1. BA 101 Introduction to Business
3.Competing in the Global Economy

2. Why Nations Trade Scarce Recourses Global Ambitions Limited
Capabilities
Economies
of Scale
International trade is rarely simple, but it’s a fact of life for all countries, for two reasons:
No single country has the resources and capabilities to produce everything its citizens want or need. Businesses and countries specialize in the production of certain goods and engage in international trade to obtain raw materials and goods that are unavailable to them or too costly for them to produce.
Many companies have ambitions that are too large for their own backyards.
All this international activity involves more than just sales growth. By expanding their markets, companies can benefit from economies of scale when they purchase, manufacture, and distribute in higher quantities. In addition to helping companies, international trade helps consumers by giving them more options and lower prices, and it helps governments by generating more revenue.

3. Theories of Production and Trading
Absolute
Advantage
Comparative
Advantage
How does a country know what to produce and what to trade for? In some cases the answer is easy: a nation may have an absolute advantage, which means it can produce a particular item more efficiently than all other nations, or it is virtually the only country producing that product. Absolute advantages rarely last, however, unless they are based on the availability of natural resources.
In most cases, a country can produce many of the same items that other countries can produce. The comparative advantage theory explains how a country chooses which items to produce and which items to trade for. The theory states that a country should produce and sell to other countries those items it produces more efficiently or at a lower cost, and it should trade for those it can't produce as economically. Comparative advantage is both relative and dynamic. In other words, no matter how good you are, you only have an advantage if you are better than someone else, and no advantage is predestined to last forever.

4. Measuring International Trade
Balance
of Trade
Surplus
Deficit
Balance
of Payments
Cash Inflow
Cash Outflow
Two key measurements of a nation's level of international trade are the balance of trade and the balance of payments.
The total value of a country's exports minus the total value of its imports, over some period of time, determines its balance of trade. In years when the value of goods and services exported by the United States exceeds the value of goods and services it imports, the U.S. balance of trade is said to be positive: People in other countries buy more goods and services from the United States than the United States buys from them, creating a trade surplus. Conversely, when the people of the United States buy more from foreign countries than the foreign countries buy from the United States, the U.S. balance of trade is said to be negative. That is, imports exceed exports, creating a trade deficit.
The balance of payments is the broadest indicator of international trade. It is the total flow of money into the country minus the total flow of money out of the country over some period of time. The balance of payments includes the balance of trade plus the net dollars received and spent on foreign investment, military expenditures, tourism, foreign aid, and other international transactions.

5. Global Trade Issues Free Trade Fair Trade Trade Restrictions
The benefits of competitive advantage are based on the assumption that nations do not take artificial steps to minimize their own weaknesses or blunt the advantages of other countries. Trade that takes place without these artificial interferences is known as free trade.
However, free trade is not a universally welcomed concept. For instance, it can be a jarring experience for companies and workers who suddenly find themselves at a competitive disadvantage in a world market. In addition, some critics assert that free trade makes it easy for companies to exploit workers by pitting them against one another in a “race to the bottom,” in which production moves to whatever country has the lowest wages and fewest restrictions on safety and environmental protection. A similar criticism involves the price leverage that large companies have when buying from small farmers and other producers in multiple countries. One response to this situation is the concept of fair trade, in which buyers voluntarily agree to pay more than the prevailing market price in order to help producers earn a living wage, enough money to satisfy their essential needs.
Unlike fair trade, which is a voluntary reaction to perceived inequalities in international free trade, government s can also mandate restrictions on various aspects of international trade. These trade restrictions are collectively known as protectionism, since they often seek to protect specific industries or groups of workers.

