Chapter 3 Business in
the Global Economy
3-1 International Business Basics
 Goals:
 Describe
importing and exporting activities.
 Compare
balance of trade and balance of
payments.
 List
factors that affect the value of global
currencies.
Trading Among Nations

Domestic Business is the making, buying, and selling of goods an services within
a country.

International Business refers to business activities needed for creating, shipping
and selling goods and services across national borders. Also known as foreign or
world trade.

United States conducts trade with more than 180 countries.

Countries are interdependent, including economies, on one another.



Countries are mutually reliant on one another.
Absolute Advantage

When a country can produce a good or service at a lower cost than other countries.

They have an abundance of natural or raw resources. (i.e. Brazil with Coffee, Saudi Arabia
with oil, United States with wheat)
Comparative Advantage

When a country has an absolute advantage in more than one area. It must decide how to
maximize its economic wealth and specialize in the production of a good or service at most
likely more efficiently or cheaply.
Trading Among Nations


Importing – items bought from other countries.

Without foreign trade, many things you buy would cost more or not be
available.

Other countries can produce some goods at a lower cost because they have
the needed raw materials or have lower labor costs.

Some consumers purchase foreign goods, even at higher prices, if they
perceive the quality to be better than domestic goods.
Exporting – goods and services sold to other countries

Exports benefit consumers in other countries just like imports benefit us.

Agricultural products, plastics, television shows, movies, books…

One of every six jobs in the United States depends on international business.
Measuring Trade Relations

Nations like people need to worry about balancing income and expenditures

Foreign debt is the amount a country owes to other countries


National Debt

Who owns most of the U.S. Debt
http://www.usdebtclock.org/
http://money.cnn.com/2015/04/15/news/economy/japan-china-us-debt-treasury/
Balance of Trade

Difference between a country’s total export and total imports

If a country exports (sells) more than it imports (buys), it has a trade surplus. The reverse, it imports
(buys) more than it exports (sells) it has a trade deficit.

A country can have a trade surplus with one country and a trade deficit with another.

List of countries that have surplus and deficit with U.S. http://www.census.gov/foreigntrade/statistics/highlights/toppartners.html

Balance of Payments

Difference between the amount of money that comes into a country and the amount that goes out.

A positive or favorable balance of payment occurs when a nation receives more money in a year than it
pays out. A negative or unfavorable balance of payment occurs when a country pays more than receives.

In addition to exporting and importing goods and services, money goes from one country to another
through investments and tourism. Investments by a citizen in one country to a corporation in another
country can also be an exchange. A business may invest in a factory in another country. A government can
give financial or military aid to another country. Banks may deposit funds in foreign banks.

When tourists travel, they aid in the flow of money from their country to the country they are visiting.
International Currency

A challenge faced by countries is when trading they have to deal with various
currencies.

Exchange Rate

The value of a currency in one country compared with the value in another. Supply and
Demand affects the value of currency.

Most large banks provide currency exchanges for businesses and consumers.

Hotels, Airports, Kiosks in the country that you landed in will charge some of the highest
exchange rate charges.


Some Credit cards and Debit cards charge a lower fee when exchanging (check with your bank).
Factors that Affect Currency Values

Balance of Payments – When a country has a favorable balance of payments, the value of its
currency is either constant or rising. An increased demand for both the nation’s products and
its currency caucuses this situation.

Economic Conditions – When prices increase and the buying power of the country’s money
declines, its currency is not as appealing. Inflation reduces the buying power of a currency.
Higher interest rates usually create owner consumer demand. This results in a reduced
demand for a nation’s currency, causing a decline in its value.

Political Stability – If a government changes suddenly, this may create an unfriendly setting for
foreign business. Political instability may also occur when new laws are put in place.
Uncertainty in a country reduces the confidence that businesspeople have in its currency.
3-2 The Global Marketplace
 Goals:
 Describe
the components of the international business
environment.
 Identify
examples of formal trade barriers.
 Explain
actions to encourage international trade.
International Business Environment

Doing business in another country requires knowledge. Businesses must consider four main
factors: Geography, Cultural Influences, Economic Development, and Political and Legal
concerns.

