Chapter 10: Business in a Global Economy

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The Global Marketplace

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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.

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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.
  • 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

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Global Competition

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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)

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