2 Our Global Economy 2-1 Economics and Decision Making CHAPTER 2 4/25/2017 CHAPTER 2 Our Global Economy 2-1 Economics and Decision Making 2-2 Basics of Economics 2-3 Economic Systems 2-4 Achieving Economic Development 2-5 Resources Satisfy Needs INTERNATIONAL BUSINESS

LESSON 2-1 Economics and Decision Making GOALS Describe the basic economic problem. List the steps of the decision-making process.

If Money Were No Object… 2 If Money Were No Object… Where would you live? What would you drive? Where would you go to school? What would you wear?

Reality… 2 There is a limited supply of money There are limited resources There is limited amount of time to get everything done you want to accomplish

The Basic Economic Problem 2 The Basic Economic Problem Scarcity refers to the limited resources available to satisfy the unlimited needs and wants of people. Economics is the study of how people choose to use limited resources to satisfy their unlimited needs and wants.

Making Economic Decisions 2 Making Economic Decisions Coping with scarcity Making choices Time Money Energy

The Decision-Making Process 2 The Decision-Making Process

The Decision-Making Process 2 The Decision-Making Process Define the problem What do I want or need? Business Example: Declining domestic sales

The Decision-Making Process 2 The Decision-Making Process Identify the alternatives What are the different ways my problem can be solved? Business Example: Increase Prices Reduce Expenses New Product Development Expansion

The Decision-Making Process 2 The Decision-Making Process Evaluate the alternatives What are the advantages and disadvantages of each of the choices available? Business Example: Lose or gain customers Downsizing R&D New products

The Decision-Making Process 2 The Decision-Making Process Make a choice Based on the advantages and disadvantages, which would be my best choice? Can I live with the consequences of that choice? Opportunity Cost – the most attractive alternative given up when a choice is made If by expanding globally, Kellogg’s has to use a manufacturing plant that currently has less than ethical business practices

The Decision-Making Process 2 The Decision-Making Process Take action on the choice What needs to be done to put the decision into action? Business Example: Expand Globally Select Countries Hire Sales Force Determine Logistics/Distribution

The Decision-Making Process 2 The Decision-Making Process Review the decision Did your decision solve the problem? As time goes by, what different actions might be necessary? Were there consequences you did not predict when you evaluated the alternatives? Did increase in sales offset cost of global expansion? Can Kellogg’s upgrade manufacturing plant with more current ethical standards?

The Decision-Making Process 2 The Decision-Making Process

LESSON 2-2 Basics of Economics GOALS Describe how the market sets prices. Explain the causes of inflation.

Price-Setting Activities 2 Price-Setting Activities Supply is the relationship between the amount of a good or service that businesses are willing and able to make available and the price. Demand is the relationship between the amount of a good or service that consumers are willing and able to purchase and the price. Law of Demand – as price declines, demand increases

Market Price Is Set by Supply and Demand 2 Market Price Is Set by Supply and Demand Market price is the point at which supply and demand cross. Also called Equilibrium Price Example: Air line tickets

Market Price Is Set by Supply and Demand 2 Market Price Is Set by Supply and Demand Market Price

2 Changing Prices Inflation – an increase in the average prices of goods and services in a country Demand-pull inflation When demand exceeds supply Can occur when a government prints too much money Cost-push inflation When the expenses of a business increase Can occur when cost of salaries or raw materials go up

LESSON 2-3 Economic Systems GOALS Name the three main factors of production. Understand how different countries make economic decisions.

Economic Resources Satisfy Needs 2 Economic Resources Satisfy Needs Factors of Production – the 3 types of resources used to produce goods and services Natural resources Human resources Capital resources

2 Natural Resources Raw materials that come from the earth, from the water, and from the air Iron ore, gold, silver, agricultural products Also known as land Used in the production of goods and services consumed by individuals, businesses, and governments.

Human Resources 2 The people who work to create goods and services Also known as labor While technology has changed or eliminated certain tasks previously performed by people, new types of work are continually being created.

2 Capital Resources Includes buildings, money, equipment, and factories used in the production process Also called capital These items are expensive and are used over several years by business organizations.

2 Economic System The economic choices of a country relate to three basic questions: 1. What goods and services are to be produced? 2. How should the goods and services be produced? 3. For whom should the goods and services be produced?

Economic Systems 2 Economic Systems The method a country uses to answer the basic economic questions Often based on customs, political factors, and religious beliefs 3 common types Command Economies Market Economies Mixed Economies

Types of Economic Systems 2 Types of Economic Systems Command Economies Government regulates the amount, distribution, and price of everything produced Government owns the productive resources Any income from these resources is used to help fund government activities Also known as Communism China, Cuba, Vietnam, Laos, North Korea

Types of Economic Systems 2 Types of Economic Systems Market Economies Individual companies and consumers make the decisions about what, how, and for whom items will be produced Also known as Capitalism of Free Enterprise System United States, Japan, Australia, Canada Is there such a thing as a Perfect Market Economy?

