Business in the Global Economy

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Goals:
◦ Describe importing and exporting activities.
◦ Compare balance of trade and balance of payments.
◦ List factors that affect the value of global currencies.

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Domestic business
◦ Making, buying, and selling of goods and services within a country.
International business
◦ Creating, shipping, and selling goods and services across national borders.
◦ Also called foreign or world trade

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The U.S. conducts trade with more than
180 countries.
The world is changing from economies defined by borders into a global economy.
◦ Two economic principles define buying and selling among companies in different countries.
 Absolute Advantage
 Comparative Advantage

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Absolute advantage
◦ Country can produce a good or service at a lower cost than other countries
◦ Can be gained from having an abundance of natural resources or raw materials.
 Examples: South America: Coffee Production
Saudi Arabia: Oil Production

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Comparative Advantage :
◦ Country specializes in the production of a good or service
◦ Lower opportunity cost than another country producing the same good.
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Again, what’s the difference between an absolute and comparative advantage ?

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Imports
◦ Items bought from other countries.
 Bananas, coffee, cocoa, tea, silk, oil, toys, tin, copper, zinc, aluminum (Coke cans), Swiss watches, French designer clothing
Without our country’s ability to import goods, many of the things we buy would be more expensive or not even available to buy!

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Exports : goods and services sold to other countries.
◦ U.S. exports include:
 agricultural products
 medicines
 plastics
 movies
 books
 machinery

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Balance of trade : the difference between a country’s total exports and total imports.
If a country exports (sells) more than it imports (buys), it has a trade surplus .
If a country imports (buys) more than it exports (sells), it has a trade deficit .
Generally speaking, the U.S.
IMPORTS MORE than it EXPORTS
◦ TRADE DEFICIT

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A country can have a trade surplus with one country and a trade deficit with another.
A country needs to keep its trade in balance.
Exports Imports

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Balance of payments : the difference between the amount of money that comes into a country and the amount of money that goes out of it.
Positive (favorable) balance : occurs when a nation receives more money in a year than it pays out.
Negative (unfavorable) balance : the result of a country sending more money out than it brings in.

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A challenge in international business is variations in currency
Nations have their own banking system and money.
◦ Japan: yen
◦ Britain: pound
Venezuela: bolivar
European Union: euro

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Exchange rate :
◦ Value of a currency in one country compared with the value in another3
◦ Supply and demand affect value of currency
◦ Must understand currency exchanges as products go from one country to another

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Three main factors affect currency exchange rates:
◦ Balance of payments
 Positive balance = high value of currency
◦ Economic conditions
 Inflation reduces the buying power of a currency
◦ Political stability
 How stable is the government and laws regulating business?


Goals:
◦ Describe importing and exporting activities.
◦ Compare balance of trade and balance of payments.
◦ List factors that affect the value of global currencies.

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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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Businesses must consider four main factors when doing business in other countries:
◦ 1) Geography
◦ 2) Cultural Influences
◦ 3) Economic Development
◦ 4) Political and Legal Concerns

Location
Natural
Resources
Climate
Seaports Terrain

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Culture : accepted behaviors, customs, values of a society.
◦ Language
◦ Religion
◦ Values
◦ Customs
◦ Social Relationships

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Differences in living and work environments reflect the level of economic development.
◦ Key factors that affect a country’s level of economic development are:
 Literacy level
 Technology
 Agricultural dependency

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Infrastructure : a nation’s transportation, communication, and utility systems.

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Trade barriers
◦ Importing/Exporting restrictions
◦ Inspection of Goods
Government system
Political stability
Business regulations

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Trade barriers : restrictions to free trade.
◦ Three common formal trade barriers are:
 Quotas
 Tariffs
 Embargoes
◦ The culture, traditions, and religion of a country can create
informal trade barriers.

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To restrict international trade, governments set a limit on the quantity of a product that may be imported or exported within a given time period.
This limit is called a quota .

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Tariff : a tax that a government places on certain imported products.
Example: You want to buy a pair of French designer shoes. The producer of the shoes charges $140 a pair, but the government charges 20% tariff ($28) on the shoes when they are imported. So, the final price you will have to pay is
$168.
Tariffs increase the price of imported products to protect domestic companies.

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Embargo : when a government stops the export or import of a product completely.
◦ Reasons for a government to impose an embargo:
 Protect their own industries from international competition
 Prevent sensitive products from falling into the hands of unfriendly groups or nations
 Express its disapproval of the actions or policies of another country

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Efforts to encourage international trade include:
◦ Free-trade zones
◦ Free-trade agreements
◦ Common markets

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Free-trade zones : a selected area where products can be imported then stored, assembled, and/or used in manufacturing without import taxes
(duty-free).
◦ Usually around a seaport or airport
Free-trade agreements : agreement between nations to remove import taxes and trade barriers between them.
◦ U.S. > Canada > Mexico
 North American Free-Trade Agreement (NAFTA)

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NAFTA
◦ Est. 1994

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Opposite of Free-Trade is No-Trade
2010

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Common market (economic community): a market in which members do away with duties and other trade barriers.
◦ Companies can freely invest in each member’s country
◦ Workers can freely move across borders
◦ Examples: European Union (EU) & Latin
American Integration Association

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Goals
◦ Describe the components of the international business environment.
◦ Identify examples of formal trade barriers.
◦ Explain actions to encourage international trade.