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)