The Global Economy

2. 4 The Global Economy

3. Chapter Objectives • Outline advantages and disadvantages related to globalization. • Explain why countries specialize and how this leads to international trade. • Analyze the effect of multinational companies on the global economy. • Describe the relationship between currency strength and the balance of trade. continued

4. Chapter Objectives • Cite examples to show how international trade affects the overall economy, businesses, workers, and consumers. • Describe what you can do to develop the skills needed to succeed in a global economy.

5. Flow of Goods and Services • Globalization—the process of becoming worldwide in scope continued

6. Flow of Goods and Services • Economic globalization is changing the way people communicate, shop, and conduct business • Understanding economic globalization will help you hold your own in the job market and in the marketplace continued

7. Flow of Goods and Services • International trade has existed for thousands of years • Most trade today occurs between businesses in different countries; not between individuals or nations • Trade is discussed in terms of imports and exports

8. What Is Traded • Finished products such as • food • furniture • toys • computers • Intermediate goods used to produce other goods such as • car parts • semiconductors for computers continued

9. What Is Traded • Services such as • banking • transportation • insurance • law • telecommunications • entertainment continued

10. What Is Traded • Investments such as • money and capital invested by businesses into building factories in other countries • salaries and wages paid by businesses to workers in foreign countries • purchase of securities, real estate, and other investments in other countries

11. Why Trades Occur • Each party in a trade benefits from the transaction • No country can produce all the goods and services that its people and businesses want • Countries specialize in particular goods and services and trade for what they cannot produce

12. Natural Resources, Climate, and Geography • These factors determine what a country can and cannot produce • Saudi Arabia produces oil • Countries with tropical climates can produce rubber, bananas, and things that only grow in that climate

13. Available Human Resources • Available human resources determine what a country can and cannot produce continued

14. Available Human Resources • Labor-intensive industries locate where labor costs are low • Industries requiring educated workers locate in countries with high literacy rates and systems of higher education

15. Consumer Preferences • Consumer preferences determine what a country produces • Some U.S. consumers like high-fashion clothing from European designers • Some U.S. consumers prefer foreign-made cars

16. Comparative Advantage • Comparative advantage explains why a country that can produce everything it needs still benefits from trade • Nations benefit when they specialize in activities for which their opportunity costs are lowest • By expanding into foreign markets, businesses can take advantage of economies of scale

17. U.S. Trade • The U.S. is world’s largest importer • Over 20 percent of world’s total output is from the U.S. • Millions of people around the world depend on the U.S. for their livelihoods continued

18. U.S. Trade • The U.S. • imports more manufactured goods than it exports • exports more services than it imports

19. Flow of Labor • Globalization has increased the flow of migrants • Migrants leave their homelands to • escape persecution, war, economic crisis, natural disasters, crime, corruption • seek better opportunities to work and earn a living wage

20. Impact of Multinationals • Much of globalization today is driven by multinational corporations • These are large companies, often comprised of many businesses • Subsidiary— a business controlled by another business

21. One Product, Many Origins • Parts and labor to make a product can come from many different countries • Outsourcing involves doing one or more aspects of a business in a different country continued

22. One Product, Many Origins • Offshore outsourcing occurs because businesses seek advantages in other countries • It benefits workers in other countries by creating new job opportunities • It hurts workers in the U.S. when jobs are moved elsewhere

23. Flows of Capital Investment • Flows of capital across borders is a major source of globalization today continued

24. Flows of Capital Investment • One-third of global trade is the movement of raw materials, goods, services, and product parts from one subsidiary of a multinational to another • International investment occurs when investors buy or sell the stocks and bonds of foreign companies

25. Collusion and Cartels • Some large multinational corporations dominate their industries and influence governments and global trade policies • A cartel exists when a group of countries or firms exert worldwide control over the production and pricing of a product or service

26. International Monetary System • When buyers and sellers using different currencies want to trade, they must determine the value of one currency in relation to the other • Different types of currency are bought and sold on the foreign exchange market

27. The Foreign Exchange Market • An exchange rate tells you how many units of one currency it takes to buy units of a foreign currency continued

