economics and business studies a level quiz, 2010

Economics and Business Studies A level quiz, 2010

Unit 3 International Business

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How to revise1. Use your own notes as your basis for revision. 2. I have used a number of examples in this quiz that

you would not be expected to know about. The specification does not require that you learn any specific examples.

3. Use this revision quiz if you want a change from your own notes. It will test your knowledge of the basic ideas. However, many of the questions contained here have more than one correct answer

4. If you don’t understand any of the questions, use your own notes, or textbooks, or teachers, or friends to improve your understanding.

5. Don’t forget – knowledge of the concepts is only part of what you are tested on. Application, Analysis and Evaluation are all equally important. The comments given provide some examples of how basic content might be extended.

3.3.1 Why does a business seek

international markets?This section of Unit 3 looks at why

some companies wish to sell overseas, looking at the product or market conditions which may encourage a business to trade internationally

3.3.1(1) International trade as a means of meeting

growth objectivesQ1: What is the simplest way of describing

the aims of most large businesses?A: Profit maximisationComment: Most large firms are public

limited companies whose shares may be bought by anyone. Unless such firms pursue the path of maximising the profit made on its assets, it is vulnerable to being taken over by companies which are more profit-orientated


growth objectivesQ2: Why does the aim of maximising profits

lead most large companies to trade internationally?

A: The UK with a population of 60 million has just 1% of the world’s population. Very few large firms can afford to ignore the other 99%

Comment: The skills which large companies acquire are in many respects transferable across the globe. It makes no sense to confine their use to just one corner of it

3.3.1(1) International trade as a means of

meeting growth objectivesQ3: Why is growth essential if profits

are to be maximised?A: There is a limit to the amount of

profit that can be squeezed out of static revenue – the only long-term way to grow profits is to grow revenue

Comment: And ultimately this means selling overseas


growth objectivesQ4: If a company manages to double its

sales levels together with sales revenue what will normally happen to profits?

A: They will more than double. Any business has fixed costs, so doubling output does not normally double costs – there are ‘economies of scale’ (size)

Comment: Selling overseas is often the fastest path to doubling sales


growth objectivesQ5: Why might selling overseas enable a

company to extend its product life cycle?A: While there is always a market in rich

countries for the latest products at relatively high prices, in ELDCs (Economically Less Developed Countries) demand for older products persists

Comment: For example, in the 1990s Trevor Bayliss reinvented the windup radio, which sold to people without access to mains power


growth objectivesQ6: Why might selling overseas enable a

company to launch an innovative new product?A: Most people who buy the latest products (the

‘first adopters’) do not live in the UK. Innovative new products may have a greater chance of success if launched first in the larger markets of Japan or the USA rather than the UK

Comment: Or they may be launched close together in Japan, the USA and Europe e.g. the Xbox 360


growth objectivesQ7: Why might selling overseas be a sensible

response to increased domestic competition?A: Any static business model is always in

danger from potential competitors, whether based in the UK or overseas. ‘The best form of defence is attack.’

Comment: However, expansion should not be seen as a solution to any company suffering from underlying problems which make it uncompetitive


growth objectivesQ8: Why might buying in supplies from

overseas be a means of growing a business?A: By confining itself to UK suppliers, a

company rules out the vast majority of potential partners, many of whom may offer better (or cheaper) products

Comment: Nonetheless, domestic suppliers will normally be able to deliver more quickly (with a shorter ‘lead time’), and without any exchange rate risk


growth objectivesQ9: What is the long-term trend with

respect to the transport and communication costs of doing business internationally?

A: These costs are falling, with telephone and email costs essentially the same internationally as nationally

Comment: These technological advances remove one of the traditional costs associated with international trade

3.3.1(2) The laws governing international

tradeQ 10: What is meant by ‘trade liberalisation’?A: The process by which international trade is

made easier through a relaxation of the rules which govern it

Comment: To ‘liberalise’ anything is to reduce the legal constraints on the activity. While this is not always a good thing, there are powerful economic arguments in favour of liberalised international trade (also known as ‘free trade’)


tradeQ11. What are trade barriers?A: Any arrangements that make

international trade more difficult, such as taxes on imports (known as ‘tariffs’) or restrictions on the amount of imports (known as ‘quotas’) – see 3.3.4

Comment: The process of trade liberalisation does, therefore, consist in the removal of trade barriers


tradeQ12: What is the work of the World Trade

Organisation (WTO)?A: To encourage trade liberalisation by operating

a system of trade rules and by providing a forum for the negotiation of trade disputes

