Académique Documents
Professionnel Documents
Culture Documents
Assignment Set-1
Opening up their economies to the global economy has been essential in enabling many
developing countries to develop competitive advantages in the manufacture of certain
products. In these countries, defined by the World Bank as the “new globalizers,” the
number of people in absolute poverty declined by over 120 million (14 percent) between
1993 and 1998.
Freeing trade frequently benefits the poor especially. Developing countries can ill-afford
the large implicit subsidies, often channeled to narrow privileged interests that trade
protection provides. Moreover, the increased growth that results from free trade itself
tends to increase the incomes of the poor in roughly the same proportion as those of the
population as a whole. New jobs are created for unskilled workers, raising them into the
middle class. Overall, inequality among countries has been on the decline since 1990,
reflecting more rapid economic growth in developing countries, in part the result of trade
liberalization.
The potential gains from eliminating remaining trade barriers are considerable. Estimate
of the gains from eliminating all barriers to merchandise trade range from US$250 billion
to US$680 billion per year. About two-thirds of these gains would accrue to industrial
countries. But the amount accruing the developing countries would still be more than
twice the level of aid they currently receive. Moreover, developing countries would gain
more from global trade liberalization as a percentage of their GDP than industrial
countries, because their economies are more highly protected and because they face
higher barriers.
Although there are benefits from improved access to other countries’ market countries
benefit most from liberalizing their own markets. The main benefits for industrial countries
would come from the liberalization of their agricultural markets. Developing countries
would gain about equally from liberalization of manufacturing and agriculture liberalization
in industrial countries because of the greater relative importance of agriculture in their
economies.
Finally, a multi-method approach to research has been advocated for decades, and for
research on culture and IB, its importance cannot be exaggerated. Most research in IB
reach is co-relational in nature, and we are more or less ignorant when it comes to the
causal processed involved. Experimentation provides a powerful tool for probing causal
relationships, and we need both co-relational experimental approaches to enrich our
understanding of IB phenomena, and to develop effective practical advice for international
managers. Culture is such a fuzzy concept that we need to probe it with all the tools we
have at our disposal, and we look forward to the bloom of multi- method approaches for
moving the field of international business research forward by leaps and bounds.
At next level, the Goods Council, Services Council and Intellectual Property (TRIPS) council
reports to the General Council.
Numerous specialized committee, working groups and working parties deal with the
individual agreements and other areas such as the environment, development, membership
applications and regional trade agreements.
Secretariat
The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-
general. Its annual budget is roughly 160 million Swiss francs; It does not have branch
office outside Geneva. Since decisions are taken by the members themselves, the
Secretariat does not have the decision-making role that other international bureaucracies
are given with. The secretariat main duties are to supply technical support for the various
councils and committee and the ministerial conferences, to provide technical assistance for
developing countries to analyze world trade, and to explain WTO affairs to the public and
media.
The secretarial also provides some forms of legal assistance in the dispute settlement
process and advices government wishing to become members of the WTO.
So, the WTO belongs to its members. The countries make their decisions through various
councils and committee, whose membership consists of all WTO members, Topmost is the
ministerial conference which has to meet at least once every two years. The Ministerial
Conference can take decisions on all matters under any of the multilateral trade
agreements.
Each of the higher-level councils has subsidiary bodies. The Goods Council has 11
committees dealing with specific subjects (such as agriculture, market access, subsidies,
anti-dumping measures and so on). Again, these consist of all member countries. Also
reporting to the Goods Council is the Textiles Monitoring Body, which consists of a
chairman and 10 members acting in their personal capacities, and groups dealing with
notifications (government the WTO about current and new policies of measures) and state
trading enterprises.
The Services Council’s subsidiary bodies deal with financial services, domestic regulations,
GATS rules and specific commitments,
At the General Council level, the Dispute Settlement Body also has two subsidiaries: the
dispute settlement “ Panels” of experts appointed to adjudicate on unresolved disputes, and
the Appellate Body that deals with appeals.
The limited achievement of the Tokyo Round, outside the tariff reduction result, was a sign
of difficult time to come. GATT’s success in reducing tariffs to such a low level, combined
with a series of economic recessions in the 1970s and early 1980s, drove government to
devise other form of protection for sectors facing increased overseas competition. High
rates of unemployment and constant factory closures led government in Europe and North
America to seek bilateral market-sharing arrangements with competitors to embark on a
subsidies race to maintain their holds on agricultural trade. Both these changes undermined
the credibility and effectiveness of GATT.
