Business in the Global Economy Business Principles A Mrs. Sorrell

3.1 International Business Basics 3.1.1—Trade Among Nations Domestic business International business, aka foreign or world trade Absolute Advantage A country can produce a good or service at a lower cost than other countries Comparative advantage A country specializes in the production of goods or services because of efficiency Imports Exports Domestic = making, buying, and selling of goods and services within a country International = business activities for creating, shipping, and selling goods and services across national borders US conducts trade with more than 180 countries Look at the labels in clothing and see where it is made. Absolute advantage due to an abundance of natural resources or raw materials in a country South American countries = coffee Saudi Arabia = oil production Comparative—company can produce smartphones and clothing better than other countries, however, smartphones are in higher demand than clothing. Better to produce smartphones but buy clothing from other countries. Imports—bought from other countries Imports account for the total supply of bananas, coffee, cocoa, certain spices, tea, silk, and crude rubber in the US US buys about half of our crude oil and fish from other countries. 20 to 50 percent of our carpets, sugar, leather gloves, dishes and sewing machines. Also import tin, chromium, manganese, nickel, copper, zinc, and other metals to make other goods. Consumers sometimes purchase from other countries because of perceived higher quality. Exports—goods and services sold to other countries Workers throughout the world use factory and farm machinery made in the US, eat food , use chemicals, fertilizers, medicines and plastics. Other countries prefer our movies, CNN, ESPN, and reading materials published in the US. One of every six jobs in the US depends on international business

What are some advantages and disadvantages of international trade? Review 3.1.1 What are some advantages and disadvantages of international trade? Looking at Figure 3-1, how would US manufacturing be affected if these imports were not available?

Measuring Trade Relations Foreign debt—owed to other countries Balance of trade Exports > imports = trade surplus Favorable trade position Imports > exports = trade deficit Unfavorable trade position Country can have a trade surplus with one country and trade deficit with another Nations have to be concerned with balancing income and expenditures Buy more than you income = debt Unfavorable balance of trade = owe money to other countries

Measuring Trade Relations, con’t. Balance of payments—difference between the amount of money coming into a country and the amount that goes out Positive or favorable Negative or unfavorable Money passes from one country to another through investments and tourism Citizens may invest in foreign countries Businesses may invest in a factory in another country One government might give financial assistance or military aid to another country Tourists’ travel adds to the flow of money from their country to the country they are visiting

How does balance of trade differ from balance of payments? Review 3.1.2 Looking at Figure 3-3, why is it better for a country to export more than it imports? How does balance of trade differ from balance of payments?

International Currency 3.1.3—Money Three functions Store of value Medium of exchange Unit of measure Foreign exchange market—banks that buy and sell different currencies Exchange rate—value of currency in one country compared with the value of currency in another Fees charged by currency exchange operators Currencies around the world are a challenge for international trade Supply and demand affect the value of currency.

Factors affecting currency values Balance of Payments Favorable = constant or rising currency value Increased demand for products and currency influence this situation Economic conditions Inflation reduces buying power Interest rates Political Stability Sudden changes in government may create an unfriendly setting for foreign business Risk of losing buildings, equipment or money in foreign banks Laws that impact foreign businesses in a country reduces confidence in that country’s currency Unfavorable balance of payments = currency usually declines in value Interest rates = cost of using someone else's money Higher interest rates usually create lower consumer demand—causing a reduced demand and then a decline in value

Review Using Figure 3-4, which currency is worth the most in terms of US dollars? Work with a partner to develop a list of actions to improve a nation’s trade relations. Think of actions that might be taken by businesses, government, workers, consumers, schools, and others. Complete Review 3.1 on Mindtap