Developing an Effective Parenting Style

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The Global Economy
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Chapter Objectives

• Outline advantages and disadvantages related to
  globalization.
• Explain why countries specialize and how this
  leads to international trade.
• Analyze the effect of multinational companies on
  the global economy.
• Describe the relationship between currency
  strength and the balance of trade.

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Chapter Objectives

• Cite examples to show how international trade
  affects the overall economy, businesses, workers,
  and consumers.
• Describe what you can do to develop the skills
  needed to succeed in a global economy.

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Flow of Goods and Services

• Globalizationthe process of becoming worldwide
  in scope

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Flow of Goods and Services

• Economic globalization is changing the way people
  communicate, shop, and conduct business
• Understanding economic globalization will help
  you hold your own in the job market and in the
  marketplace

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Flow of Goods and Services

• International trade has existed for thousands of
  years
• Most trade today occurs between businesses in
  different countries not between individuals or
  nations
• Trade is discussed in terms of imports and exports

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What Is Traded

• Finished products such as
• food
• furniture
• toys
• computers
• Intermediate goods used to produce other goods
  such as
• car parts
• semiconductors for computers

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What Is Traded

• Services such as
• banking
• transportation
• insurance
• law
• telecommunications
• entertainment

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What Is Traded

• Investments such as
• money and capital invested by businesses into
  building factories in other countries
• salaries and wages paid by businesses to workers
  in foreign countries
• purchase of securities, real estate, and other
  investments in other countries

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Why Trades Occur

• Each party in a trade benefits from the
  transaction
• No country can produce all the goods and services
  that its people and businesses want
• Countries specialize in particular goods and
  services and trade for what they cannot produce

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Natural Resources, Climate, and Geography

• These factors determine what a country can and
  cannot produce
• Saudi Arabia produces oil
• Countries with tropical climates can produce
  rubber, bananas, and things that only grow in
  that climate

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Available Human Resources

• Available human resources determine what a
  country can and cannot produce

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Available Human Resources

• Labor-intensive industries locate where labor
  costs are low
• Industries requiring educated workers locate in
  countries with high literacy rates and systems of
  higher education

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Consumer Preferences

• Consumer preferences determine what a country
  produces
• Some U.S. consumers like high-fashion clothing
  from European designers
• Some U.S. consumers prefer foreign-made cars

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Comparative Advantage

• Comparative advantage explains why a country that
  can produce everything it needs still benefits
  from trade
• Nations benefit when they specialize in
  activities for which their opportunity costs are
  lowest
• By expanding into foreign markets, businesses can
  take advantage of economies of scale

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U.S. Trade

• The U.S. is worlds largest importer
• Over 20 percent of worlds total output is from
  the U.S.
• Millions of people around the world depend on the
  U.S. for their livelihoods

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U.S. Trade

• The U.S.
• imports more manufactured goods than it exports
• exports more services than it imports

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Flow of Labor

• Globalization has increased the flow of migrants
• Migrants leave their homelands to
• escape persecution, war, economic crisis, natural
  disasters, crime, corruption
• seek better opportunities to work and earn a
  living wage

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Impact of Multinationals

• Much of globalization today is driven by
  multinational corporations
• These are large companies, often comprised of
  many businesses
• Subsidiary a business controlled by another
  business

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One Product, Many Origins

• Parts and labor to make a product can come from
  many different countries
• Outsourcing involves doing one or more aspects of
  a business in a different country

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One Product, Many Origins

• Offshore outsourcing occurs because businesses
  seek advantages in other countries
• It benefits workers in other countries by
  creating new job opportunities
• It hurts workers in the U.S. when jobs are moved
  elsewhere

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Flows of Capital Investment

• Flows of capital across borders is a major source
  of globalization today

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Flows of Capital Investment

• One-third of global trade is the movement of raw
  materials, goods, services, and product parts
  from one subsidiary of a multinational to another
• International investment occurs when investors
  buy or sell the stocks and bonds of foreign
  companies

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Collusion and Cartels

• Some large multinational corporations dominate
  their industries and influence governments and
  global trade policies
• A cartel exists when a group of countries or
  firms exert worldwide control over the production
  and pricing of a product or service

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International Monetary System

• When buyers and sellers using different
  currencies want to trade, they must determine the
  value of one currency in relation to the other
• Different types of currency are bought and sold
  on the foreign exchange market

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The Foreign Exchange Market

• An exchange rate tells you how many units of one
  currency it takes to buy units of a foreign
  currency

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The Foreign Exchange Market

• The value of the U.S. dollar is set by buyers and
  sellers in the foreign exchange market through
  supply and demand

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The Foreign Exchange Market

• Factors that affect exchange rates
• Political and economic stabilitystable countries
  draw foreign investors
• Interest rateshigher interest rates draw foreign
  investors, raise demand for a currency
• U.S. dollar is the international reserve currency

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Buying and Selling U.S. Dollars

• The foreign exchange market/rate affects you when
  you
• travel to another country and must exchange
  dollars for foreign currency
• buy goods and services made in other countries or
  by foreign companies
• conduct business in another country

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Trade and Exchange Rates

• When the U.S. dollar is strong,
• goods and services imported into the U.S. cost
  less
• U.S. consumers get more for their dollars and buy
  more imports
• foreign buyers get less for their money

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Trade and Exchange Rates

• When the U.S. dollar is weak,
• goods and services imported into the U.S. cost
  more
• U.S. consumers get less for their dollars and buy
  fewer imports
• foreign buyers get more for their money

