Learn It 3-1: The Basis for International Business

An absolute advantage means that while a comparative advantage means that

1. a country has the ability to produce a product more efficiently than any other nation 2. a country has the ability to produce a product more efficiently than any other product

A balance of payments is different from a balance of trade in that _______.

a balance of payments includes investments, money spent by foreign tourists, and other factors

A country that exports more than it imports is said to have a ________.

positive balance of trade

The United States currently has a(n) _______.

trade deficit

Story:

Can you imagine if you could only purchase products and services produced in the United States? Many products that you use, like an iPhone or Samsung phone, coffee, and Nike or Adidas shoes, are all produced outside of the United States. The demand for global products is increasing—both for U.S. products abroad and foreign products in the United States. International business is all business activities that involve exchanges across national boundaries. This is more than just buying or selling products—international business includes a business buying any part of its input or selling any part of its output to a company in a foreign country. Absolute and Comparative Advantage Some countries have a natural capability of producing certain goods better or more efficiently than others. This could be due to natural resources or the skills of the labor supply: An absolute advantage is one nation's ability to produce a product more efficiently than any other nation. This means that the country can produce the product with fewer resources than another country. With 65 percent of the world's diamond mines, South Africa has an absolute advantage in producing diamonds. A comparative advantage is the ability to produce a product more efficiently than any other product. For example, the United States has a comparative advantage in producing crops such as corn and soybeans, and Brazil has a comparative advantage in producing coffee beans. Countries can have more than one absolute and comparative advantage, but it is still valuable for the country to engage in international business and trade with other countries. A country should specialize in their absolute and comparative advantages and export these items and import what they cannot produce efficiently from another country. Exporting and Importing Exporting is the selling and shipping of raw materials or products to other nations. Importing is purchasing raw materials or products in other nations and bringing them into one's own country. These are the two categories of international trade. Some countries may import more goods than they export, which leads to a negative, or unfavorable, balance of trade. A balance of trade is the total value of a nation's exports minus the total value of its imports over a specified period of time. A country that exports more than it imports has a positive, or favorable, balance of trade. The United States has had a trade deficit every year since 1974, meaning they import more goods than they export. However, the United States regularly exports more services than it imports—making it a service economy. Further, an overall trade deficit is not necessarily bad as it can indicate a strong economy. A better measure of a nation's economy is its balance of payments, or the total flow of money into a country minus the total flow of money out of that country over a specified period of time. A country's balance of payments includes investments, money spent by foreign tourists, payments by and aid to foreign governments, etc. Other nations may lose confidence in a country's economy if that country continually has a negative balance of payments. It is also possible that a country with a negative balance of payments exports goods, but limits imports with trade restrictions.