Business in a Global Economy

Learning Objectives After completing this chapter, you’ll be able to: Explain why nations need to trade with each other. Describe how currency exchange works. State the advantages of protectionism and free trade. Name types of trade barriers. Identify some of the major trade alliances in the world today.

Why It’s Important Global trade doesn’t just influence business, it also affects all the countries and people of the world.

Technology’s Influence on Business We are all part of the global marketplace. The global marketplace exists anywhere business crosses national borders. Countries can satisfy their citizens’ wants and needs by buying them in the global market.

The Global Marketplace The global marketplace works much like a shopping mall or a supermarket. The United States is rich in resources—human, natural, and production—but it still needs things from other countries.

Name the product that the United States exports more than it imports. Figure 10.1 MAJOR EXPORTS AND IMPORTS OF THE UNITED STATES Look at the graph to see what products the United States imports and exports. Name the product that the United States exports more than it imports. Source: Standard & Poor’s

Specialization Countries specialize in producing certain goods and services. By specializing, countries can sell what they produce best so they can buy the products they need from other countries.

Specialization The kinds of resources available to a country often influence what it specializes in producing. A country with little money or advanced technology but a large population might specialize in manual labor.

Types of Trade Imports are goods and services that one country buys from another country. Exports are goods and services that one country sells to another country.

Types of Trade Other types of trade include: Investment Exchange of human resources Tourism Military aid Loans

Currency Countries have to pay for each other’s products with currency. Currency is another name for money. Just as countries use different languages, they use different currencies, such as dollars, pesos, and yen. The foreign exchange market is made up of banks where different currencies are exchanged.

Exchange Rates The exchange rate is the price at which one currency can buy another currency. Exchange rates change from day to day and from country to country. How much the currency of a country is worth depends on how many other countries want to buy its products.

Prices A company follows the change in exchange rates to find the best prices for products. When the value of a country’s currency goes up compared to another country’s, it has a favorable exchange rate. Some countries choose to lower the value of their currency to bring in more business.

Balance of Trade Balance of trade is the difference in the value between how much a country imports and how much it exports.30

Balance of Trade When a country exports more than it imports, it has a trade surplus. When a country imports more than it exports, it has a trade deficit. A country can have an unfavorable balance of trade with one country and a favorable balance with another.

How Exchange Rates Affect the Graphic Organizer Graphic Organizer How Exchange Rates Affect the Balance of Trade More exports than imports Trade surplus (leftover money) Weak Currency FAVORABLE BALANCE OF TRADE More imports than exports NEGATIVE BALANCE OF TRADE Trade deficit (debt) Strong Currency

Global Competition Global competition often leads to trade disputes between countries. At the heart of most trade disputes is whether there should be limits on trade.

Protectionism Protectionism is the practice of putting limits on foreign trade to protect businesses at home.

Protectionism Some of the reasons in favor of protectionism are: Foreign competition can lower the demand for products made at home. Companies at home need to be protected from unfair foreign competition. continued

Protectionism Industries that make products related to national defense need to be protected. The use of cheap labor in other countries can lower wages or threaten jobs at home. A country can become too dependent on another country for important products like oil, steel, or grain. Other countries might not have the same environmental or human rights standards.

Trade Barriers To limit competition from other countries, governments put up trade barriers to keep foreign products out. A tariff is a tax placed on imports to increase their price in the domestic market.

Trade Barriers A quota is a limit placed on the quantities of a product that can be imported. An embargo is when the government decides to stop an import or export of a product.

Free Trade Supporters of free trade believe there should be no limits on trade.

Free Trade The benefits of free trade are: It opens up new markets in other countries. It creates new jobs, especially in areas related to global trade. Competition forces businesses to be more efficient and productive. Consumers have more choice in the variety, price, and quality of products. It promotes cultural understanding and cooperation between countries. It helps all countries raise their standard of living.

Trade Alliances To reduce limits on trade more countries are forming trade alliances with each other. In a trade alliance, several countries merge their economies into one huge market.

Trade Alliances NAFTA (North American Free Trade Agreement) was controversial because some workers would be displaced when trade barriers were lowered.

Trade Alliances Some of the major trade alliances in the world today are: NAFTA European Union (EU) Association of Southeast Asian Nations (ASEAN)

International Business and Finance Affects Everyone Understanding international business and finance has become increasingly important for the consumer, wage earner, investor, citizen, and business leader. An understanding of international business helps you understand why goods and services are at particular prices.

International Business and Finance Affects Everyone The business leader of tomorrow will have a good grasp of international business and finance.