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. International Business 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 International Business 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 Absolute Advantage 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 Comparative Advantage Comparative Advantage: Country specializes in the production of a good or service Lower opportunity cost than another country producing the same good. Again, whats the difference between an absolute and comparative advantage? absolute and comparative advantage Importing 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 countrys ability to import goods, many of the things we buy would be more expensive or not even available to buy! Exporting Exports: goods and services sold to other countries. U.S. exports include: agricultural products medicines plastics movies books machinery Balance of Trade Balance of trade: the difference between a countrys 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 Balance of Trade 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. ExportsImports Balance of Payments 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. International Currency A challenge in international business is variations in currency Nations have their own banking system and money. Japan: yenVenezuela: bolivar Britain: poundEuropean Union: euro Currencies Foreign Exchange Rates 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 Factors Affecting Currency Values 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? 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. 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 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 1) Geography Influence Business Activity LocationClimateTerrainSeaports Natural Resources 2) Cultural Influences Culture: accepted behaviors, customs, values of a society. Language Religion Values Customs Social Relationships 3) Economic Development Differences in living and work environments reflect the level of economic development. Key factors that affect a countrys level of economic development are: Literacy level Technology Agricultural dependency 3) Economic Development Infrastructure: a nations transportation, communication, and utility systems. 4) Political and Legal Concerns Trade barriers Importing/Exporting restrictions Inspection of Goods Government system Political stability Business regulations International Trade Barriers 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. Trade Barriers 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. Trade Barriers 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. Trade Barriers 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 Encouraging International Trade Efforts to encourage international trade include: Free-trade zones Free-trade agreements Common markets Free-Trade 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) NAFTA Est. 1994 2010 Opposite of Free-Trade is No-Trade Common Markets Common market (economic community): a market in which members do away with duties and other trade barriers. Companies can freely invest in each members country Workers can freely move across borders Examples: European Union (EU) & Latin American Integration Association 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.