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Chapter 10 Business in a Global Economy

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

1.1. ExplainExplain why nations need to trade with each other.

2.2. DescribeDescribe how currency exchange works.

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

3.3. StateState the advantages of protectionism and free trade.

4.4. NameName types of trade barriers.

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Learning ObjectivesLearning ObjectivesAfter completing this chapter, you’ll be After completing this chapter, you’ll be able to:able to:

5.5. IdentifyIdentify some of the major trade alliances in the world today.

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Why It’s ImportantWhy It’s Important

Global trade doesn’t just influence business, it also affects all the countries and people of the world.

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Key WordsKey Words

multinational companyimportsexportsexchange ratebalance of tradeprotectionism

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Key WordsKey Words

tariffquotaembargofree trade

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Global Producers Global Producers and Consumersand Consumers

We are all part of the global marketplace.

The global marketplace exists anywhere business crosses national borders.

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Global Producers Global Producers and Consumersand Consumers

Countries can satisfy their citizens’ wants and needs by buying them in the global market.

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The Global Marketplace The Global Marketplace A multinational corporation is a company that does business in many countries and has facilities and offices in many countries around the world.

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The Global Marketplace The Global Marketplace The global marketplace works much like a shopping mall or a supermarket.

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The Global Marketplace The Global Marketplace The United States is rich in resources—human, natural, and production—but it still needs things from other countries.

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Figure10.1 MAJOR EXPORTS AND IMPORTS OF THE UNITED STATES

Look at the graph to see what products the United States imports and exports.

Name the product that the United States exports more than it imports.

Source: Standard & Poor’s

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Specialization Specialization Countries specialize in producing certain goods and services.

By specializing, countries can sell what they produce best so they can buy the products they need from other countries.

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Specialization Specialization The kinds of resources available to a country often influence what it specializes in producing.

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Specialization Specialization A country with little money or advanced technology but a large population might specialize in manual labor.

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Types of Trade Types of Trade Imports are goods and services that one country buys from another country.

Exports are goods and services that one country sells to another country.

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Types of Trade Types of Trade Other types of trade include:

• Investment• Exchange of human resources• Tourism• Military aid• Loans

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Currency Currency Countries have to pay for each other’s products with currency. Currency is another name for money.

Just as countries use different lan-guages, they use different currencies, such as dollars, pesos, and yen.

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Currency Currency The foreign exchange market is made up of banks where different currencies are exchanged.

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Exchange Rates Exchange Rates The exchange rate is the price at which one currency can buy another currency.

Exchange rates change from day to day and from country to country.

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Exchange Rates Exchange Rates How much the currency of a country is worth depends on how many other countries want to buy its products.

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Prices Prices A company follows the change in exchange rates to find the best prices for products.

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Prices Prices When the value of a country’s currency goes up compared to another country’s, it has a favorable exchange rate.

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Prices Prices When the value of a country’s currency goes down compared to another country’s, it has an unfavorable exchange rate.

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Prices Prices Some countries choose to lower the value of their currency to bring in more business.

When this happens, it costs less to buy products from that country.

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Balance of Trade Balance of Trade Balance of trade is the difference in the value between how much a country imports and how much it exports.

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Balance of Trade Balance of Trade When a country exports more than it imports, it has a trade surplus.

When a country imports more than it exports, it has a trade deficit.

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Balance of Trade Balance of Trade A country can have an unfavorable balance of trade with one country and a favorable balance with another.

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Graphic OrganizerHow Exchange Rates Affect theHow Exchange Rates Affect theBalance of TradeBalance of Trade

Graphic OrganizerGraphic Organizer

WeakCurrency

FAVORABLEBALANCE

OFTRADE

Moreexports

thanimports

StrongCurrency

Moreimports

thanexports

NEGATIVEBALANCE

OFTRADE

Tradesurplus(leftovermoney)

Tradedeficit(debt)

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Fast Review

1. Explain what trade is.

2. Explain exchange rates.

3. Why would a country want to devalue its currency?

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Global Competition Global Competition Global competition often leads to trade disputes between countries.

At the heart of most trade disputes is whether there should be limits on trade.

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Protectionism Protectionism Protectionism is the practice of putting limits on foreign trade to protect businesses at home.

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http://www.rescueamericanjobs.org/stories/voiceofamerica.mp3

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Protectionism Protectionism Some of the reasons in favor of protectionism are:

• Foreign competition can lower the demand for products made at home.