Apart from the deterioration in the trade policy environment, it also became apparent by the
early 1980s that the General Agreement was no longer as relevant to the realities of world
trade as it had been in the 1940s. For a start, world trade and become far more complex
and important than 40 years before: the globalization of the world economy was underway,
international investment was exploding and trade in services – not covered by the rules of
GATT – was of major interest to more and more countries and, at the same time, closely
tied to further increase in world merchandise trade. In other respects, the GATT had been
found wanting: for instance, with respect to agriculture where loopholes in the multilateral
system were heavily exploited – and effort at liberalizing agricultural trade met with little
success – and in the textiles and clothing sector where an exception to the normal
disciplines of GATT was negotiated in the form of the Multi-fibre Arrangement. Even the
institutional structure of GATT and its dispute settlement system were giving cause for
concern.
Together, these and other factors convinced GATT members that a new effort to reinforce
and extend the multilateral system should be attempted. That effort resulted in the Uruguay
Round.
Integration in East Asia has progressed very slowly and is still in an early stage despite that
the process has continued for decades. In fact, it could be said that the process began
centuries ago- even as far back as the 15the century. By comparison, European integration
has progressed steadily and has gradually deepened over the last 50 year to reach an
advanced stage today with a common currency and well-developed regional institutions.
Thus, the speed of progression and the level integration attained in two regions are quite
dissimilar.
In addition to these differences, the drivers behind the integration process in each region
are different. In Europe, the origins of integration have been institutional in nature, and the
development of institutions has been prominent throughout the process. Thus, regional
institutions have been the driving force behind integration in Europe. In EAST Asia, the
development of regional institutions has also occurred; however progress in this area has
been slow and the few existing institutions are fairly weak and ineffective.
Nevertheless, regional integration is taking place in East Asia, but the driving force the
market rather than policy of institutions. Corporations and the production networks they
have established are driving integration in East Asia.
This sounds like an exaggerated claim, and it would be wrong to make too much of it.
Nevertheless, the system does contribute to international peace, and if we understand why,
we have a clearer picture of what the system actually does.
As trade expands in volume, in the number of products traded, and in the numbers of
countries and companies trading, there is a greater chance that disputes will arise. The
WTO system helps resolve these disputes peacefully and constructively.
The WTO cannot claim to make all countries equal. But it does reduce some inequalities,
giving smaller countries more voice, and at the same time freeing the major powers from
the complexity of having to negotiate trade agreements with each of their numerous trading
partners.
Think of all the things we can now have because we can import them: fruits and vegetables
out of season, foods, clothing and other products that used to be considered exotic, cut
flowers from any part of the world, all sorts of household goods, books, music, movies, and
so on.
Lowering trade barriers allows trade to increase, which adds to incomes — national
incomes and personal incomes. But some adjustment is necessary.
Trade clearly has the potential to create jobs. In practice there is often factual evidence that
lower trade barriers have been good for employment. But the picture is complicated by a
number of factors. Nevertheless, the alternative — protectionism — is not the way to tackle
employment problems.
Many of the benefits of the trading system are more difficult to summarize in numbers, but
they are still important. They are the result of essential principles at the heart of the system,
and they make life simpler for the enterprises directly involved in trade and for the
producers of goods and services.
The GATT-WTO system which evolved in the second half of the 20th Century helps
governments take a more balanced view of trade policy. Governments are better placed to
defend themselves against lobbying from narrow interest groups by focusing on trade-offs
that are made in the interests of everyone in the economy.
Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is
difficult to reverse. The rules also discourage a range of unwise policies. For businesses,
that means greater certainty and clarity about trading conditions. For governments it can
often mean good discipline.
Finally, the EOL curve peaks at each redesign. The last wave begins shortly before original
production ceases and ends when the product is no longer manufactured or supported by
the EOL Company or division. The EOL element requires that a decision be made about
the preceding version at each major redesign: continue production, make a short-term run
of spares, keep blueprints active so that parts can be made as ordered or discontinue
production.