Geography – Location, climate, terrain, seaports, and natural resources influence business activity.

Cultural Influences – Main cultural and social factors that affect international business are
language, religion, values, customs and social relationships (Include interactions among families,
labor unions and other organizations).


Economic Development – Every country and every individual faces the problem of limited
resources to satisfy needs and wants. Just as individuals use time, money and energy for their
benefit, countries do the same (on a larger scale).


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Culture is the accepted behaviors, customs, and values of a society. A society’s culture has a strong
influence on business activities. (i.e. In Mexico, some businesses close in the afternoon for siesta).
Factors that Affect a country’s level of Economic Development:

Literacy Level – Countries with better education systems usually provide more and better good and services for their
citizens.

Technology – More technology translates to companies deliver goods, services and ideas quickly.

Agricultural Dependency – An economy largely involved in agriculture doesn’t have the manufacturing base to provide
citizens with great quantity and high quality of a product.
Infrastructure refers to a nation’s transportation, communication and utility system. It helps support
international trade. (i.e. Germany has an efficient rail system).
Political and Legal Concerns – Some countries have a lot of personal freedom, and some others
have a strong government presence. Governments can control advertising, enforce contracts,
inspect foods and medications.
International Trade Barriers

Trade Barriers are restrictions on free trade.
 Formal
Trade Barriers include Quotas, Tariffs and Embargoes
 Informal
Trade Barriers include culture, traditions, religion, location
 Quota
– A government sets a limit on the quantity of a product imported or
exported.

Quotas are set for many reasons: Place a quota on an item so that the supply will
remain low and prices will stay at a certain level. Quotas may be set on imports
from another country to express displeasure at the policies of that country. Quotas
can be set by a country to protect one of it industries from too much competition
from abroad. This is usually to protect an “infant industry”.
 Tariff
– A tax a government places on certain imported products.
 Embargo

– Government stops the export or import of a product completely.
Embargo is set to protect their own industries from international competition more
than a quota or tariff will achieve. Government may wish to prevent sensitive
products, especially those vital to the nation’s defense, from falling into the hands of
unfriendly groups or nations. Embargoes may be an expression of disapproval of the
actions or policies of another country.
Encouraging International Trade

Specific actions by governments can promote international business activities.
Governments view exporting as an effective way to create jobs and foster economic
prosperity. They do this through: Free Trade Zones, Free Trade Agreements, and
Common Markets.

Free Trade Zone – A selected area where products can be imported duty free (no tax) and
then stored, assembled, and/or used in manufacturing. They are usually located around
seaports or airports. Importer only pays duty (tax) when the product leaves the zone.

Free Trade Agreements – Member countries agree to remove duties (taxes) and trade
barriers on products traded among them.

North American Free Trade Agreement (NAFTA) created in 1994 by President Clinton for free
trading among Canada, United States and Mexico.


Pros and Cons to the Agreement. Pros: It has increased the wealth of some Investors and U.S. Companies.
Cons: It cost some manufacturing jobs in U.S. and it didn’t raise the living standard of Mexicans.
Common Markets – Members do away with duties and other trade barriers. Companies are
permitted to invest freely in each member’s country and workers are allowed to move
freely across borders. Also known as an Economic Community.

Examples: European Union (EU) and Latin American Integration Association (LAIA)
3-3 International Business Organizations

Not a part of the curriculum, but some important concepts.

Multinational Companies (MNC) – does business in another country


Global Strategy – Use the same product and marketing strategy worldwide (i.e.
Coca Cola).

Multinational Strategy – Treats each country market differently (i.e. McDonalds).
When doing business in another country. Need to be aware of:

Customs, Monetary conversions, language translation, government, labor, food…