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The U.S. Trade Deficit

• Balance of trade is the difference between total
  imports and total exports recorded in balance of
  payments
• Trade deficit develops when a country buys or
  imports more than it sells
• Trade surplus develops when a country sells or
  exports more than it buys

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The U.S. Trade Deficit

• The U.S. has run a substantial trade deficit
  since 1976
• The U.S. has the largest deficit and China has
  the largest trade surplus
• Other countries accumulate U.S. dollars with
  which they buy more U.S. goods, services, and
  investments

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Governments Role in Global Trade

• Governments regulate trade
• Free trade is policy of limited government trade
  restrictions
• Protectionism refers to government policies that
  restrict trade

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Why Nations Favor Free Trade

• Stimulates growth and raises productivity and
  living standards in free-trade countries
• Allows countries to specialize in goods and
  services they produce most efficiently and trade
  for the rest
• Gives consumers a greater selection of goods and
  services at lower prices

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Why Nations Favor Free Trade

• Generates innovation as a result of global
  competition and the exchange of ideas and
  technologies
• Creates new investment opportunities
• Promotes cooperation and peaceful relations among
  nations that are trading partners

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Why Nations Favor Restricted Trade

• To protect domestic industries and jobs from
  foreign competition
• To reduce dependence on foreign imports
• To control the export of products and
  technologies that can threaten national security
• To address unfair trade practices of other
  countries that hurt domestic companies

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How Governments Restrict Trade

• Trade barriers include
• tariffs on imports
• import quotas
• non-tariff barriers
• embargos

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Subsidies

• A form of protectionism
• Government gives payments, tax breaks, or other
  incentives to domestic businesses and industries
• Subsidized goods can be offered at lower prices,
  giving them an advantage over imported goods

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Currency Manipulation

• When a currency is devalued,
• exports become cheaper in world markets
• exports and foreign investment increase and
  imports decrease
• unfair competition is created

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Trade Organizations and Agreements

• Create economic opportunities for participating
  nations due to free trade and investment
• Example North American Free Trade Agreement
  (NAFTA)
• U.S., Canada, Mexico

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Trade Organizations and Agreements

• European Union (EU) is a powerful organization of
  27 countries
• 15 EU countries share a common currency

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World Trade Organization

• The World Trade Organization is an international
  organization created in 1995
• Consists of 151 member nations
• WTOs mission is
• to establish fair trade practices
• to mediate trade disputes among member nations

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Other Important Global Organizations

• World Bank
• International Monetary Fund (IMF)
• G-20
• United Nations (UN)

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In Your Opinion

• How does globalization affect your life now? How
  will it affect you in the future?

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Globalization and You, the Student

• You already buy goods and services from other
  countries
• Globalization will present you with both
  opportunities and challenges

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As a Worker

• You may work for a multinational corporation with
  subsidiaries in other countries
• You may work for a foreign-owned corporation in
  the U.S.
• Your managers and coworkers may be foreign-born

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As a Worker

• As an entrepreneur, you may sell your products
  and services in other countries
• You may lose your job if your employer
• outsources your job
• cannot compete with competition from foreign
  companies

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What You Can Do

• Continue your education
• Consider science- and math-related occupations
• Keep your skills sharp
• Learn a foreign language
• Learn about world affairs
• Travel or live abroad

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Central Ideas of the Chapter

• Globalization is the growing economic
  interconnectedness of people around the world.
• Globalization presents new opportunities and
  dilemmas.

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Glossary of Key Terms
Back

• balance of payments. An account of the flow of
  goods, services, and money coming into and going
  out of the country.
• capital. Money used to generate income or to
  invest in a business or asset.
• cartel. A group of countries or firms that
  control the production and pricing of a product
  or service.
• comparative advantage. The benefit to the party
  that has the lower opportunity cost in pursuing a
  given course of action.

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Glossary of Key Terms
Back

• economic globalization. The flow of goods,
  services, labor, money, innovative ideas, and
  technology across borders.
• economies of scale. The concept that cost of
  producing one unit of something declines as the
  number of units produced rises.
• European Union (EU). A group of nations joined
  together to form a trade sector, most of which
  use a common currency called the euro.
• exchange rate. The value of one currency compared
  to another.

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Glossary of Key Terms
Back

• exports. The goods and services grown or made in
  a particular country and then sold in world
  markets
• free trade. A policy of limited government trade
  restrictions.
• imports. Goods and services that come into a
  country from foreign countries.
• international trade. The buying and selling of
  goods and services across national borders and
  among the people of different nations.

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Glossary of Key Terms
Back

• migrants. People who move from one place or
  country to another.
• multinational corporation. A business that
  operates in more than one country.
• North American Free Trade Agreement (NAFTA). An
  agreement that lowered trade barriers and opened
  markets among the United States, Canada, and
  Mexico.
• offshore outsourcing. The procedure of moving
  sections of a business to another country.

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Glossary of Key Terms
Back

• outsourcing. The procedure of a company moving
  sections of its business to other companies or to
  its own subsidiaries.
• specialization. The range of products and
  services a country can produce and then trade for
  whatever it cannot produce.
• trade barrier. Any action taken to control or
  limit imports.

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Glossary of Key Terms
Back

• trade deficit. The loss of economic power due to
  a country importing more than it is exporting
  over a period of time.
• trade surplus. A gain of economic power due to a
  country exporting more than it is exporting over
  a period of time.
• World Trade Organization (WTO). An international
  organization that mediates trade disputes among
  151 member nations and establishes trade
  practices that are acceptable and fair to all
  nations.