1. Business in the Global Economy
Chapter 3
Business in the Global Economy

2. 3-1 International Business Basics
After finishing this section, you will be able to:
Describe importing and exporting activities
Compare balance of trade and balance of payments
List factors that affect global currencies

3. TRADING AMONG NATIONS
Absolute Advantage- exists when a country can produce a good or service at a lower cost than any other 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

4. Imports- items bought from other countries
Account for the total supply of: bananas, coffee, cocoa, spices, tea, silk, and crude rubber in the US
Without foreign trade, many things we buy would cost more or would not be available
Other countries can produce goods at a lower cost because they have the raw materials or lower labor costs
See Figure 3-1 Page 55

5. Exports- goods and services sold to other countries
Just as imports benefit you, exports benefit consumers in other countries
One in every six jobs in the US depends on international business

6. Checkpoint>>
How does importing differ from exporting?

7. MEASURING TRADE RELATIONS
A major reason people work is to earn money to buy things.
First they sell their labor for wages
Second they spend the major part of those wages for goods and services
People usually try to keep their income and spending in balance
When people buy more than their income allows, they go into debt

8. The same thing can happen to a country, this is called foreign debt
Foreign debt- the amount of money a country owes to other countries

9. Balance of Trade
Balance of Trade- difference between a country’s imports and exports
Trade surplus- when a country exports (sells) more than it imports (buys)
Trade deficit- when a country imports (buys) more than it exports (sells)
A country can have a trade surplus with one country and a trade deficit with another country
The United States has had a trade deficit in recent years

10. Balance of Payments
Money goes from one country to another through investments and tourism.
A citizen in one country might invest in a corporation in another country.
A business may invest in a factory in another country.
One government may give financial or military aid to another nation.
Some countries limit the money their citizens can take out of the country when traveling

11. Balance of payments- difference between the amount of money that comes into a country and the amount that goes out of it

12. Positive / favorable balance of payments- when a nation receives more money in a year than it puts out
Negative / unfavorable balance of payments- the result of a country sending out more money out than it brings in

13. Checkpoint>>
How does balance of trade differ from balance of payments?

14. INTERNATIONAL CURRENCY
Foreign Exchange Rages
Exchange rate- the value of a currency in one country compared with the value in another
Supply and demand affect the value of currency

15. Travelers and business people must deal with currency exchanges as they go from one country to another
Currency exchange windows are available where you can buy any amount of local currency you want
The amount of local currency you receive is based on the value of the two currencies at the time
Exchange stations are found in airports, train stations, hotels, and local banks
Operators charge a fee for the service

16. Factors Affecting Currency Values
Three main factors affect currency exchange rates:
balance of payments
economic conditions
political stability

17. Balance of Payments
When a country has a favorable balance of payments, the value of its currency is constant or rising
An increased demand for both the nation’s products and currency causes this situation.
When a country has an unfavorable balance of payments, its currency usually declines in value.

18. Economic Conditions Inflation reduces the buying power of a currency.
Interest rates- the cost of using someone else’s money
Higher interest rates create lower consumer demand.
This results in a reduced demand for a nation’s currency causing a decline in its value.

19. Political Stability
Companies and individuals want to avoid risk when doing business in other countries.
Political instability may occur when new laws are put into place.
These laws may not allow businesses to operate freely as they did under the old laws
Uncertainty in a country reduces the confidence business people have in the currency

20. Checkpoint>>
What factors affect the value of a country’s currency? (List at least two not already given in the notes.)

21. 3-1 ASSESSMENT
Complete the 4 questions

22. 3-2 The Global Marketplace
After finishing this section, you will be able to:
Describe the components of the international business environment
Identify examples of formal trade barriers
Explain actions to encourage international trade

23. 3-2 The Global Marketplace
INTERNATIONAL BUSINESS ENVIRONMENT
Businesses must consider four main factors when dealing with other countries:
geography
cultural influences
economic development
political and legal concerns

24. Geography
The location, climate, terrain, seaports and natural resources of a country influence business activity
Very hot weather can limit the types of crops that can be grown
Countries with many seaports can easily ship products for foreign trade
Countries with few natural resources must rely on imports

25. Cultural Influences
Culture- accepted behaviors, customs, and values of a society
The main cultural and social factors that affect international business are language, religion, values, customs, and social relationships
These relationships include interactions among families, labor unions, and other organizations

26. Economic Development
Every country and every individual faces the problem of limited resources to satisfy wants and needs
You continually make decisions about the use of your time, money, and energy
In a similar way, every country plans the use of its land, natural resources, workers, and wealth to best serve the needs of its people

27. Key factors that affect a country’s level of economic development are:
Literacy level
Technology
Agricultural dependency

28. Literacy Level
Countries with better education systems usually provide more and better goods and services for citizens

29. Technology
Automated production, distribution, and communications systems allow companies to create and deliver goods, services, and ideas quickly

30. Agricultural Dependency
An economy that is largely involved in agriculture does not have the manufacturing base to provide citizens with great quantity and high quality of a product
Infrastructure- a nation’s transportation, communication, and utility systems

31. Political and Legal Concerns
The most common political and legal factors that affect international business activities include:
Type of government
Stability of government
Government policies toward business

32. Checkpoint>>
List the four main elements of international business and give one example for each.

33. INTERNATIONAL TRADE BARRIERS
Trade barriers- restrictions to free trade
Formal trade barriers- political actions
Informal trade barriers- culture, traditions, and religion of a country

34. Quotas
Quota- limit on the quantity of a product that may be imported or exported within a given time
Quotas can be set for many reasons including:
To express displeasure at policies of that country
To protect one of its industries from too much foreign competition