Comment: While every country stands to benefit from free trade taken as a whole, every country also faces situations where they would like an exception to be made – normally to protect a domestic producer who is not competitive


tradeQ13: What is a trade bloc?A: A group of countries which have agreed

to operate by the same rules with respect to international trade

Comment: Depending on how closely the members wish to integrate their economies they may form different types of trade bloc – such as free trade areas, customs unions, common markets and full economic and monetary union


tradeQ14: What is a free trade area?A: A group of countries, which have agreed not to

impose any trade barriers between themselvesComment: There are many such regional blocs

around the world, including the North American Free Trade Association (NAFTA), consisting of Mexico, Canada and the USA. The European Economic Area (EEA) consisting of non-EU states is another example – now small, the main members being Norway and Iceland


tradeQ15: What is a Customs Union?A: A free trade area where all the members

impose the same import taxes on all other countries – the level of import taxes being known as the Common External Tariff (CET)

Comment: The benefit of a CET is that once goods have been imported into one of the countries in the Customs Union they may then be moved freely within it without the owners of the goods avoiding tariffs


tradeQ16: What is a Common Market?A: A customs union where the members also

have the same rules on product regulation, and seek to implement free movement of capital and labour between member states

Comment: The Eurasian Economic Community, whose members consist of many former states within the Soviet Union such as Russia, Belarus, and Kazakhstan is one example


tradeQ17: What is Economic and Monetary

Union (EMU)? A: A common market where the

members also use the same currencyComment: Many examples of EMU

consist of one major state with satellite states e.g. EMU between South Africa and Swaziland, Lesotho & Namibia


tradeQ18: Do trade blocs always fit neatly into one

of the above categories?A: No. Trade blocs tend to be very fluid. They

form, break down, gain members and lose them – and often evolve from one type of trade bloc into another over time

Comment: Nonetheless there appears to be a global trend towards more, and more tightly knit, trade blocs – and this is in turn one of the factors driving the increase in international trade


tradeQ19: What type of trade bloc is the European

Union (EU)?A: The EU is an example of Economic and

Monetary Union. Although only 16 out of the current 27 member countries have adopted the Euro, all except the UK and Denmark are committed to adopting it in due course

Comment: The other 9 (mainly recent members) are expected to join when their economies become more closely integrated with the EU


tradeQ20: Is the EU essentially a trading bloc?A: The EU has a strong political dimension:

it is not merely an economic arrangement. The original aim of the 1957 Treaty of Rome was ‘ever closer union’. This is interpreted by many to mean a single state should be the aim

Comment: Indeed for many the economic arrangements within the EU are secondary to the political project


tradeQ21: What are the benefits of trading within

the EU?A: As a free trade area, there are no import

duties, and as a common market what is sold in one country may be sold in another. With monetary union there are fewer costs involved in changing currencies, and it is easier to compare prices

Comment: Almost all multinational companies including those based in the UK would like Britain to adopt the Euro


tradeQ22: What are the constraints on trading

within the EU?A: The UK is not part of the Euro zone, so we

still face the exchange rate risk and transactions costs of dealing in another currency. Different languages and cultures also form trade barriers

Comment: Additionally, while the EU is a vast market of 500 million mainly wealthy people, rapidly growing markets in Asia and elsewhere will for many offer more opportunity

3.3.2 Key players in the world economy

This section of Unit 3 looks at how firms and businesses may be affected by the growing economic power of India and China and how a national business may seek to trade with them.

3.3.2(1) What will be the likely impact of the growing economic

power of India and China?Top ten countries by GDP

GDP in US $ trillion

Ranking by GDP /head (out of 228)

1. USA 14.4 10

2. China 8.0 133

3. Japan 4.3 37

4. India 3.3 167

5. Germany 2.9 33

6. Russia 2.3 73

7. UK 2.2 32

8. France 2.1 39

9. Brazil 2.0 102

10. Italy 1.8 41

Top ten countries by GDP/head

GDP/ head in US $

Ranking by GDP (out of 228)

1. Liechtenstein 118,000 165

2. Qatar 111,000 69

3. Luxembourg 81,200 97

4. Bermuda 69,900 162

5. Norway 59,500 41

6. Kuwait 57,500 58

7. Jersey 57,000 159

8. Singapore 51,600 47

9. Brunei 51,300 123

10. USA 44,600 1

Source: CIA Factbook 2009. Figures are for 2008, or the latest available estimates. Figures converted into US dollars using Purchasing Power Parity exchange rates

TABLE 3.1 TABLE 3.2


power of India and China?Q23: Does GDP or GDP/head give a better guide

to economic power (see previous tables)?A: GDP gives the better guideComment: A country is economically powerful if

it produces more goods than others. This is measured by GDP. By contrast, GDP/head is a guide to the standard of living as it measures output per person. Because of wildly different population sizes there is little connection between the two measures, as the previous tables show


power of India and China?TABLE 3.3 Top ten countries by GDP, using market exchange rates

GDP in 2008 as % of world GDP

1. USA 25.52. Japan 10.33. China 6.44. Germany 6.35.France 4.66. UK 4.27. Italy 3.88. India 2.79. Canada 2.510. Spain 2.4

TABLE 3.4Top ten countries by GDP, using Purchasing Power Parity exchange rates

GDP in 2008 as % of world GDP

1. USA 20.6

2. China 11.4

3. Japan 6.2

4. India 4.7

5. Germany 4.2

6. Russia 3.2

7. UK 3.2

8. France 3.0

9. Brazil 2.8

10. Italy 2.6Note: World GDP in 2008 was US$70.1 trillion (PPP exchange rates) Sources: CIA Factbook 2009 and UNData websites


power of India and China?Q24: What is the difference between market

exchange rates and Purchasing Power Parity (PPP) exchange rates?

