Global Business – Chapter 2
Our Global Economy
LESSON 2-1: Economics and Decision Making
The Basic Economic Problem
 Scarcity refers to the limited resources
available to satisfy the unlimited
needs and wants of people.
 Economics is the study of how
people choose to use limited resources to satisfy their
unlimited needs and wants.
The Decision-Making Process
1. Define the Problem
 What do I want or need?
 Business Example: ________________________________________________
2. Identify the alternatives
 What are the different ways my problem can be solved?
 Business Example: ________________________________________________
3. Evaluate the alternatives
 What are the advantages and disadvantages of each of the choices available?
 Business Example: ________________________________________________
4. Make a choice
 Based on the advantages and disadvantages, which would be my best choice?
 Opportunity Cost – the most attractive alternative given up when a choice is made
 Business Example: ________________________________________________
5. Take action on the choice
 What needs to be done to put the decision into action?
 Business Example: ________________________________________________
6. Review the decision
 Did your decision solve the problem? What different actions might be necessary?
 Business Example: ________________________________________________
LESSON 2-2: Basics of Economics
Price-Setting Activities
 Supply is the relationship between the amount of a good or service that businesses
willing and able to make available and the price.
 Demand is the relationship between the amount of a good or service that consumers
willing and able to purchase and the price.
o Law of Demand – as price declines, demand increases
 Market Price – the point at which supply and demand cross
o Also called Equilibrium Price
Changing Prices
 Inflation – an increase
in the average prices of goods and services in a country
o Demand-pull inflation - when demand exceeds
supply
 Can occur when a government prints too much money
o Cost-push inflation - when the expenses of a business increase
 Can occur when cost of salaries or raw materials go up
are
are
LESSON 2-3: Economic Systems
Factors of Production – the 3 types of resources used to produce goods and services
Natural Resources
 Raw materials
that come from the earth, from the water, and from the air
o Iron ore, gold, silver, agricultural products
 Also known as land
 Used in the production of goods and services consumed by individuals, businesses, and
governments.
Human Resources
 The people
who work to create goods and services
 Also known as labor
 While technology has changed or eliminated certain tasks previously performed by people, new
types of work are continually being created.
Capital Resources
 Includes buildings, money, equipment, and factories
used in the production process
 Also called capital
 These items are expensive and are used over several years by business organizations.
Economic System
 The economic choices of a country relate to three basic questions:
1. What
goods and services are to be produced?
2. How
should the goods and services be produced?
3. For whom
should the goods and services be produced?
Command Economies
 Government
regulates the amount, distribution, and price of everything produced
 Government owns
the productive resources
 Any income from these resources is used to help fund
government activities
 Also known as Communism
o China, Cuba, Vietnam, Laos, North Korea
Market Economies
 Individual
companies and consumers make the decisions about what, how, and
for whom items will be produced
 Also known as Capitalism
or Free Enterprise System
o United States, Japan, Australia, Canada
Is there such a thing as a Perfect Market Economy? _____________________________
3 Characteristics of Market Economies
 Private property – individuals have right to buy and sell productive resources and to own
business enterprises
 Profit motive – individuals are inspired by the opportunity to be rewarded
for taking
business risks and for working hard
 Free, competitive marketplace – consumers have the power to use their choices to determine
what is to be produced and to influence
the prices to be charged
Mixed Economies
 Blend between government involvement in business and private ownership
 Government owns transportation, communications, and major industries
 Individuals free to engage in other business opportunities and free to make buying choices
 Also known as Socialism
o Sweden, France
Privatization – process of changing an industry from public to private
ownership
LESSON 2-4: Achieving Economic Development
True or false?
 countries with better education systems usually provide more goods and services that are of
higher quality for their citizens _____

automated production, distribution, and communication systems allow companies to create and
deliver goods, services, and ideas quickly _____

an economy that is largely involved in agriculture does not have the manufacturing base to
provide citizens with a large number of high quality products _____
Industrialized or Developed Countries
 Strong Infrastructure - a nation’s transportation, communication, and utility systems
 Actively involved
in international business and foreign trade
 Average annual income per person of more than $30,000
o US, Canada, UK, France, Germany, Italy, Japan
Less-Developed Countries (LDCs)
 Little economic wealth
 May have resources, but no technology
to make use of them
 Weak Infrastructure, poor health care, low literacy rates, low levels of employment skills,
uncertain political environments
 Little to no
foreign trade
 Average annual income per person of less than $1,000
o Bangladesh, Cambodia, Chad, Haiti, Nepal, Niger, and Sudan
Developing Countries
 Evolving
from less developed to industrialized
 Improving educational systems, increasing technology, and expanding industries
 Also known as Emerging Markets
o Argentina, Brazil, Ecuador, India, Kenya, Hungary, Poland, South Africa, Turkey, Thailand,
and Vietnam
LESSON 2-5: Resources Satisfy Needs
The Economics of Foreign Trade
Absolute advantage
 exists when a country can produce a good or service at a lower cost
than other countries
 Usually occurs as a result of the natural resources
or raw materials of a country
 Examples: ________________________________________________________________
Comparative advantage
 exists when a country can produce a good or service with more efficiency
than other
countries
 If advantage exists in more than one area, produce goods with greatest return and buy other
goods elsewhere
Measuring Economic Progress
Measures of Production
 Gross domestic product (GDP)
o Measures the output of goods that a country produces within its borders
o Includes items produced with foreign resources
 Gross national product (GNP)
o Measures the total value of all goods and services produced by the resources of a
country
o GDP plus
production on other countries using our resources
 Per Capita
o Refers to an amount per person
o Takes total GDP divided by country population
Which country has the highest per capita GDP? ___________________________
International Trade Activity
 Balance of trade – the difference between a country’s exports and imports
 Trade Surplus – when a country exports (sells)
more than it imports (buys)
o Country with the highest trade surplus? ________________________________
 Trade Deficit – when a country imports (buys)
more than it exports (sells)
o Country with the highest trade deficit? _________________________________
 Foreign exchange rate – the value of one country’s money in relation to the value of the money
of another country
o How does the US$ compare to the Euro, Rupee, Canadian$?
___________________________________________________________________________
 Foreign debt – the amount a country owes
to other countries
o How much external debt does the US have? ______________________________
Other Economic Measurements
 Consumer price index (CPI)
o How inflation is measured in US
o Monthly report that provides price levels for various products and services in different
regions of the country
 Unemployment rate
o Number of people not working
o When people are not earning an income, they cannot
purchase needed
goods and services