6. Protectionism and Trade Restrictions
Tariffs
Quotas
Embargoes
The most commonly used trade restrictions are tariffs, quotas, embargoes, and sanctions.
Tariffs are taxes, surcharges, or duties levied against imported goods.
Quotas limit the amount of a particular good that countries can import during a year.
In its most extreme form, a quota becomes an embargo, a complete ban on the import or export of certain products.
Sanctions are politically motivated embargoes that revoke a country's normal trade relations status; they are often used as forceful alternatives short of war.
In addition to restricting foreign trade, governments sometimes give their domestic producers a competitive edge by using these protectionist tactics:
Countries can assist their domestic producers by establishing restrictive import standards, such as requiring special licenses for doing certain kinds of business and then making it difficult for foreign companies to obtain such a license.
Rather than restrict imports, some countries subsidize domestic producers so that their prices can compete favorably in the global marketplace.
The practice of selling large quantities of a product at a price lower than the cost of production or below what the company would charge in its home market is dumping.
Sanctions
Restrictive
Imports
Subsidies
Dumping

7. Promoting Free Trade General Agreement on Tariffs and Trade (GATT)
Asia Pacific
Econ Cooperation
Council (APECC)
World Trade
Organization
(WTO)
The major trade agreements and organizations include the GATT, the WTO, the APEC, the IMF, and the World Bank. These agreements and organizations support the basic principles of free trade.
The General Agreement on Tariffs and Trade (GATT) is a worldwide pact that was first established in the aftermath of World War II. In 1995 GATT established the World Trade Organization (WTO), which has replaced GATT as the world forum for trade negotiations. The World Trade Organization (WTO) is a permanent forum for negotiating, implementing, and monitoring international trade and mediating trade disputes among its 144 members.
The Asia Pacific Economic Cooperation Council (APEC) is an organization of 18 countries that are making efforts to liberalize trade in the Pacific Rim (the land areas that surround the Pacific Ocean). Among the member nations are the United States, Japan, China, Mexico, Australia, South Korea, and Canada.
The International Monetary Fund (IMF) was founded in 1945 and is now affiliated with the United Nations. Its primary function is to provide short-term loans to countries that are unable to meet their budgetary expenses.
Officially known as the International Bank for Reconstruction and Development, the World Bank was founded to finance reconstruction after World War II. It now provides low-interest loans to developing nations for improvement of transportation, telecommunications, health, and education.
International
Monetary Fund
(IMF)
The World Bank

8. Trading Blocs Advantages Disadvantages Help smaller countries
Promote competition
Widen markets
Foster economic growth
Economic isolation
Trade restrictions
Decline in world trade
Fewer choices
Trading blocs are another type of organization that promotes international trade. Their primary objective is to ensure the economic growth and benefit of members.
Trading blocs can be advantageous or disadvantageous in promoting world trade, depending on one's perspective. Some economists are apprehensive about the growing importance of regional trading blocs. They fear that the world is splitting into three camps, revolving around the Americas, Europe, and Asia. Any nation that does not fall into one of these economic regions could suffer, they say, because members of the trading blocs could place severe restrictions on trade with nonmember countries. The critics fear that overall world trade could decline as members become more protective of their own regions. As a result, consumers could find themselves with fewer choices, and many producers could lose sales in lucrative foreign markets.
Others claim, however, that trading blocs could improve world trade. The growth of commerce and the availability of customers and suppliers within a trading bloc could be a boon to smaller or younger nations that are trying to build strong economies. The lack of trade barriers within the bloc could help member industries compete with producers in more developed nations, and, in some cases, member countries could reach a wider market than before. Close ties to more stable economies could help shield emerging nations from fluctuations in the global economy and could promote a greater sharing of knowledge and technology; thereby aiding future economic development.
The four most powerful trading blocs today are the Association of Southeast Asian Nations (ASEAN), South America’s Mercosur, the North American Free Trade Agreement (NAFTA), and the European Union (EU).

9. North American Free Trade Agreement (NAFTA)
United States
Canada
Mexico
In 1994 the United States, Canada, and Mexico formed a powerful trading bloc, the North American Free Trade Agreement (NAFTA). The agreement paves the way for the free flow of goods, services, and capital within the bloc by eliminating all tariffs and quotas on trades between the three nations.
Now after more than a decade in action, has NAFTA lived up to its promises, particularly regarding trade between the USA and Mexico? The results have been mixed. Mexico has tripled its exports, but many of the manufacturing jobs Mexico hoped for went to China instead; and hoped for improvements in education and health care have not materialized. Critics in the USA say that the promises of lower prices for consumers and steady exports for small farmers did not come true, and that the benefits of NAFTA have gone mostly to huge agribusiness corporations.
Another NAFTA-like agreement, the Central American Free Trade Agreement (CAFTA), proposes to link the USA and five countries in Central America—making it the largest free-trade zone on the planet. However, many in the USA and Mexico have become opposed to the prospects of free trade.