The five element product wave, or FPW, uses trigger point, rather than time, as the horizon
over which the element curves vary. Changes in magnitude, represented by the vertical
axis, result from differing activity levels within the five elements. Simple changes in levels of
dollar or unit product sales, in and of themselves, do not necessarily determine the triggar
point. Rather, the varying activity levels are a direct result of product introductions and
redesign that, from the outset, must take into account company strategy, core capabilities,
and the state of the competitive environment. For example, a product with strong sales may
be redesigned in a preemptive strike against competitors, further distancing that product
from the competition, such as with Caterpillar’s innovative high-drive bulldozers.
The five-element wave is grounded in reality becomes apparent when considering the
recent research that suggests product introducing cycles are being compressed. Bayus
(1194) claims that knowledge is being applied faster, resulting in increasing levels of new
product introductions. Yet since product removals are not keeping pace with introduction,
there are an increasing number of product variations on the market. Slater (1993) observes
that product life cycles are growing shorter and shorter. Vesey (1992) reports that the
strategy for the 1990s is speed to market and discusses the pressures the market is
exerting to shorten product introduction lead times.
Regardless of whether life cycles are actually being compressed or knowledge is simply
being applies faster, it is apparent that firm are increasing the speed with which they bring
their products to market. The effect of this is a compression of the design engineering,
process engineering, production, and product marketing elements of the wave model. (The
EOL curve may remain unchanged because accelerated introductions do not necessarily
affect EOL efforts.) The five-element wave clearly shows the inefficiency of traditional “
over-the-wall” systems as speed to market increases. As the elements compress. More and
more information is thrown over the wall. Recipients find themselves with less and less time
to take action. Taken to the extreme, in-baskets, phone lines, conference take action.
Taken to the extreme, in-baskets, phone lines, conference rooms, desks, and floors are
soon grid locked and littered with unanswered correspondence the things to do. Forget
quality; production itself grinds to a halt.
The solution is to maximize the advantage of the relationships within the five-elements
wave and work in concurrent teams, as illustrated in Figure 6. That way, responsibility is
shared throughout the system. Members from each discipline optimize the system. The
method tears down barriers between departments and speeds the introduction process,
thus decreasing costs. The focal point become the customer, rather that the task. The
system is totally interactive and bound together. Each element is connected to all of the
others and is focused on the customer.
The strength of the five-elements product wave is the fact that it illuminates critical decision
points in the life of a product or services. The interrelationships of the elements clearly
illustrate the benefit of working product introductions, design changes, end-of-life decisions
in teams. This is particularly true in today’s rapidly compressing environment of speeding
products to market. Furthermore, the model is flexible and may be expanded or contracted
to include those functional areas relevant to the production team. Thus whether a given
firm’s products is a services or a manufactured good, the five-elements wave is a powerful
tool that can be deployed to accelerate effective decision making in markets demanding
ever-increasing levels of speed and agility.
AT its mot basic, there is nothing mysterious about globalization. The term has come into
common usage since the 1980s, reflecting technological advances that have made it easier
and quicker to complete international transactions – both trade and financial flows. It refers
to and extension beyond national borders of the same market forces that have operated for
centuries at all levels of human economic activity – village, urban industries, or financial
centers.
Markets promote efficiency through competition and the division of labor – the
specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around the
world. It means that they can have access to more capital flows, technology, cheaper
imports, and larger export markets. But markets do not necessarily ensure that the benefits
of increased efficiency are shared by al. Countries must be prepared to embrace the
polices needed, and in the case of the poorest countries may need the support of the
international community as they do so.
It may also help the company to improve its domestic business, increase its market
share and help establish the image of the company.
Business strategy relating to overseas investment differs from that of domestic investment
due to the differences in business environment:-
The political environment includes the characteristics and policies of the political
parties, nature of the constitution and the governmental system. These factors vary
considerably between different nations.
The legal system that exists in different countries across the world may be classified
into common law, civil law or code law and theocratic law. Common law is based on
tradition, past practices and legal precedents set by the courts through interpretation
of statutes, legal legislations and past rulings. Code law, on the other hand, is based
on an all-inclusive system of written rules of law. While the theocratic law is based on
religious precepts. These differences in the legal framework play a very important
role in overseas investment strategy.
Cultural differences are one of the most important factors influencing international
investments. The cultural or social environment of any country encompasses
language, religion, customs, traditions and beliefs, tastes and preferences, social
stratification, social institutions, etc.
