Understanding International Business: Trading, Relations, and Currencies

1. Chapter 3 Business in the Global Economy

2. 3-1 International Business Basics • After finishing this section, you will be able to: • Describe importing and exporting activities • Compare balance of trade and balance of payments • List factors that affect global currencies

3. TRADING AMONG NATIONS • Absolute Advantage-exists when a country can produce a good or service at a lower cost than any other country • Comparative Advantage- a situation in which a country specializes in the production of a good or service at which it is relatively more efficient

4. Imports- items bought from other countries • Account for the total supply of: bananas, coffee, cocoa, spices, tea, silk, and crude rubber in the US • Without foreign trade, many things we buy would cost more or would not be available • Other countries can produce goods at a lower cost because they have the raw materials or lower labor costs • See Figure 3-1 Page 55

5. Exports- goods and services sold to other countries • Just as imports benefit you, exports benefit consumers in other countries • One in every six jobs in the US depends on international business

6. Checkpoint>> • How does importing differ from exporting?

7. MEASURING TRADE RELATIONS • A major reason people work is to earn money to buy things. • First they sell their labor for wages • Second they spend the major part of those wages for goods and services • People usually try to keep their income and spending in balance • When people buy more than their income allows, they go into debt

8. The same thing can happen to a country, this is called foreign debt • Foreign debt- the amount of money a country owes to other countries

9. Balance of Trade • Balance of Trade- difference between a country’s imports and exports • Trade surplus-when a country exports (sells) more than it imports (buys) • Trade deficit-when a country imports (buys) more than it exports (sells) • A country can have a trade surplus with one country and a trade deficit with another country • The United States has had a trade deficit in recent years

10. Balance of Payments • Money goes from one country to another through investments and tourism. • A citizen in one country might invest in a corporation in another country. • A business may invest in a factory in another country. • One government may give financial or military aid to another nation. • Some countries limit the money their citizens can take out of the country when traveling

11. Balance of payments- difference between the amount of money that comes into a country and the amount that goes out of it

12. Positive / favorable balance of payments-when a nation receives more money in a year than it puts out • Negative / unfavorable balance of payments- the result of a country sending out more money out than it brings in

13. Checkpoint>> • How does balance of trade differ from balance of payments?

14. INTERNATIONAL CURRENCY • Foreign Exchange Rages • Exchange rate- the value of a currency in one country compared with the value in another • Supply and demand affect the value of currency

15. Travelers and business people must deal with currency exchanges as they go from one country to another • Currency exchange windows are available where you can buy any amount of local currency you want • The amount of local currency you receive is based on the value of the two currencies at the time • Exchange stations are found in airports, train stations, hotels, and local banks • Operators charge a fee for the service

16. Factors Affecting Currency Values • Three main factors affect currency exchange rates: • balance of payments • economic conditions • political stability

17. Balance of Payments • When a country has a favorable balance of payments, the value of its currency is constant or rising • An increased demand for both the nation’s products and currency causes this situation. • When a country has an unfavorable balance of payments, its currency usually declines in value.

18. Economic Conditions • Inflation reduces the buying power of a currency. • Interest rates- the cost of using someone else’s money • Higher interest rates create lower consumer demand. • This results in a reduced demand for a nation’s currency causing a decline in its value.

19. Political Stability • Companies and individuals want to avoid risk when doing business in other countries. • Political instability may occur when new laws are put into place. • These laws may not allow businesses to operate freely as they did under the old laws • Uncertainty in a country reduces the confidence business people have in the currency

20. Checkpoint>> • What factors affect the value of a country’s currency? (List at least two not already given in the notes.)