10. The European Union Minimizing Establishing Global Local Regulations
Product Standards
Variations in
Product Standards
Consumer Protection
One of the largest trading blocs is the European Union (EU), which combines 25 countries and nearly half a billion people. Talks are under way to admit more countries in EU nations are working to eliminate hundreds of local regulations, variations in product standards, and protectionist measures that limit trade between member countries. Eliminating barriers enables the nations of the EU to function as a single market, with trade flowing between member countries as it does between states in the United States.
Increasingly, the rules governing the food we eat, the software we use, and the cars we drive are set in Brussels, the administrative home of the European Union. The European Union, which regulates more frequently and more rigorously than the United States—especially when it comes to consumer protection—significantly impacts global product standards.
When it comes to consumer or environmental protections, EU regulators believe it’s better to be safe than sorry. That approach evolved partly from a series of food scares in Europe over the past decade or two, such as the mad-cow disease. It also reflects the fact that Europeans are more inclined than Americans to expect government to protect them.
Trade Protectionism
Environmental
Protection

11. The Economic and Monetary Union (EMU)
Impact
Currency
Unification
The EURO
In 1999, 12 of the 15 countries formed the economic and monetary union (EMU) and turned over control of their individual monetary policies to the newly created European Central Bank. With a combined population of about 376 million people, these 12 countries account for about 20 percent of the world's gross domestic product (GDP), making them world’s second largest economy. One of the driving forces behind the decision to join forces was the anticipated advantages these 11 countries would enjoy by creating a unified currency called the euro.
European leaders believe it will build a bond among Europe’s cities and improve trade. Moreover, the euro could wipe out some $65 billion annually in currency exchange costs among participants and cut the middleman out of trillions of dollars' worth of foreign exchange transactions. U.S. businesses and travelers alone could save as much as 50 percent of the costs they now pay to convert dollars into multiple European currencies. And, with prices in these 11 nations now visible in one currency, consumers can compare prices on similar items whether they are sold in Lisbon or Vienna.
Centralized
Banking
Currency
Exchange

12. Foreign Exchange Rates and Currency Valuations
Floating Rates
Government Action
Currency Devaluation
The euro was designed to solve one of the most complex issues that bedevil international commerce: exchange rates and currency valuations. The number of units of currency that must be changed for a unit of another currency is known as the exchange rate between currencies.
Most international currencies operate under a floating exchange rate system; thus, a currency's value or price fluctuates in response to the forces of global supply and demand. Because supply and demand for a currency are always changing, the rate at which it is exchanged for other currencies may change a little each day. A currency is strong relative to another when its exchange rate is higher than what is considered normal and weak when its rate is lower than normal.
Even though most governments let the value of their currency respond to the forces of supply and demand, sometimes a government will intervene and adjust the exchange rate of its country's currency. Why would a government do this? One reason is to keep the price of a nation's goods and services more affordable in the global marketplace and to protect the nation's economy against trade imbalances. Another is to boost or slow down the country's economy.
Devaluation, or the drop in the value of a nation's currency relative to the value of other currencies, can at times boost a country's economy because it makes the country's products and services more affordable in foreign markets while it increases the price of imports.
Some countries fix, or peg, the value of their currencies to the value of more stable currencies, such as the dollar or the yen, instead of letting it float freely. Hong Kong, for example, pegs its currency to the U.S. dollar.
Fixed Value System

13. The Global Business Environment
Opportunities
Challenges
Growth Potential
Increased Sales
Operating Efficiencies
New Technologies
More Consumer Choices
Laws and Customs
Consumer Preferences
Ethical Standards
Labor Skills
Politics and Economics
Doing business internationally is not easy, but it has become essential for thousands of U.S. companies. Selling goods and services in foreign markets can generate increased sales, produce operational efficiencies, expose companies to new technologies, and provide greater consumer choices.
But venturing abroad also exposes companies to many new challenges. For instance, each country has unique ways of doing business, which must be learned: Laws, customs, consumer preferences, ethical standards, labor skill, and political and economic stability vary from country to country, and all can affect a firm's international prospects. Furthermore, volatile currencies, international trade relationships, and the threat of terrorism can indeed make global expansion a risky proposition.