A: Market rates are the rates at which currencies may be traded in the open market. PPP rates are the rates at which you could buy the same typical basket of goods in different countries

Comment: If all products could be freely traded the two rates would be very similar. In practice, most services cannot be traded internationally


power of India and China?Q25: Why does it matter which rate we use?A: PPP exchange rates give a much better

indication of purchasing power, and so of economic power

Comment: If you compare China and Japan in the previous set of tables Japan appears to produce almost double the GDP (10.3/6.4) using the market exchange rate whereas in reality it is producing roughly half the GDP (6.2/11.4)


power of India and China?Q26: Why does using PPP exchange rates

show countries with low standards of living narrowing the gap with rich countries?

A: Because poor countries have low wages which are reflected in low prices for labour-intensive services. Market exchange rates do not reflect this because most services cannot be traded internationally

Comment: For example, a porter in India cannot sell his services at the going rate in a rich country


power of India and China?Q27: How can we summarise the relative

economic strength of the major economies in 2008?

A: Using PPP exchange rates, the USA on 21% of world GDP is well ahead of China (11%), Japan (6%), India (5%) and Germany (4%)

Comment: Another way of looking at it is to say that the USA on 21% is roughly matched by all 27 EU countries (also on 21%) and by the top three Asian countries combined on 22%


power of India and China?Note: While PPP exchange rates give a

better guide to current economic power, economic growth rates are normally expressed using GDP based on market exchange rates. For this reason, the subsequent slides are based on comparisons using market exchange rates. As China and India catch up with the developed world, so the difference between their PPP and market exchange rates will diminish


power of India and China?TABLE 3.5 Rank order by GDP in 2008

GDP in 2008 - mkt exchange rates: US $ bn

Annual real growth: ‘97 to 2008

GDP in 2015 at 1997-2008 growth rate



1. USA 14440 2.6% 17229 19546 25155

2. Japan 5838 1.4% 6438 6904 7939

3. China 3617 9.7% 6936 11043 27994

4. Germany 3546 1.5% 3932 4233 4906

5.France 2635 2.1% 3037 3361 4118

6. UK 2382 2.6% 2853 3246 4200

7. Italy 2170 1.2% 2361 2507 2828

8. India 1527 8.0% 2615 3841 8282

9. Canada 1428 2.9% 1750 2023 2705

10. Spain 1340 3.5% 1703 2021 2845Source: UNData website


power of India and China?Q28: The ‘rule of 70’ states that a variable

growing at x% pa will double in approximately 70/x years. Using this rule and the data from Table 3.5, how long will it take for a) China b) India and c) Britain/USA to double their GDP?

A: China – 70/9.7 = 7.2 years India – 70/8.0 = 8.8 years USA/Britain = 70/2.6 = 26.9 years

Comment: The ‘rule of 70’ is pretty accurate. The actual times are a)7.5 b)9.0 c)27.0 years


power of India and China?Q29: What does a country need to challenge

for the top spots in world economic power?A: A level of GDP that is already high, and a

future long-term annual rate of growth of GDP that will be higher than the existing leaders

Comment: From Table 3.5, both India and China are likely to meet these criteria with growth rates over the past decade far in excess of anything produced by the other 8 largest economies


power of India and China?Q30: From Table 3.5, how does the forecast

relationship between China’s and the USA’s GDP change between 2008 and 2030?

A: In 2008, the USA’s GDP is almost exactly four times that of China’s. By 2030, China will have just pulled ahead – on this forecast

Comment: We might guess that by 2030, the USA and China will have roughly the same GDP – and roughly three times more than Japan and India, who may be fighting for third place


power of India and China?TABLE 3.6 Rank order by GDP in 2008

GDP in 2008 - mkt exchange rates: US $ bn

Annual real growth of GDP: ’97-’08

Population in millions (2008/09)

GDP / head (US $ mkt exch rate)

1. USA 14440 2.6% 307 47,000

2. Japan 5838 1.4% 127 46,000

3. China 3617 9.7% 1339 2,700

4. Germany 3546 1.5% 82 43,200

5.France 2635 2.1% 64 41,200

6. UK 2382 2.6% 61 39,000

7. Italy 2170 1.2% 58 37,400

8. India 1527 8.0% 1166 1,300

9. Canada 1428 2.9% 33 43,300

10. Spain 1340 3.5% 41 32,700Source: UNData website, and CIA Factbook

economics and business studies a level quiz, 2010

Documents

international trade

large companies

international markets

trade internationally3

large firms

growth essential

large businesses

revision quiz