21. 3-1 ASSESSMENT • Complete the 4 questions

22. 3-2 The Global Marketplace • After finishing this section, you will be able to: • Describe the components of the international business environment • Identify examples of formal trade barriers • Explain actions to encourage international trade

23. 3-2 The Global Marketplace • INTERNATIONAL BUSINESS ENVIRONMENT • Businesses must consider four main factors when dealing with other countries: • geography • cultural influences • economic development • political and legal concerns

24. Geography • The location, climate, terrain, seaports andnatural resources of a country influence business activity • Very hot weather can limit the types of crops that can be grown • Countries with many seaports can easily ship products for foreign trade • Countries with few natural resources must rely on imports

25. Cultural Influences • Culture- accepted behaviors, customs, and values of a society • The main cultural and social factors that affect international business are language, religion, values, customs, and social relationships • These relationships include interactions among families, labor unions, and other organizations

26. Economic Development • Every country and every individual faces the problem of limited resources to satisfy wants and needs • You continually make decisions about the use of your time, money, and energy • In a similar way, every country plans the use of its land, natural resources, workers, and wealth to best serve the needs of its people

27. Key factors that affect a country’s level of economic development are: • Literacy level • Technology • Agricultural dependency

28. Literacy Level • Countries with better education systems usually provide more and better goods and services for citizens

29. Technology • Automated production, distribution, and communications systems allow companies to create and deliver goods, services, and ideas quickly

30. Agricultural Dependency • An economy that is largely involved in agriculture does not have the manufacturing base to provide citizens with great quantity and high quality of a product • Infrastructure- a nation’s transportation, communication, and utility systems

31. Political and Legal Concerns • The most common political and legal factors that affect international business activities include: • Type of government • Stability of government • Government policies toward business

32. Checkpoint>> • List the four main elements of international business and give one example for each.

33. INTERNATIONAL TRADE BARRIERS • Trade barriers- restrictions to free trade • Formal trade barriers-political actions • Informal trade barriers-culture, traditions, and religion of a country

34. Quotas • Quota- limit on the quantity of a product that may be imported or exported within a given time • Quotas can be set for many reasons including: • To express displeasure at policies of that country • To protect one of its industries from too much foreign competition

35. Tariffs • Tariff- tax a government places on certain imported products • Some tariffs are a set amount by pound, gallon, or other unit • Other tariffs are calculated by the value of a good

36. Example: • You buy an imported bike that costs $170 • The government imposes a tariff of 25% • Calculation: $170 * .25 = $42.50 • Final price you pay for the bike: $170 + $42.50 = $212.50

37. Embargoes • Embargo- the government stoppage of the importing or exporting of a product completely • Governments may impose embargoes for various reasons including: • To protect their own industries from international competition • To prevent sensitive products, especially those vital to the nation’s defense from falling into the wrong hands

38. Checkpoint>> • What are three formal trade barriers and when could they be used?

39. ENCOURAGING INTERNATIONAL TRADE • Specific actions by governments can promote international business activity • Common efforts include: • Free-trade zones • Free-trade agreements • Common markets

40. Free-Trade Zones • Free-trade zone-selected area where products can be imported duty free and then stored, assembled, or used in manufacturing • Usually located around a seaport or airport • The importer pays duty only when the product leaves the zone

41. Free-Trade Agreements • Free-trade agreement- member countries agree to remove duties (import taxes) • This results in increased trade between the members • North American Free Trade Agreement (NAFTA)-1994, no tariffs when trading between the U.S., Canada, and Mexico

42. Common Markets • Common markets- members do away with duties and other trade barriers • They allow companies to invest freely in each member’s country • They allow workers to move freely across borders • Common external duties on products being imported from nonmember countries • Examples: European Union (EU), Latin American Integration Association (LAIA)

43. Checkpoint>> • What actions could be taken to encourage international trade? (List at least 2 ideas.)

44. 3-2 ASSESSMENT • Complete 6 questions.

45. 3-3 International Business Organizations • After finishing this section, you will be able to: • Describe the components of the international business environment • Identify examples of formal trade barriers • Explain actions to encourage international trade

46. MULTINATIONAL COMPANIES • Multinational company (MNC)- an organization that does business in several countries • Usually consists of a parent company in the home country and divisions or separate companies in one or more host countries • Host country- the country in which the business places business activities

47. MNC Strategies • Global strategy- uses the same product and marketing strategy worldwide • The same product is sold in the same manner around the world • Example: Coca-Cola

48. Multinational strategy- treats each country market differently • Firms develop products and marketing strategies that adapt to the customs, tastes, and buying habits of a distinct national market • Example: restaurant chains

49. MNC Benefits • Three groups benefit from international trade including: • consumers • businesses / employees • nations

50. Consumers • Consumers benefit from international trade with: • Larger amounts of goods available • Lower priced goods than those made domestically