Business in the Global Economy Chapter 3 11/14/2018

Goals (3.1) Describe importing & exporting activities Compare balance of trade & balance of payments List factors that affect the value of global currencies 11/14/2018

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 First…most business activities occur within a country’s own borders. Although the US has many natural resources, a skilled labor force, and modern production facilities, American companies & consumers go beyond the U.S. borders to obtain many things. The U.S. conducts trade with more than 180 countries. 11/14/2018

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. 11/14/2018

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. 11/14/2018

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 11/14/2018

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 11/14/2018

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 First…one challenge faced by businesses involved in international trade is the various currencies used around the world 11/14/2018

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 11/14/2018

3.2 Goals Describe the components of the international business environment Identify examples of formal trade barriers Explain actions to encourage international trade 11/14/2018

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 First…doing business in other countries requires knowledge of the differences that exist among people and places. Businesses must consider four main factors: geography, cultural influences, economic development, & political and legal concerns 11/14/2018

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 11/14/2018

International 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 11/14/2018

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 11/14/2018

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 11/14/2018

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 11/14/2018

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 First…specific actions by governments can promote international business activities. Governments view exporting as an effective way to create jobs & foster economic prosperity. Common efforts to encourage international trade include free trade zones, free-trade agreements, & common markets. 11/14/2018

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 11/14/2018

3.3 Goals Discuss activities of multinational organizations Explain common international business entry modes Describe activities of international trade organizations and agencies 11/14/2018

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 11/14/2018

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 11/14/2018

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 11/14/2018

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 First…as companies expand into other countries, several methods are available for their use. 11/14/2018

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 11/14/2018

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 11/14/2018

World Bank Key function: Give economic aid to less-developed countries These funds build communications systems, transportation networks, & energy plants 11/14/2018