Types of Economic Systems 2 Types of Economic Systems 3 Characteristics of Market Economies Private property – individuals have right to buy and sell productive resources and to own business enterprises Profit motive – individuals are inspired by the opportunity to be rewarded for taking business risks and for working hard Free, competitive marketplace – consumers have the power to use their choices to determine what is to be produced and to influence the prices to be charged

Types of Economic Systems 2 Types of Economic Systems Mixed Economies Blend between government involvement in business and private ownership Government owns transportation, communications, and major industries Individuals free to engage in other business opportunities and free to make buying choices Also known as Socialism Sweden, France Privatization – process of changing an industry from public to private ownership

LESSON 2-4 Achieving Economic Development GOALS Describe the factors that affect economic development. Identify the different levels of economic development.

2 Economic Development Traveling on a high-speed bullet train to manage a computer network in a high-rise building Going by ox cart to a grass hut to operate a hand loom to make cloth for family members and other people in their village

What Influences a Country’s Economic Development? 2 What Influences a Country’s Economic Development? Literacy level Technology Agricultural dependency

What Influences a Country’s Economic Development? 2 What Influences a Country’s Economic Development? True or false? countries with better education systems usually provide more goods and services that are of higher quality for their citizens automated production, distribution, and communication systems allow companies to create and deliver goods, services, and ideas quickly an economy that is largely involved in agriculture does not have the manufacturing base to provide citizens with a large number of high quality products

Level of Economic Development 2 Level of Economic Development Industrialized or Developed Countries Less-Developed Countries Developing Countries

Levels of Economic Development 2 Levels of Economic Development Less- Developed Country Developing Country Industrialized Country Low literacy Limited technology Agricultural or mining economy Improving literacy Improving technology Decreasing dependence on agriculture or mining High literacy Modern technology Industrial economy

Industrialized or Developed Countries 2 Industrialized or Developed Countries Strong Infrastructure a nation’s transportation, communication, and utility systems Actively involved in international business and foreign trade Average annual income per person of more than $30,000 US, Canada, UK, France, Germany, Italy, Japan

Less-Developed Countries (LDCs) 2 Little economic wealth May have resources, but no technology to make use of them Weak Infrastructure, poor health care, low literacy rates, low levels of employment skills, uncertain political environments Little to no foreign trade Average annual income per person of less than $1,000 Bangladesh, Cambodia, Chad, Haiti, Nepal, Niger, and Sudan

Developing Countries 2 Evolving from less developed to industrialized Improving educational systems, increasing technology, and expanding industries Also known as Emerging Markets Argentina, Brazil, Ecuador, India, Kenya, Hungary, Poland, South Africa, Turkey, Thailand, and Vietnam

LESSON 2-5 Resources Satisfy Needs GOALS Discuss economic principles that explain the need for international trade. Identify various measures of economic progress and development.

The Economics of Foreign Trade 2 The Economics of Foreign Trade Absolute advantage exists when a country can produce a good or service at a lower cost than other countries Usually occurs as a result of the natural resources or raw materials of a country Examples: South America – coffee Saudi Arabia – oil Canada - lumber

The Economics of Foreign Trade 2 The Economics of Foreign Trade Comparative advantage exists when a country can produce a good or service with more efficiency than other countries Maximizing economic wealth If advantage exists in more than one area, produce goods with greatest return and buy other goods elsewhere

Measuring Economic Progress 2 Measuring Economic Progress Measures of Production Gross domestic product (GDP) Measures the output of goods that a country produces within its borders Includes items produced with foreign resources Gross national product (GNP) Measures the total value of all goods and services produced by the resources of a country GDP plus production on other countries using our resources Per Capita Refers to an amount per person Takes total GDP divided by country population

Per Capita GDP for Selected Countries 2 Per Capita GDP for Selected Countries Rank Country US$ 1 Qatar 143,427 8 San Marino 60,664 2 Luxembourg 92,049 9 Switzerland 58,087 3 Singapore 82,762 10 Hong Kong 54,722 4 Brunei 73,233 11 US 54,597 5 Kuwait 71,020 12 Saudi Arabia 52,183 6 Norway 66,937 13 Bahrain 51,714 7 UAE 64,479 14 Ireland 49,195 Source: International Monetary Fund (2014)

Measuring Economic Progress 2 Measuring Economic Progress International Trade Activity Balance of trade – the difference between a country’s exports and imports Trade Surplus – when a country exports (sells) more than it imports (buys) Trade Deficit – when a country imports (buys) more than it exports (sells)

2 Balance of Trade

Measuring Economic Progress 2 Measuring Economic Progress International Trade Activity Foreign exchange rate – the value of one country’s money in relation to the value of the money of another country How strong is the US dollar today? Foreign debt – the amount a country owes to other countries How much external debt does the US have?

Measuring Economic Progress 2 Measuring Economic Progress Other Economic Measurements Consumer price index (CPI) How inflation is measured in US Monthly report that provides price levels for various products and services in different regions of the country Unemployment rate Number of people not working When people are not earning an income, they cannot purchase needed goods and services