Transcript Chapter 3
Business in the Global Economy Most business activities occur within a country’s own borders Domestic Business– the making, buying, and selling of goods and services within a country International business– business activities needed for creating, shipping, and selling goods and services across national borders. The United States conducts trade with over 180 countries. Absolute Advantage– when a country can produce a good or service at a lower cost than other countries. This can result from an abundance of natural resources or raw materials in a country South America has an absolute advantage in coffee production Saudi Arabia has an absolute advantage in oil production A country can have an absolute advantage in more than one area. If this is so, they must decide how to maximize its economic wealth. A country could have the absolute advantage in computer and clothing, but there is a stronger market for computers so it would be better to produce computers and buy clothing from another 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. Benefits of Trade/Comparative Advantage | EconEdLink Imports– Items bought from other countries Without foreign trade, many things you buy would cost more or not be available Other countries can produce some goods at a lower cost because they have the needed raw materials or have lower labor costs. Some consumers purchase foreign goods because they believe the quality of the good is better. Exports– goods and services sold to other countries Factory and farm equipment, food, movies, TV channels, books, magazines and newspapers The goods and services exported by the United States create many jobs. One of every six jobs in the United States depends on international trade A major reason people work is to earn money to buy things People try to keep their income and spending in balance because if they don’t, they can run into financial problems. This works the same way with a country, if the country has an unfavorable balance of trade it owes money to others. Foreign debt– the amount a country owes to other countries. Balance of trade– the difference between a country’s total exports and total imports. If a country exports more than it imports, it has a trade surplus. If a country imports more than it exports, it has a trade deficit A country may have a trade surplus with one country and a trade deficit with another. Month Exports Imports Balance January 2012 126,527.4 192,480.3 -65,952.9 February 2012 126,880.6 186,360.9 -59,480.3 March 2012 130,788.6 197,453.0 -66,664.4 April 2012 129,010.8 193,813.8 -64,803.0 May 2012 129,640.9 191,943.9 -62,303.0 June 2012 131,387.2 188,312.0 -56,924.9 TOTAL 2012 774,235.5 1,150,364.0 -376,128.4 Money is another form of trading that happens between countries When tourist travel, they add to the flow of money from their country to the country they are visiting Balance of payments– the difference between the amount of money that comes into a country and the amount that goes out of it. It goes from country to country through investments and tourism A positive balance of payments is when a nation receives more money in a year than they pay out A negative balance of payments is when a nation sends out more money than they receive. Balance of Trade and Balance of Payments | EconEdLink A challenge faced by businesses in international trade is the different currencies used around the world. The process of exchanging one currency for another occurs in the foreign exchange market, which consists of banks that buy and sell different currencies Exchange rate– the value of a currency in one country compared with the value in another country Supply and demand affects the value of currency. Foreign Exchange Rates and Currency Exchange Rate Calculator - CNNMoney Balance of Payments When the country has a positive balance of payments, the value of its currency is usually constant or rising and vice versa Economic conditions When prices increase and the buying power of the country’s money declines, its currency will not be as appealing Interest Rates can also affect the value of currency Political stability If a government changes suddenly, this may create and unfriendly setting for foreign business New laws can also hinder foreign business Four Main Factors of the International Business Environment: Geography Cultural Influences Economic Development Political and Legal Concers The location, climate, terrain, seaports, and natural resources of a country influence business activity Hot weather can limit the types of crops that can be grown A nation with many rivers or ocean seaports can easily ship products for foreign trade Countries with few natural resources must depend on imports In some societies, hugging is an appropriate business greeting. In others, a handshake is custom. Culture– the accepted behaviors, customs, and values of a society. A society’s culture has a strong influence on business activities. The main cultural and social factors that affect international business are language, religion, values, customs, and social relationships Every country plans the use of its land, natural resources, workers, and wealth to best serve the needs of its people. Differences in living and work environments reflect the level of economic development The key effects on a country’s level of economic development are: Literacy Level Technology Agricultural Dependency Infrastructure– a nation’s transportation, communication, and utility system People in the United States have a great deal of freedom in their business activities. Other countries do not. The common political and legal factors that affect international business activities are: The type of government The stability of the government Government policies toward business Trade barriers– restrictions to free trade. Three common formal trade barriers are: Quotas Tariffs Embargos Informal trade barriers Culture Traditions Religion Barriers to Trade | EconEdLink Quota– governments set a limit on the quantity of a product that may be imported or exported within a given period. Quotas may be set on imports from another country to express displeasure at the policies of that country Quotas may be set by a country to protect one of its industries from too much competition from abroad. Tariff– a tax that a government places on certain imported products Some tariffs are a set amount per pound, gallon, or other unit, while others are figured on the value of the good. A tariff increases the price for an imported product. A high tariff tends to lower the demand for the product and reduce the quantity of that import Embargo– stopping the export or import of a product completely Governments may do this to protect their own industries from international competition They may wish to prevent sensitive products from falling in to the hands of unfriendly groups or nations. Sometimes they impose an embargo to express its disapproval of the actions or policies of another country Common efforts to encourage international trade include: Free-trade Zones Free-Trade Agreements Common Markets Free-Trade Zone– a selected area where products can be imported duty-free and then stored, assembled, and/or used in manufacturing Usually located around a seaport or airport Free-Trade Agreements– member countries agree to remove duties and trade barriers on products traded among them This results in increase trade between the members Example: NAFTA Between U.S., Canada, and Mexico Common Market– 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 Examples: The European Union and the Latin American Integration Association The goals are to expand trade among member nations and promote regional economic integration Multinational company (MNC)– organization that does business in several countries MNCs usually consist of a parent company in a home country and divisions or separate companies in one or more host countries Can use either a global or multinational strategy Global strategy– uses the same product and marketing strategy worldwide Coca-Cola Multinational– 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 Restaurant Chains Advantages: Consumers have a large amount of good available, usually at a lower price Career Opportunities expand Can foster understanding, communication, and respect among people of different nations. Disadvantages: Can become a major economic power in a host country Workers of the host country may depend on MNC for jobs Consumers become dependent on it for goods and services MNC may actually influence or control the political power of the country Some companies want to produce items in other countries without being actively involved. Licensing– selling the right to use some intangible property (production process, trademark, or brand name) for a fee The Gerber Company began selling its baby food products in Japan by means of licensing. A franchise is the right to use a company name or business process in a specific way Organizations enter into contracts with people in other countries to set up a business that looks and runs like the parent company McDonald’s Burger King Wendy’s KFC Pizza Hut Joint Venture– an agreement between two or more companies to share a business project The main benefit of a joint venture is the sharing of raw materials, shipping facilities, management activities, or production facilities Disadvantages to his business are sharing of profits and not as much control since several companies are involved Ford Motor company and Mazda Ford used Mazda-produced parts in their cars and Mazda setup assembly plants for Ford Motor vehicles World Trade Organization (WTO) was created to promote trade around the world. WTO settle trade disputes and enforces freetrade agreements between its members Other goals of the WTO: Lowering tariffs Eliminating import quotas Reducing barriers for banks, insurance companies and other financial services Assisting poor countries with economic growth Helps promote economic cooperation It maintains an orderly system of world trade and exchange rates Cooperation among IMF nations make trade wars less likely Gives economic aid to less developed countries Has two main divisions: International Development Association Makes loans to help developing countries International Finance Corporation Provides capital and technical help to private businesses in nations with limited resources