Business in the Global Economy

Business in the Global Economy Chapter 3

Goals (3.1) • Describe importing & exporting activities • Compare balance of trade & balance of payments • List factors that affect the value of global currencies

Trading among nations • Absolute advantage • One country can produce a good or service at a lower cost than other countries • Comparative advantage • Situation where a country specializes in the production of a good or service at which it is relatively more efficient

Imports • Items bought from other countries. • Without foreign trade, many thing you buy would cost more or not be available • Exports • Goods & services sold to other countries • Benefit consumers in other countries • Creates many jobs in the U.S.

Measuring trade relations • Nations are concerned about balancing income with expenditures. • When people borrow more than their income allows, they go into debt. • Foreign debt- amount a country owes to other countries.

Balance of trade • Difference between a country’s total exports & total imports • Trade surplus- if a country sells more than it buys • Trade deficit- if a country imports more than it exports. • Trade surplus makes our trade position more favorable

Balance of payments • Difference between the amount of money that comes into a country and the amount that goes out of it • Positive balance of payments • A nation receives more money in a year than it pays out • Negative balance of payments • A country sends more money out than it brings in

International currency • The process of exchanging one currency for another occurs in the foreign exchange market which consists of banks that buy and sell different currencies • Foreign exchange rates • Value of a currency in one country compared with the value in another • Supply & demand affect the value of currency

Factors affecting currency values • Balance of payments • When a country has a favorable balance of payments, the value of its currency is usually constant or rising • Economic conditions • When prices increase & the buying power of the country’s money declines, its currency is not as appealing • Inflation reduces the buying power of a currency • Political stability • If a government changes suddenly, this may create an unfriendly setting for foreign business • If new laws are put into place, they may not allow foreign businesses to operate as freely as they did under old laws

3.2 Goals • Describe the components of the international business environment • Identify examples of formal trade barriers • Explain actions to encourage international trade

The Global Marketplace (3.2) • Geography • Location, climate, terrain, seaports, & natural resources of a country influence business activity • Cultural influences • A society’s culture has a strong influence on business activities • Key factors that affect a country’s level of economic development: • Literacy level • Technology • Agricultural dependency

infrastructure • Refers to a nation’s transportation, communication, & utility systems • Country’s with an efficient rail system, high-speed highways, & computers are better prepared for international business activities • Political & legal concerns • Most common political & legal factors that affect international business activities include: • Type of government • Stability of government • Government policies toward business

International Trade Barriers • Trade barriers • Restrictions to free trade • Formal • Political actions taken by the government (quotas, tariffs, & embargos) • Informal • Culture, traditions, & religion of a country can create informal trade barriers • Not based on formal government actions but they can restrict trade

Quotas • Set a limit on the quantity of a product that may be imported or exported within a given period • Keeps supply low so that prices stay at a certain level • May be set on imports from another country to express displeasure at the policies of that country • Also may be set by a country to protect one of its industries from too much competition from abroad • Shields “infant industries” which need protection to get started

tariffs • Tax that a government places on certain imported products • Increases the price for an imported product • Lowers the demand for the product & reduces the quantity of that import • Many people believe that tariffs should be used to protect U.S. jobs from foreign competition

embargoes • Stop the export or import of a product completely • Reasons that a government would impose an embargo: • Protect their own industries from international competition more than either a quota or tariff will achieve • Prevent sensitive products, especially those vital to the nation’s defense, from falling into the hands of unfriendly groups or nations • To express its disapproval of the actions or policies of another country

Encouraging International Trade • Free trade zones • Selected area where products can be imported duty-free & then stored, assembled, and/or used in manufacturing. • Usually located around an airport or seaport • Importer only pays duty when product leaves the zone • Free trade agreements • Member countries agree to remove duties and trade barriers on products traded among them which results in increased trade between the members • NAFTA (North American Free Trade Agreement) is an example

Common markets (economic community) • Members do away with duties & other trade barriers which allows companies to invest freely in each member’s country • Allows workers to move freely across borders • Examples: European Union (EU) • Goal is to expand trade among member nations & promote regional economic integration

3.3 Goals • Discuss activities of multinational organizations • Explain common international business entry modes • Describe activities of international trade organizations and agencies

International Business Organizations (3.3) • Multinational company • Organization that does business in several countries • Usually consist of a parent company in a home country and divisions or separate companies in one or most host countries • MNC Strategies • Can use either a global or multinational strategy • MNC treats each country market differently adapting to customs, tastes, & buying habits of a distinct national market

MNC Benefits • Consumers have a large amount of goods available • Goods are at a lower prices than made domestically • Career opportunities expand as a company does business in a variety of countries • Fosters understanding, communication, & respect among people of different nations • Nations that are business partners usually try to maintain friendly relations for economic reasons

Drawbacks of Multinational companies • An MNC can become a major economic power in a host country • Workers of the host country may depend on the MNC for jobs • Consumers become dependent upon it for goods & services • MNC may actually influence or control the political power of the country

Global Market Entry Modes • Licensing • Selling the right to use some intangible property (production process, trademark, or brand name) for a fee or royalty • Franchising • Right to use a company name or business process in a specific way • Involves a royalty payment as well to the parent company Joint Venture • Agreement between two or more companies to share a business project • Main benefit – sharing of raw materials, shipping facilities, management activities, or production facilities • Concerns – sharing of profits and not as much control because several companies are involved

International Trade Organizations • World Trade Organizations (WTO) • Created in 1995 to promote trade around the world • Settles trade disputes & enforces free-trade agreements between its members • Other goals of WTO: • Lowering tariffs that discourage free trade • Eliminating import quotas • Reducing barriers for banks, insurance companies, & other financial services • Assisting poor countries with economic growth

International Monetary Fund (IMF) • Helps to promote economic cooperation • Maintains an orderly system of world trade & exchange rates • Cooperation among IMF nations makes trade wars less likely

World Bank • Key function: • Give economic aid to less-developed countries • These funds build communications systems, transportation networks, & energy plants

Business in the Global Economy