Chapter 10: Business in a Global Economy

The Global Marketplace

The Global Economy

• The $global economy$ is the interconnected economies of the nations of the world.
• We live in a global economy fueled by international trade.
• $International trade$ involves the exchange of goods and services between nations.
• The development of the global economy is often referred to as globalization.
• A $multinational corporation$ is a company that does business in many countries and has facilities and offices around the world.
    * Sony is a multinational corporation.

International Trade

• $Trade$ has several meanings.
• This chapter looks at trade as the activity of buying and selling goods and services in domestic or international markets.
• Domestic trade is the production, purchase, and sale of goods and services within a country.
• World trade is the exchange of goods and services across international boundaries.
• $Imports$ are goods and services that one country buys from another country.
• $Exports$ are goods and services that one country sells to another country.
• Countries can also invest in other nations by opening businesses there.
    * 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.
• A $balance of trade$ is the difference in value between a country’s imports and exports over a period of time.
• A country can have a trade deficit with one country and a trade surplus with another.
• To specialize means to focus on a particular activity, area, or product.
    * Specialization builds and sustains a market economy.
• A $comparative advantage$ is the ability of a country or company to produce a particular good more efficiently than another country or company.
• Countries have to pay for products and services with currency.
• To trade with another country, businesses and countries must convert their money into that nation’s currency.
    * To do that, their currency is exchanged on the foreign exchange market
    * The foreign exchange market is mostly made up of banks where different currencies are exchanged.
• Each country’s currency has a value that is different from those of other countries.
• The price at which one currency can buy another currency is called the $exchange rate$.
    * Companies follow the change in exchange rates to find the best prices for products

Global Competition

Protectionism and Free Trade

• $Protectionism$ is the practice of the government putting limits on foreign trade to protect businesses at home.
• Reasons to restrict trade include the following:
    * Foreign competition can lower the demand for products made at home.
    * Companies at home need to be protected from unfair foreign competition.
    * Industries that make products related to national defense (such as satellites, aircraft, and weapons) need to be protected.
    * 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 such as oil, steel, or grain.
    * Other countries might not have the same environmental or human rights standards.
• To limit competition from other countries, governments develop trade barriers
    * A $tariff$ is a tax placed on imports to increase their price in the domestic market.
    * A $quota$ is a limit placed on the quantities of a product that can be imported.
    * An $embargo$ is a ban on the import or export of a product.
• Economic or foreign policy often determines which countries trade with each other.
• Free trade occurs when there are few or no limits on trade between countries.
• To reduce limits on trade, nations form trade alliances
    * In a trade alliance, several countries merge their economies into one huge market.
• Some of the major trade alliances in the world today are:
    * North American Free Trade Agreement (NAFTA)
    * European Union (EU)
    * Association of Southeast Asian Nations (ASEAN)