Chapter 3

1. Chapter 3 Business in the Global Economy

2. 3-1 International Business Basics • Goals: • Describe importing and exporting activities. • Compare balance of trade and balance of payments. • List factors that affect the value of global currencies.

3. International Business • Most business occurs within a country’s own borders. • Domestic business: the making, buying, and selling of goods and services within a country. • International business: refers to business activities needed for creating, shipping, and selling goods and services across national borders. • Also called foreign or world trade

4. International Business • The U.S. conducts trade with more than 180 countries. • The world is changing from economies defined by borders into a global economy. • Two economic principles define buying and selling among companies in different countries. • Absolute Advantage • Comparative Advantage

5. Absolute Advantage • Absolute advantage exists when a country can produce a good or service at a lower cost than other countries. • Absolute advantage usually can be gained from a country having an abundance of natural resources or raw materials. • Examples: South America > Coffee ProductionSaudi Arabia > Oil Production

6. Comparative Advantage • Comparative Advantage: when a country specializes in the production of a good or serviceand has a lower opportunity cost than another country producing the same good. • Again, what’s the difference between an absolute and comparative advantage?

7. Importing • Imports: items bought from other countries. • Bananas, coffee, cocoa, tea, silk, oil, toys, tin, copper, zinc, aluminum (Coke cans), Swiss watches, French designer clothing • Without our country’s ability to import goods, many of the things we buy would be more expensive or not even available to buy!

8. Exporting • Exports: goods and services sold to other countries. • Exports benefit consumers in other countries. • U.S. exports include: agricultural products, medicines, plastics, movies, books, machinery.

9. Balance of Trade • Balance of trade: the difference between a country’s total exports and total imports. • If a country exports (sells) more than it imports (buys), it has a trade surplus. • If a country imports (buys) more than it exports (sells), it has a trade deficit. • Generally speaking, the U.S. IMPORTS MORE than it EXPORTS • TRADE DEFICIT

10. Balance of Trade • A country can have a trade surplus with one country and a trade deficit with another. • A country needs to keep its trade in balance.

11. Balance of Payments • Balance of payments: the difference between the amount of money that comes into a country and the amount of money that goes out of it. • Positive (favorable) balance: occurs when a nation receives more money in a year than it pays out. • Negative (unfavorable) balance: the result of a country sending more money out than it brings in.

12. International Currency • One of the biggest challenges faced by businesses involved in international trade is the various currencies used around the world. • Nations have their own banking system and money. • Japan: yen Venezuela: bolivar • Britain: pound European Union: euro

13. Currencies

14. Foreign Exchange Rates • The exchange rate: is the value of a currency in one country compared with the value in another. • Supply and demand affect the value of currency. • You must deal with currency exchanges as they go from one country to another.

15. Factors Affecting Currency Values • Three main factors affect currency exchange rates: • Balance of payments: Positive balance = high value of currency • Economic conditions: Inflation reduces the buying power of a currency • Political stability: How stable is the government and laws regulating business?

16. 3-1 International Business Basics • Goals: • Describe importing and exporting activities. • Compare balance of trade and balance of payments. • List factors that affect the value of global currencies.

17. 3-2 The Global Marketplace • Goals • Describe the components of the international business environment. • Identify examples of formal trade barriers. • Explain actions to encourage international trade.

18. International Business Environment • Businesses must consider four main factors when doing business in other countries: • 1) Geography • 2) Cultural Influences • 3) Economic Development • 4) Political and Legal Concerns

19. 1) Geography

20. 2) Cultural Influences • Culture: accepted behaviors, customs, values of a society. • Language • Religion • Values • Customs • Social Relationships

22. 3) Economic Development • Differences in living and work environments reflect the level of economic development. • Key factors that affect a country’s level of economic development are: • Literacy level • Technology • Agricultural dependency

23. 3) Economic Development • Another factor that supports international trade in industrialized countries is infrastructure. • Infrastructure: a nation’s transportation, communication, and utility systems.

24. 4) Political and Legal Concerns • Trade barriers • Importing/Exporting restrictions • Inspection of Goods • Government system • Political stability • Business regulations

25. International Trade Barriers • Trade barriers: restrictions to free trade. • Three common formal trade barriers are: • Quotas • Tariffs • Embargoes • The culture, traditions, andreligion of a country can create informal trade barriers.

26. Trade Barriers • To restrict international trade, governments set a limit on the quantity of a product that may be imported or exported within a given time period. • This limit is called a quota.

27. Trade Barriers • Tariff: a tax that a government places on certain imported products. • Example: You want to buy a pair of French designer shoes. The producer of the shoes charges $140 a pair, but the government charges 20% tariff ($28) on the shoes when they are imported. So, the final price you will have to pay is $168. • Tariffs increase the price of imported products to protect domestic companies.

28. Trade Barriers • Embargo: when a government stops the export or import of a product completely. • Reasons for a government to impose an embargo: • Protect their own industries from international competition • Prevent sensitive products from falling into the hands of unfriendly groups or nations • Express its disapproval of the actions or policies of another country

29. Encouraging International Trade • Efforts to encourage international trade include: • Free-trade zones • Free-trade agreements • Common markets

30. Free-Trade • Free-trade zones: a selected area where products can be imported then stored, assembled, and/or used in manufacturing without import taxes (duty-free). • Usually around a seaport or airport • Free-trade agreements: agreement between nations to remove import taxes and trade barriers between them. • U.S. > Canada > Mexico • North American Free-Trade Agreement (NAFTA)

31. NAFTA • Est. 1994

32. Opposite of Free-Trade is No-Trade 2010

33. Common Markets • Common market (economic community): a market in which members do away with duties and other trade barriers. • Companies can freely invest in each member’s country • Workers can freely move across borders • Examples: European Union (EU) & Latin American Integration Association

35. 3-2 The Global Marketplace • Goals • Describe the components of the international business environment. • Identify examples of formal trade barriers. • Explain actions to encourage international trade.