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