Economic environment also varies from country to country. It broadly includes the
nature and level of development of the economy, economic resources, size of the
economy, economic systems and economic policies, economic conditions, trends in
various economic indicators like national income, per capita income, foreign trade,
inflation rate, industry production, etc.
However, a firm which plans to invest abroad has to make a series of strategic decisions:-
The first decision a company has to make is whether to expand its business abroad
or not. This decision is based on consideration of number of important factors like: -
The next important decision relates to determining the appropriate modes of entering
those foreign markets. The important foreign market entry strategies are:-
• Licensing and Franchising:- are easy ways of entering the foreign markets.
Under international licensing, a firm in one country (the licensor) permits a
firm in another country (the licensee) to use its intellectual property (such as
patents, trade marks, copyrights, technology, technical know-how, marketing
skill or some other specific skill). The monetary benefit to the licensor is the
royalty or fees, which the licensee pays.
Hence, a firm typically passes through different stages in its transition from local firm to a
transnational firm. That is, a firm, which is entirely domestic in its activities normally, passes
through different stages of internationalization before it becomes a truly global one. A firm
may start exporting its products on an experimental basis and if the results are satisfying, it
would enlarge its international operations and in due course it would establishes its offices,
branches or subsidiaries or joint ventures abroad. This expansionary process may also be
characterized by increasing the product mix and the number of market segments and the
number of countries of operation. Thus, the company becomes multinational or global. In
other words, for many firms overseas business initially starts with a low degree of
commitment and involvement, and gradually develops into a global business organization
MB0037 – International Business Management
Assignment Set- 2
Q.1 Evaluate the monetary system and currency markets in international business
management.
Ans:
Electronic commerce or e-commerce refers to a wide range of online business activities for
products and services. It also pertains to “any form of business transaction in which the
parties interact electronically rather than by physical exchanges or direct physical contact.”
E-commerce is usually associated with buying and selling over the Internet, or conducting
any transaction involving the transfer of ownership or rights to use goods or services
through a computer-mediated network. Though popular, this definition is not comprehensive
enough to capture recent developments in this new and revolutionary business
phenomenon. A more complete definition is: E-commerce is the use of electronic
communications and digital information processing technology in business transactions to
create, transform, and redefine relationships for value creation between or among
organizations, and between organizations and individuals.
Bill of lading
A bill of lading can be used as a traded object. The standard short form bill of lading is
evidence of the contract of carriage of goods and it serves a number of purposes:
Letter of credit
The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals between a supplier in one
country and a customer in another. In such cases the International Chamber of Commerce
Uniform Customs and Practice for Documentary Credits applies. They are also used in the
land development process to ensure that approved public facilities (streets, sidewalks,
storm water ponds, etc.) will be built. The parties to a letter of credit are usually a
beneficiary who is to receive the money, the issuing bank of whom the applicant is a client,
and the advising bank of whom the beneficiary is a client. Almost all letters of credit are
irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary,
the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit
incorporate functions common to giros and Traveler's cheques. Typically, the documents a
beneficiary has to present in order to receive payment include a commercial invoice, bill of
lading, and documents proving the shipment was insured against loss or damage in transit.
However, the list and form of documents is open to imagination and negotiation and might
contain requirements to present documents issued by a neutral third party evidencing the
quality of the goods shipped, or their place of origin.
Ans:
Uncitral is:
There are two main approaches to global segmentation. At the macro level, countries are
seen as segments, given country aggregate characteristics and statistics tend to differ
significantly. For example, there will only be a large market for expensive pharmaceuticals
in countries with certain income levels, and entry opportunities into infant clothing will be
significantly greater in countries with large and growing birth-rates ( in countries with
smaller birth-rates or stable to declining birth-rates entrenched competitors will fight hard to
keep the market share).
There are, however, significant differences within countries. For example, although it was
though that the Italian market would demand “no frills” inexpensive washing machines while
German consumers would insist on high quality, very reliable ones, it was found that more
units of the inexpensive kind were sold in Germany than in Italy- although many German
consumers fit the predicted profile, there were large segment difference within that country.
At the micro level, where one looks at segments within countries. Two approaches exist,
and their use often parallels the firm’s stage of international involvement intra-market
segmentation involves segmenting each country’s market from scratch-i.e. And American
firm going into the Brazilian market would do research to segment Brazilian consumers
without incorporating knowledge of U.s. buyers. In contrast, inter-marketing segmentation
involves the detection of segment that exist in another and that the sizes of the segment
may differ significantly. For example, there is a huge small car segment in Europe, while it
is considerably smaller in the U.S.