35. Tariffs
Tariff- tax a government places on certain imported products
Some tariffs are a set amount by pound, gallon, or other unit
Other tariffs are calculated by the value of a good

36. Example: You buy an imported bike that costs $170
The government imposes a tariff of 25%
Calculation: $170 * .25 = $42.50
Final price you pay for the bike: $170 + $42.50 = $212.50

37. Embargoes
Embargo- the government stoppage of the importing or exporting of a product completely
Governments may impose embargoes for various reasons including:
To protect their own industries from international competition
To prevent sensitive products, especially those vital to the nation’s defense from falling into the wrong hands

38. Checkpoint>>
What are three formal trade barriers and when could they be used?

39. ENCOURAGING INTERNATIONAL TRADE
Specific actions by governments can promote international business activity
Common efforts include:
Free-trade zones
Free-trade agreements
Common markets

40. Free-Trade Zones
Free-trade zone- selected area where products can be imported duty free and then stored, assembled, or used in manufacturing
Usually located around a seaport or airport
The importer pays duty only when the product leaves the zone

41. Free-Trade Agreements
Free-trade agreement- member countries agree to remove duties (import taxes)
This results in increased trade between the members
North American Free Trade Agreement (NAFTA)- 1994, no tariffs when trading between the U.S., Canada, and Mexico

42. Common Markets
Common markets- 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
Common external duties on products being imported from nonmember countries
Examples: European Union (EU), Latin American Integration Association (LAIA)

43. Checkpoint>>
What actions could be taken to encourage international trade? (List at least 2 ideas.)

44. 3-2 ASSESSMENT
Complete 6 questions.

45. 3-3 International Business Organizations
After finishing this section, you will be able to:
Describe the components of the international business environment
Identify examples of formal trade barriers
Explain actions to encourage international trade

46. MULTINATIONAL COMPANIES
Multinational company (MNC)- an organization that does business in several countries
Usually consists of a parent company in the home country and divisions or separate companies in one or more host countries
Host country- the country in which the business places business activities

47. MNC Strategies
Global strategy- uses the same product and marketing strategy worldwide
The same product is sold in the same manner around the world
Example: Coca-Cola

48. Multinational strategy- 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
Example: restaurant chains

49. MNC Benefits
Three groups benefit from international trade including:
consumers
businesses / employees
nations

50. Consumers
Consumers benefit from international trade with:
Larger amounts of goods available
Lower priced goods than those made domestically

51. Businesses / Employees
Businesses and employees benefit from international trade with:
Expanded career opportunities

52. Nations
Nations benefit from international trade with:
Better understanding, communication, and respect among various nations

53. Drawbacks of Multinational Companies
The MNC can become a major economic power in the host country
The workers of the host country may depend on the MNC for jobs
Consumers become dependent upon it for goods and services
The MNC may actually influence or control the political power of the country

54. Checkpoint>>
What are two marketing strategies commonly used by multinational companies?

55. GLOBAL MARKET ENTRY MODES
Licensing
Some companies want to produce products in other countries without being actively involved
Licensing- selling the right to use some intangible property for a fee or royalty

56. Intangible property- production process, trademark, or brand name
Examples: Gerber began selling baby food in Japan by means of licensing. OR The use of television characters or sports teams on hats, shirts, jackets, notebooks, or other items
Licensing has a low financial investment, so the potential for profit and the risk are also low

57. Franchise- 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

58. The company obtaining the franchise will usually adapt a range of business elements including food products, packaging, and advertising messages to meet both cultural and legal requirements
Examples: McDonald’s, Burger King, Wendy’s, KFC, and Pizza Hut

59. Licensing vs. Franchising
Licensing involves a manufacturing process
Franchising involves selling a good or service

60. 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

61. Concerns about this type of partnership include sharing of profits, and less control
This arrangement is very popular for manufacturing
Example: Ford Motor Company entered a joint venture with Mazda Motor Corporation. Ford used Mazda-produced parts for several of its cars and Mazda set up assembly plants for Ford Motor cars.

62. Checkpoint>>
How does licensing differ from a franchise?

63. INTERNATIONAL TRADE ORGANIZATIONS
International trade activities can be very complex. As a result, several organizations have been created to help companies with global trade activities.
Organizations include:
World Trade Organization (WTO)
International Monetary Fund (IMF)
World Bank

64. World Trade Organization- created in 1995 to promote trade around the world
More than 150 member countries
Settles trade disputes and enforces free trade agreements among members

65. Other goals of the WTO include:
Lowering tariffs
Eliminating import quotas
Reducing barriers for banks, insurance companies ,and other financial institutions
Assisting poor countries with economic growth

66. International Monetary Fund- maintains an orderly system of trade and exchange rates and promotes economic cooperation among its more than 150 members
Created in 1946 when economic interdependence was growing at a historical pace

67. Before the IMF was instituted, a country could change the value of its legal tender to attract more foreign customers
As other countries lose business, they may impose trade restrictions or lower the value of their currency
As one nation tries to outdo another, a trade war may result

68. World Bank- (the international bank for Reconstruction and Development)- created in 1944 to provide loans for rebuilding after World War II
Today, the bank’s key function is to give economic aid to less developed countries paying for communications systems, transportation networks, and energy plants
More than 180 member countries

69. There are two main divisions of the World Bank:
The International Development Association(IDA)
The International Finance Corporation(IFC)

70. International Development Association- makes loans to developing countries
International Finance Corporation- provides capital and technical help to private businesses in nations with limited resources
The IFC promotes joint ventures between foreign and local companies to further capital investment in developing nations

71. Checkpoint>>
How does the International Monetary Fund assist countries?

72. 3-3 ASSESSMENT
Complete the 3 assessment questions from the last page of your note packet!