14. Cultural Differences In Global Business
Consider the other person’s customs
Deal with the individual
Clarify your intent and meaning
Adapt your style to the other person
Show respect
Cultural differences present a number of challenges in the global marketplace. Successful companies recognize and respect differences in language; social values; ideas of status; decision-making habits; and attitudes toward time, use of space, body language, manners, and ethical standards. Above all, you must avoid stereotyping and ethnocentrism.
The best way to prepare yourself for doing business with people from another culture is to study that culture in advance. In addition, seasoned international businesspeople offer the following tips for improving intercultural communication:
Be alert to the other person’s customs.
Deal with the individual.
Clarify your intent and meaning.
Adapt your style to the other person’s.
Show respect.

15. International Business Activity
Importing and Exporting
Licensing and Franchising
Strategic Alliances
and Joint Ventures
Direct Foreign Investment
Ownership
Financial
Risk
Low
Moderate
High
Common Forms
Levels of Commitment
Importing, the buying of goods or services from a supplier in another country, and exporting, the selling of products outside the country in which they are produced, have existed for centuries. Exporting, one of the least risky forms of international business activity, permits a firm to enter a foreign market gradually, assess local conditions, then fine-tune its product to meet the needs of foreign consumers. In most cases, the firm’s financial exposure is limited to market research costs, advertising costs, and the costs of either establishing a direct sales and distribution system or hiring intermediaries.
Licensing is another popular approach to international business. License agreements entitle one company to use some or all of another firm’s intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) in return for a royalty payment. Some companies choose to expand into foreign markets by franchising their operation. By franchising its operations, a firm can minimize the costs and risks of global expansion and bypass certain trade restrictions.
A strategic alliance is a long-term partnership between two or more companies to jointly develop, produce, or sell products in the global marketplace. To reach their individual but complimentary goals, the companies typically share ideas, expertise, resources, technologies, investment costs, risks, management, and profits. A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.
Companies with a physical presence in numerous countries are called multinational corporations (MNCs). Since 1969, the number of multinational corporations in the world’s 14 richest countries has more than tripled, from 7,000 to 24,000. Some multinational corporations increase their involvement in foreign countries by establishing foreign direct investment (FDI). That is, they either establish production and marketing facilities in the countries where they operate or purchase existing foreign firms.

16. Impact of Terrorism on Global Business
Government
Expenditures
Business
Expenditures
Transportation
Banking
In the global marketplace, the problems of one country can greatly affect world economics. The September 11 terrorist attacks on the World Trade towers in New York city and the Pentagon in Washington D.C. were targeted at the American people and its free-market system, but economically the attacks knew no borders. The impact of terrorism reaches far beyond the overt acts of violence themselves and affects business in many ways:
Government expenditures. In 2005, the U.S. federal government spent more than $40 billion on homeland security, money that could have been spent on research, health care, lower taxes, and other areas that benefit society. At the same time, much of the money did flow to businesses via contracts for security-related products and services.
Business expenditures. Beefing up security costs money. For example, Wall Street investment banks spend three or four times more on security than before September 11. Experts are concerned that many facilities that are vital to the economy (such as the electricity grid) or that present safety risks in the event of attacks (such as chemical plants) are still unprotected because the private sector is not doing enough to protect them.
Transportation. The U.S. economy depends heavily on the flow of goods across its borders, but it’s impossible to inspect every one of the thousands of shipments that enter the country every day. By doing a better job of securing distribution channels from end to end, officials hope to improve security without the massive costs and delays that would result from a 100-percent inspection.
Banking. Cutting off terrorists’ financial support is a key element in the fight against terror; however, the sometimes-murky world of international banking makes this a challenge.
In spite of these costs and obstacles, the U.S. economy, U.S. companies, and U.S. workers are too dependent on international trade to retreat behind our national borders. In fact, expanding international trade may itself be a helpful deterrent in battling terrorism as global trading partners pursue safety and freedom.