Inter- market segmentation entails several benefits. The fact that products and promotional
campaigns may be used across markets introduces economies of scale, and learning that
has been acquired in one market may be used in another – e.g., a firm that has been
serving a segment of premium quality cellular phone buyers in one country can put its
experience to use in another country that features that same segment. (Even though
segments may be similar across the cultures, it should be noted that it is still necessary to
learn about the local market. For example, although a segment common across two
countries may seek the same benefits, the cultures of each country may cause people to
respond differently to the “ hard sell” advertising that has been successful in one).
The international product life cycle suggests that product adoption and spread in some
markets may lag significantly behind those of others. Often, then, a segment that has
existed for some time in an “ early adopter” country such as the U.S. or Japan will emerge
after several years (or even decades) in a “late adopter” country such as Britain or most
developing countries. (We will discuss this issue in more details when we cover the product
mix in the second half of the term).
Firms often have to make a trade off between adapting their products to the unique
demands of a country market or gaining benefits of standardization such as cost savings
and the maintenance of consistent global brand image. There are no easy answers here.
On the one hand, McDonald’s has spent a great deal of resources to promote its global
image; on the other hand, significant accommodations are made to local tastes and
preferences – for example , while serving alcohol in U.S. restaurants would go against the
family image of the restaurant carefully over several decades, Mc Donald’s has
accommodated this demand of European patrons.
A brand is the identity of a specific product, service, or business. A brand can take many
forms, including a name, sign, symbol, color combination or slogan. The word brand began
simply as a way to tell one person's cattle from another by means of a hot iron stamp. A
legally protected brand name is called a trademark. The word brand has continued to
evolve to encompass identity - it affects the personality of a product, company or service.
People engaged in branding seek to develop or align the expectations behind the brand
experience, creating the impression that a brand associated with a product or service has
certain qualities or characteristics that make it special or unique. A brand is therefore one of
the most valuable elements in an advertising theme, as it demonstrates what the brand
owner is able to offer in the marketplace. The art of creating and maintaining a brand is
called brand management. Orientation of the whole organization towards its brand is called
brand orientation.
Careful brand management seeks to make the product or services relevant to the target
audience. Brands should be seen as more than the difference between the actual cost of a
product and its selling price - they represent the sum of all valuable qualities of a product to
the consumer. There are many intangibles involved in business, intangibles left wholly from
the income statement and balance sheet which determine how a business is perceived.
The learned skill of a knowledge worker, the type of mental working, the type of stitch: all
may be without an 'accounting cost' but for those who truly know the product, for it is these
people the company should wish to find and keep, the difference is incomparable.
A brand which is widely known in the marketplace acquires brand recognition. When
brand recognition builds up to a point where a brand enjoys a critical mass of positive
sentiment in the marketplace, it is said to have achieved brand franchise. One goal in
brand recognition is the identification of a brand without the name of the company present.
For example, Disney has been successful at branding with their particular script font
(originally created for Walt Disney's "signature" logo), which it used in the logo for go.com.
TRADEMARKS
• ™ (for an unregistered trade mark, that is, a mark used to promote or brand goods)
• ℠ (for an unregistered service mark, that is, a mark used to promote or brand
services)
• ® (for a registered trademark)
The owner of a registered trademark may commence legal proceedings for trademark
infringement to prevent unauthorized use of that trademark. However, registration is not
required. The owner of a common law trademark may also file suit, but an unregistered
mark may be protectable only within the geographical area within which it has been used or
in geographical areas into which it may be reasonably expected to expand.
The term trademark is also used informally to refer to any distinguishing attribute by which
an individual is readily identified, such as the well known characteristics of celebrities.
When a trademark is used in relation to services rather than products, it may sometimes be
called a service mark, particularly in the United States.
This variety of exchange rate regimes exists in an environment with the following
characteristics.
• Partly for efficiency reasons, and also because of the limited effectiveness of capital
controls, industrial countries have generally abandoned such controls and emerging
market economies have gradually moved away from them. The growth of
international capital flows and globalization of financial markets has also been
spurred by the revolution in telecommunications and information technology, which
has dramatically lowered transaction cost in financial market and further promoted
the liberalization and deregulation of international financial transaction.
