations to promote free
trade among them.
• This limits foreign competition since member
nations co-operate among themselves to promote
mutual trading benefits.

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 FOUR MOST POWERFUL
TRADING BLOCKS

• The European Union (EU)

• The North American Free Trade Agreement
(NAFTA)
• The Association of South East Asian Nations
(ASEAN)
• South America’s MERCOSUR

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 WORLD TRADE ORGANIZATION
(WTO)

• Formed on 1 January 1995 to replace GATT (1947)

with the following objectives:
– To reduce trade barriers.
– To eliminate discrimination in international trade.
– To prevent the establishment of further trade barriers.
– To consult one another for unilateral benefits.

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 WORLD TRADE ORGANIZATION
(WTO) (cont.)

• Targets:
– Liberalization schedule:
• Developed countries—2010
• Developing countries—2020

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 STRATEGIES TO PENETRATE
THE GLOBAL MARKET

1. Importing and exporting 5. Foreign direct

Investment
2. Licensing (HONDA-Boon
Siew)
3. Franchising (KFC)
4. Strategic alliances
(agreement between two
or more parties, e.g )

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3– 28
 MALAYSIA AND ITS EXTERNAL
TRADE

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 MALAYSIA AND ITS EXTERNAL
TRADE (cont.)

• One of the world’s 20 largest trading nations.

• According to AT Kearney/Foreign Policy
Globalization index, Malaysia is ranked the 19th most
globalized nation in the world.
• The World Bank has ranked Malaysia as the 24th
nation in terms of ease of doing business.
• Malaysia’s open policy to international trade.
• Importance of international trade to the Malaysian
economy.

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 MALAYSIA: BALANCE OF TRADE

• Malaysia has continuously recorded a

commendable or positive trade balance since 2000
(the beginning of the millennium) when global free
trade was promoted through the WTO.
• The February 2011 Malaysia External Statistics
Report stated that “… it was the 160th consecutive
month of trade surplus since November 1997”.

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MALAYSIA: BALANCE OF TRADE,
2000–2011 (RM BILLION)

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 MAJOR EXPORTS OF MALAYSIA,
2007

• Electrical and electronic goods (44.1% of total

exports).
• Palm oil and palm oil-based products (7.4%),
crude petroleum (5.3%), liquefied natural gas
(4.3%), timber and timber-based products (3.8%)
and petroleum products (3.2%).

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 MAJOR IMPORTS OF MALAYSIA,
2007

• Three main categories:

– Intermediate goods (70.9% of total
imports)
– Capital goods (13.9%)
– Consumption goods (5.7%)

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 MAJOR EXPORTS OF MALAYSIA,
2011

• Electrical and electronic goods (37.5% of total

exports).
• Palm oil and palm oil-based products (10.6%),
liquefied natural gas (6.5%), petroleum
products (5.8%), crude petroleum (4.4%) and
timber-based products (2.3%).

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 MAJOR IMPORTS OF MALAYSIA,
2011

• Electronics
• Machinery
• Petroleum products
• Plastics
• Vehicles
• Iron and steel products
• Chemicals

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MALAYSIA: EXPORT PARTNERS,
2011

Malaysia’s Export Partners

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MALAYSIA: IMPORT PARTNERS,
2011

Malaysia’s Import Partners

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 MALAYSIA’S TOP FIVE TRADING
PARTNERS IN 2007

• The United States of America

• The Republic of Singapore
• The European Union
• Japan
• The People’s Republic of China

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 MALAYSIA’S TOP TEN TRADING
PARTNERS IN 2011

• The Republic of • Thailand

Singapore • The Republic of
• The People’s Republic Indonesia
of China • The Republic of
• Japan Korea
• The European Union • Taiwan
• The United States of • Hong Kong
America
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1) The theory of comparative advantage is
credited to
• A) Adam Smith.
• B) David Ricardo.
• C) John Maynard Keynes.
• D) Milton Friedman.
• Answer: B
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2) According to the theory of comparative advantage, a
country should
A. specialize and export goods with the highest opportunity
cost.
B. specialize and export goods with the lowest production
cost.
C. specialize and export goods with the lowest opportunity
cost.
D. specialize and export goods with the lowest average cost.
• Answer: C

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3) Refer to Figure above. Which of the following statements is TRUE?
A. The United States has both an absolute advantage and a comparative advantage in the production
of soybeans and alfalfa.
B. The United States has an absolute advantage in the production of soybeans and alfalfa, but a
comparative advantage only in the production of soybeans.
C. The United States has an absolute advantage in the production of soybeans and alfalfa, but a
comparative advantage only in the production of alfalfa.
D. The United States has a comparative advantage in the production of both soybeans and alfalfa,
but an absolute advantage only in the production of soybeans.
• Answer: C All Rights Reserved
4) Refer to Figure 19.2. The opportunity cost of a truck is ________ car(s) in the United States and
________ car(s) in England.
A. 6: 4
B. 4: 1.5
C. 4: 6
D. 25: 1.5
• Answer: B
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5. The _____ is defined as the difference in value
of a country's exports and imports over a period of
time.
• A. balance of trade
• B. federal deficit
• C. federal surplus
• D. balance of exchange
• E. balance of payments
• ANS: A
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6. A country that exports more goods than it
imports is said to have a(n):
• A. favorable balance of payment
• B. negative trade deficit
• C. favorable balance of trade
• D. unfavorable balance of trade
• E. positive trade deficit
• ANS: C
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8. All of the following terms are associated with
international trade EXCEPT:
• A. absolute advantage
• B. balance of payments
• C. balance of trade
• D. discount rate
• E. comparative advantage
• ANS: D
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9. A natural barrier that faces Argentina when it
sells beef to Siberia is:
• A. custom regulations
• B. exchange controls
• C. government controls
• D. distance
• E. taxes
• ANS: D
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10. A(n) _____ is a tax levied by a nation on
imported goods.
• A. embargo
• B. tariff
• C. premium
• D. boycott
• E. subsidy
• ANS: B
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11. An argument in favor of protective tariffs is the "infant-
industry argument," which states that:
• A. any industry dealing with products for infants should be
protected
• B. infant-industries need government loans
• C. infant-industries should be protected by tariffs from
established foreign competition
• D. infant-industries should be exempt from antitrust laws
• E. infant-industries should be able to form monopolies
• ANS: C

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12. In 1914, the United States prohibited the importation of
Mexican avocados even though Mexico is the world’s largest
producer of the fruit. This prohibition remained in effect until
1996. The ban on importing Mexican avocados is an example
of a(n):
• A. import quota
• B. embargo
• C. restrictive limit
• D. boycott
• E. tariff
• ANS: B

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13. U.S. plane manufacturer McDonnell-Douglas has authorized
Mitsubishi Heavy Industries, a Japanese company, to use its
trademarks, patents, and other proprietary knowledge to
manufacture F-15 fighter planes. Mitsubishi Heavy Industries
pays McDonnell-Douglas. This is an example of:
• A. licensing
• B. contract manufacturing
• C. importing
• D. franchising
• E. exporting
• ANS: A

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