Conditions that prompt trade Flashcards
Introduction to conditions that prompt trade
Reasons why countries trade with each other:
To obtain goods that cannot be produced domestically
To obtain goods that can be bought more cheaply overseas
Excess supplies- some countries have surplus commodities that they cannot use all by themselves
Push factors
Negative factors in the existing market that encourage an organisation to seek international opportunities
Saturated markets:
Were most of the customers who would buy a certain product already have it/ limited remaining opportunity for growth in sales
To increase sales, firms could differentiate their product from the ones in the home market or they could look to sell their product elsewhere in a market where there is still demand for it.
Competition:
High level of competition in a domestic market may force a business to sell abroad
Competitors could be selling similar products at a lower price or higher quality/ makes the selling of the original product unprofitable
They may decide to change their product to meet the taste of consumers abroad
Pull factors
Opportunities in overseas markets that entice firms into new markets
Increased sales and profitability:
Many firms can usually grow sales by exploiting overseas markets.
They sell goods and services to existing consumers and new consumers in many countries around the world
Increases sales revenue and raises profits
Emerging economies with certain under-developed markets tend to attract many businesses
Economies of scale:
Occur where increasing the scale of production leads to a lower cost per unit of output/ increases efficiency and lowers costs
Firms can buy supplies in large amounts at a discount and can train workers to specialise in tasks
However can lead to diseconomies of scale- costs rise and resources spread too thinly
Risk spreading:
Probability of a bad event happening multiplied by its negative impact
Firms can limit the risks faced by expanding into other markets, as they will not be over-dependent on one market, which would leave them vulnerable to risks in the short term and even long-term
Expanding abroad helps to minimise the impact of such risks on its overall profitability
Improving cost competitiveness by offshoring and outsourcing
Offshoring: The relocation of a business' operations from one country to another A firm might offshore in order to; reduce costs hire workers with particular skills
Could lead to complications caused by language/ cultural differences
May be political, economic, technological or IP risks associated with the host country
Could increase management costs, reduce efficiency/ quality, expose firms to corruption etc..
Outsourcing: Involves moving an entire business function to a specialist external provider A firm might outsource to: reduce costs specialise areas of the business improve speed, flexibility and quality comply with rules and regulations
A firm can become vulnerable to loss of expertise ad knowledge if it is over-dependent on others
Poor communication can raise issues and costs
It can lead to quality problems if strict standards are not informed
Extending the product life cycle
Describes the stages in the life of a product:
Development- the product is researched and design and a decision is made on whether to launch the product
Introduction- from the development of an original idea to the launch of the product on the market
Growth- when the product takes off and sales increase
Maturity- when sales are near their highest but are slowing down
Decline- when sales begin to fall
When a product has reached the decline stage, a firm can decide to take the product out of the market altogether or attempt to extend the product life cycle
It could choose to move production to new market to reduce costs/ increase margins
It could choose to sell to new markets
A product in a mature stage in one market may be at an introduction stage in another
A firm can also choose whether to change product for new markets or standardise it for global use