• International private capital flows fiancé substantial current account imbalances, but
the changes in these flows appear also sometimes to be a cause of macroeconomic
disturbances or and important channel through which they are transmitted to the
international system.
• Developing and transition countries have been increasingly drawn into the
integrating world economy, in terms of both their trade in goods and services and of
financial transactions.
Lessons from the recent crises in emerging markets are that for such counties with
important linkages to global capital market, the requirements for sustaining pegged
exchange rate regimes have become more demanding as a result of the increased mobility
of capital. Therefore, desirable unless the exchange rate is firmly fixed through a currency
board, unification with another currency, or the adoption of another currency as the
domestic currency (dollarization)
Flexible exchange rates among the major industrial country currencies seem likely to
remain a key feature of the system. The launch of the euro in January 199 market a new
phase in the evolution of the system, but the European Central Bank has a clear mandate
to focus monetary policy on the domestic objective of price stability rather than on the
exchange rate. Many medium-sized industrial countries, and developing and transition
economies, in an environment of increasing capital market integration, may also continue to
maintain market- determined floating rates, although more countries could may adopt
harder pegs over the longer term. Thus prospects are that:
• Exchange rates among the euro, the yen, and the dollar are likely to continue to
exhibit volatility, and schemes to reduce volatility are neither likely to be adopted, nor
to be desirable as they prevent monetary policy from being devoted consistently to
domestic stabilization objectives.
• Several of the transition countries of central and eastern Europe especially those
preparing for membership in the European Union, are likely to seek to establish over
time the policy disciplines and institutional structures required to make possible the
eventual adoption of the euro.
The approach taken by the IMF continues to be to advise member countries on the
implications of adopting different exchange rate regimes, to consider the choice of regime
to be a matter for each country to decide and to provide policy advice that is consistent with
the maintenance of the chosen regime.
Product Strategies
There are five major product strategies in international marketing.
This strategy is very low cost and merely takes the same product and communication
strategy into other markets. However it can be risky if misjudgments are made. For
example, CPC international believed the US consumer would takes to dry soups, which
dominate the European market it did not work.
If the product basically fits the different needs or segments of a market it may need an
adjustment in marketing communications only. Again this is a low cost strategy, but different
product functions have to be identified and a suitable communications mix developed.
The product is adapted to fit usage conditions but the communication stays the same. The
assumption is that the product will serve the same function in foreign markets under
different usage conditions.
Product invention
This needs a totally new idea to fit the exclusive conditions of the market. This is very much
a strategy, which could be idea in a Third World situation. The development costs may be
high, but the advantages are also very high.
International Pricing
Imperfect competition is a key feature of the new open – economy framework. Because
agents have some degree of monopoly power instead of being price takers, this framework
allows the explicit analysis of pricing and local-currency pricing. The first case is the
traditional approach, which assumes that prices are preset in the currency of the seller. In
this case, prices of imported goods change proportionally with unexpected changes in the
nominal exchange rate, and the law of one price always holds.’ In contrast, under the
assumption of local-currency pricing prices are preset in the buyer’s currency. Here,
unexpected movements in the nominal exchange rate do not affect the price of imported
goods and lead to short- run deviations from the law of one price.
Empirical evidence using disaggregated data suggests that international markets for
tradable goods remain highly segmented and that deviations in the law of one price are
large, persistent, and highly correlated with movement in the nominal exchange rate for
highly tradable goods. Moreover, there is strong evidence that the large and persistent
movements that characterize the behaviour of real exchange rates at the aggregate level
are largely accounted for by deviations in the law of one price for tradable goods,
The price- setting regime determines the currency of the denomination of imported goods
and the extent to which changes in exchange rates affect the relative price of imported to
domestic goods and the international allocation of goods in the short run. That is different
pricing regimes imply different roles for the exchange rate in the international transmission
of monetary disturbances. As we shall see, this assumption has very striking implications
for several important questions, namely real exchange rate variability, the linkage between
macroeconomic volatility and international trade, and the welfare effects of alternative
exchange rate regimes, among other.
While generating deviations from the law of one price that are absent from models
assuming producer – currency pricing, the assumption of local-currency pricing still leaves
important features of the data unexplained. The key role of this assumption in the properties
of open-economy models suggests that it is necessary to keep exploring the implication of
alternative pricing structures in open- economy models.