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Protectionism Protectionism • Companies at home need to be

protected from unfair foreign competition.

• Industries that make products related to national defense need to be protected.

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Protectionism Protectionism • The use of cheap labor in other

countries can lower wages or threaten jobs at home.

• A country can become too dependent on another country for important products like oil, steel, or grain. continued

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Protectionism Protectionism • Other countries might not have the

same environmental or human rights standards.

Introduction to Business 39

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‘Other Arguments’‘Other Arguments’For“Keep Money at Home”

-Country gets the goods & the foreigners get the money.

“Home Market”-More jobs can be created.

“National Security”-A nation dependent on foreign sources of supply is a vulnerable position during war.

“Infant Industry”New industry needs protection for time to develop against established competition.

For“Keep Money at Home”

-Country gets the goods & the foreigners get the money.

“Home Market”-More jobs can be created.

“National Security”-A nation dependent on foreign sources of supply is a vulnerable position during war.

“Infant Industry”New industry needs protection for time to develop against established competition.

Against“Keep Money at Home”

-Money is not the only form of wealth. Money paid for imports will return sooner or later in the form of exports or investments (stocks)

“Home Market”-Why would we not specialize in something that we have a competitive advantage over our competition?

“National Security”-We are less likely to go to war with countries who depend on us for key goods and/or services.

“Infant Industry”-New companies successfully start everyday in this country competing against current competition.

Against“Keep Money at Home”

-Money is not the only form of wealth. Money paid for imports will return sooner or later in the form of exports or investments (stocks)

“Home Market”-Why would we not specialize in something that we have a competitive advantage over our competition?

“National Security”-We are less likely to go to war with countries who depend on us for key goods and/or services.

“Infant Industry”-New companies successfully start everyday in this country competing against current competition.

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Trade Barriers Trade Barriers To limit competition from other countries, governments put up trade barriers to keep foreign products out.

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Trade Barriers Trade Barriers A tariff is a tax placed on imports to increase their price in the domestic market.

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Trade Barriers Trade Barriers A quota is a limit placed on the quantities of a product that can be imported.

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Trade Barriers Trade Barriers An embargo is when the government decides to stop an import or export of a product.

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Free Trade Free Trade Supporters of free trade believe there should be no limits on trade.

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Free Trade Free Trade The benefits of free trade are:

• It opens up new markets in other countries.

• It creates new jobs, especially in areas related to global trade.

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Free Trade Free Trade

• Competition forces businesses to be more efficient and productive.

• Consumers have more choice in the variety, price, and quality of products.

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Free Trade Free Trade

• It promotes cultural understanding and cooperation between countries.

• It helps all countries raise their standard of living.

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Trade Alliances Trade Alliances To reduce limits on trade more countries are forming trade alliances with each other.

In a trade alliance, several countries merge their economies into one huge market.

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Trade Alliances Trade Alliances NAFTA (North American Free Trade Agreement) was controversial because some workers would be displaced when trade barriers were lowered.

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Trade Alliances Trade Alliances Some of the major trade alliances in the world today are:

• NAFTA • European Union (EU) • Association of Southeast Asian

Nations (ASEAN)

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Figure10.2 MAP OF TRADE ALLIANCES IN THE WORLD

The European Union (EU) is the oldest and best-known economic community formed to promote free trade among the members of the community and to foster common economic policies.

What nations make up the European Union?

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International Business and International Business and Finance Affects EveryoneFinance Affects Everyone

Understanding international business and finance has become increasingly important for the consumer, wage earner, investor, citizen, and business leader.

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International Business and International Business and Finance Affects EveryoneFinance Affects Everyone

An understanding of international business helps you understand why goods and services are at particular prices.

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International Business and International Business and Finance Affects EveryoneFinance Affects Everyone

The business leader of tomorrow will have a good grasp of international business and finance.

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Fast Review

1. Develop an opinion as to how you feel about the global market.a. Are you a protectionist? Why or why not?b. Do you believe in free trade? Why or why

not?c. Are you some where in the middle? If so,

what trade restrictions implemented at what time make the most sense?

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As a restaurant owner, what kind of things might you import and export?

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In the global marketplace, what is the importance of specialization?

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By expanding operations domestically and internationally, how does this affect the economies involved?

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How can a small company, like Panda Express, change domestic culture?

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