28. The Foreign Exchange Market • The value of the U.S. dollar is set by buyers and sellers in the foreign exchange market through supply and demand continued

29. The Foreign Exchange Market • Factors that affect exchange rates: • Political and economic stability—stable countries draw foreign investors • Interest rates—higher interest rates draw foreign investors, raise demand for a currency • U.S. dollar is the international reserve currency

30. Buying and Selling U.S. Dollars • The foreign exchange market/rate affects you when you • travel to another country and must exchange dollars for foreign currency • buy goods and services made in other countries or by foreign companies • conduct business in another country

31. Trade and Exchange Rates • When the U.S. dollar is strong, • goods and services imported into the U.S. cost less • U.S. consumers get more for their dollars and buy more imports • foreign buyers get less for their money continued

32. Trade and Exchange Rates • When the U.S. dollar is weak, • goods and services imported into the U.S. cost more • U.S. consumers get less for their dollars and buy fewer imports • foreign buyers get more for their money

33. The U.S. Trade Deficit • Balance of trade is the difference between total imports and total exports; recorded in balance of payments • Trade deficit develops when a country buys or imports more than it sells • Trade surplus develops when a country sells or exports more than it buys continued

34. The U.S. Trade Deficit • The U.S. has run a substantial trade deficit since 1976 • The U.S. has the largest deficit and China has the largest trade surplus • Other countries accumulate U.S. dollars with which they buy more U.S. goods, services, and investments

35. Government’s Role in Global Trade • Governments regulate trade • Free trade is policy of limited government trade restrictions • Protectionism refers to government policies that restrict trade

36. Why Nations Favor Free Trade • Stimulates growth and raises productivity and living standards in free-trade countries • Allows countries to specialize in goods and services they produce most efficiently and trade for the rest • Gives consumers a greater selection of goods and services at lower prices continued

37. Why Nations Favor Free Trade • Generates innovation as a result of global competition and the exchange of ideas and technologies • Creates new investment opportunities • Promotes cooperation and peaceful relations among nations that are trading partners

38. Why Nations Favor Restricted Trade • To protect domestic industries and jobs from foreign competition • To reduce dependence on foreign imports • To control the export of products and technologies that can threaten national security • To address unfair trade practices of other countries that hurt domestic companies

39. How Governments Restrict Trade • Trade barriers include • tariffs on imports • import quotas • non-tariff barriers • embargos

40. Subsidies • A form of protectionism • Government gives payments, tax breaks, or other incentives to domestic businesses and industries • Subsidized goods can be offered at lower prices, giving them an advantage over imported goods

41. Currency Manipulation • When a currency is devalued, • exports become cheaper in world markets • exports and foreign investment increase and imports decrease • unfair competition is created

42. Trade Organizations and Agreements • Create economic opportunities for participating nations due to free trade and investment • Example: North American Free Trade Agreement (NAFTA) • U.S., Canada, Mexico continued

43. Trade Organizations and Agreements • European Union (EU) is a powerful organization of 27 countries • 15 EU countries share a common currency

44. World Trade Organization • The World Trade Organization is an international organization created in 1995 • Consists of 151 member nations • WTO’s mission is • to establish fair trade practices • to mediate trade disputes among member nations

45. Other Important Global Organizations • World Bank • International Monetary Fund (IMF) • G-20 • United Nations (UN)

46. In Your Opinion • How does globalization affect your life now? How will it affect you in the future?

47. Globalization and You, the Student • You already buy goods and services from other countries • Globalization will present you with both opportunities and challenges

48. As a Worker • You may work for a multinational corporation with subsidiaries in other countries • You may work for a foreign-owned corporation in the U.S. • Your managers and coworkers may be foreign-born continued

49. As a Worker • As an entrepreneur, you may sell your products and services in other countries • You may lose your job if your employer • outsources your job • cannot compete with competition from foreign companies

50. What You Can Do • Continue your education • Consider science- and math-related occupations • Keep your skills sharp • Learn a foreign language • Learn about world affairs • Travel or live abroad