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 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.

MonthExportsImportsBalance January , , ,952.9 February , , ,480.3 March , , ,664.4 April , , ,803.0 May , , ,303.0 June , , ,924.9 TOTAL ,235.51,150, ,128.4

 Money is another form of trading that happens between countries  It goes from country to country through investments and tourism  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.  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 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 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 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 free- trade 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