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CHAPTER 2:
Trade in the Modern World
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Key Terms
importing trade embargo
global sourcing trade sanctions
exporting exchange rate
value added floating rate
licensing agreement currency revaluation
exclusive distribution rights currency devaluation
franchise terms of trade
joint venture hard currencies
foreign subsidiary soft currencies
protectionism currency speculating
trade quotas
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Chapter Objectives
By the time you finish this chapter, you should be able to:
Identify the types of international businesses
Describe, drawing on information from a variety of sources,
including the Internet, the impact technology has had on the
international business environment
Identify the factors that affect foreign exchange rates
Explain how changes in the value of the Canadian dollar can
affect business opportunities
Identify the types of products that trade freely into and out of
Canada and those that are restricted in their movement
Identify and locate on a map Canada’s major trading partners
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
© [Link]
Reasons that Canada trades:
Company growth
Entry into new markets
Expanded customer base
Increased profits
Access to inexpensive supplies
Lower labour costs
Access to financing
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Foreign portfolio investment
Investment in businesses located outside of Canada through
stocks, bonds, and financial instruments
Allows Canadians to spread out their investments, which is less
risky than investing in just one area
Also provides greater choice and opportunity
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Importing
To bring products or services into a country, for
use by another business or for resale.
The majority of the goods that Canada imports
come from the United States.
Global sourcing
The process of a company buying equipment,
capital goods, raw materials, or services from
around the world.
© [Link]
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Exporting
To send goods or services to another country, for use
by a business or for resale.
The majority of goods that Canada exports go to the
United States.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Value added
The amount of worth that is added to a product at each
stage of processing. It is the difference between the
cost of the raw materials and the finished goods.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Photos: © [Link]
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Licensing agreement
An agreement that grants permission to a company to use a
product, service, brand name, or patent in exchange for a fee or
royalty.
Exclusive distribution rights
A form of licensing agreement that grants a company the right to
be the only distributor of a product in a specific geographic area or
country.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Franchise
An agreement granted to an individual or group by a
company to use that company’s name, services,
products, and marketing.
For a fee, the franchisor provides support to the
franchisee in the areas of financing, operations, human
resources, marketing, advertising, quality control, etc.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Joint venture
A common type of international business, in
which a new company with shared ownership
is formed by two businesses, one of which is
usually located in the country where the new
company is established.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
Foreign subsidiaries
Often referred to as a wholly owned subsidiary, a
branch of a company that is run as an independent
entity in a country outside of the one in which the
parent company is located.
The parent company often sets financial targets,
and allows the subsidiary to manage its own day-to-
day operations as long as those targets are being
met.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Tariffs
Tariffs, the most common type of trade
barrier, are taxes or duties put on imported
products or services.
Tariffs raise the cost of imports, so that locally
manufactured products are less expensive
and more appealing to consumers.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Protectionism
The theory or practice of shielding domestic
industries from foreign competition, often
through trade barriers such as tariffs.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Trade quotas
A government-imposed limit on the amount of
product that can be imported in a certain period of
time.
Trade embargo
A government-imposed ban on trade of a specific
product or with a specific country, often declared to
pressure foreign governments to change their
policies.
Trade sanctions
Economic action taken by a country to coerce
another to conform to an international agreement or
norms of conduct.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Foreign investment restrictions
Canadian law with the greatest impact is the
Investments Canada Act
Ensures that all foreign investments are reviewed
to determine how they will benefit Canada
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Standards
Countries have different standards for products in
areas such as environmental protection, voltage,
and health and safety
The ISO (International Organization for
Standardization) is a network of standardization
groups from over 170 countries established to set
quality regulations
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Exchange rate
The amount of one country’s currency in relation to the
currency of another country.
The Canadian dollar (CAD) is most often quoted
against the U.S. dollar (USD) because the two
countries are the largest trading partners in the world.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Winners of a High Canadian Dollar
Importers
Canadian travelers
Major league sports teams in Canada
© [Link]
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Losers of a High Canadian Dollar
Exporters
Canadian tourism
Canadian retailers
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Floating rate
An exchange rate that is not fixed in relation to other
currencies.
The price at which currency with a floating rate is
bought and sold fluctuates according to supply and
demand.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Currency revaluation
The increase in value of a currency because the
demand for that particular currency is greater than
the supply.
Currency devaluation
The decrease in value of a currency because the
supply of that particular currency is greater than the
demand for it.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Factors Affecting the Exchange Rate
Economic conditions in Canada—inflation rate,
unemployment rate, GDP, interest rates
Trading between countries—the more favourable the
terms of trade (comparison of exports to imports), the
higher the currency exchange
Politics—political tension and instability or the threat
of terrorism decreases the demand for a currency
Psychological factors—historical significance and
stability change the way currencies are viewed
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Hard currencies
Stable currencies, such as the euro, and the U.S. and
Canadian dollars, which are easily converted to other
currencies on the world exchange markets.
Soft currencies
A currency belonging to a country with an economy
that is small, weak, or that fluctuates often, and is
difficult to convert into other currencies, such as the
Russian ruble or the Chinese yuan.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Currency speculating
Buying, holding, or selling foreign currency in
anticipation of its value changing in order to
profit from fluctuations in the price of
currency.
Used under license from Shutterstock, Inc.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Time Zones
Time Zones
Communication technology allows the world of
international business to operate twenty-four hours
a day
Certain methods of communication can be used at
any time (email); other methods (telephone)
require knowledge of time zones
Some methods offer immediate feedback and
interaction; others do not
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
Time Zones
Used under license from Shutterstock, Inc.
Chapter 2: Fundamentals of International Business
TRADE IN THE MODERN WORLD Copyright © 2010 Thompson Educational Publishing, Inc.
