1. Business in the Global Economy
Chapter 3
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2. Goals (3.1) Describe importing & exporting activities
Compare balance of trade & balance of payments
List factors that affect the value of global currencies
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3. 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.
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4. 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.
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5. 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.
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6. 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
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7. 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
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8. 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
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9. 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
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10. 3.2 Goals
Describe the components of the international business environment
Identify examples of formal trade barriers
Explain actions to encourage international trade
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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.
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18. 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
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19. 3.3 Goals Discuss activities of multinational organizations
Explain common international business entry modes
Describe activities of international trade organizations and agencies
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20. 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
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21. 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
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22. 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
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23. 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.
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24. 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
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25. 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
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26. World Bank Key function: Give economic aid to less-developed countries
These funds build communications systems, transportation networks, & energy plants
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