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Intro to Business
Table of Contents
Unit 3 Overview: Competing in the Global Marketplace
3.1 Global Trade in the United States
3.2 Why Nations Trade
3.3 Barriers to Trade
3.4 Fostering Global Trade
3.5 International Economic Communities
3.6 Participating in the Global Marketplace
3.7 Threats and Opportunities in the Global Marketplace
3.8 The Impact of Multinational Corporations
3.9 Trends in Global Competition

International trade shapes the global economy, with countries leveraging their strengths for mutual benefit. Absolute advantage allows nations to produce goods efficiently, while comparative advantage drives specialization and trade based on opportunity costs.

Globalization and free trade have far-reaching impacts, offering benefits like economic growth and consumer choice. However, they also present challenges such as job displacement and environmental concerns. Policymakers must balance these factors when crafting international economic strategies.

International Trade and Comparative Advantage

Concept of absolute advantage

  • Ability to produce a good or service more efficiently than another country
  • Efficiency measured by quantity of resources (labor, capital, land) required to produce the good or service
  • Country with absolute advantage can produce good or service using fewer resources than other countries
  • Examples:
    • China has absolute advantage in manufacturing due to large, low-cost labor force and advanced infrastructure
    • Saudi Arabia has absolute advantage in oil production due to vast oil reserves and well-developed extraction infrastructure
    • United States has absolute advantage in technology and innovation due to highly skilled workforce and robust research and development capabilities

Comparative advantage in trade

  • Ability to produce a good or service at a lower opportunity cost than another country
    • Opportunity cost is value of next best alternative foregone when making a decision
  • Country has comparative advantage when it can produce good or service at lower opportunity cost than other countries, even without absolute advantage
  • Comparative advantage influences trade decisions by encouraging countries to specialize in production of goods and services for which they have comparative advantage
    • Countries trade with one another to obtain goods and services they do not produce themselves
    • Specialization and trade leads to increased efficiency, lower prices, and greater variety of goods and services available to consumers
  • Example:
    • Country A can produce either 10 units of wheat or 5 units of cloth with its resources
    • Country B can produce either 8 units of wheat or 2 units of cloth
    • Country A has comparative advantage in producing cloth (opportunity cost: 2 units of wheat per unit of cloth) compared to Country B (opportunity cost: 4 units of wheat per unit of cloth)
    • Country B has comparative advantage in producing wheat (opportunity cost: 0.25 units of cloth per unit of wheat) compared to Country A (opportunity cost: 0.5 units of cloth per unit of wheat)
    • Both countries benefit from specializing in good for which they have comparative advantage and trading with each other

Globalization and Free Trade

Globalization and free trade impacts

  • Benefits:
    • Increased economic growth and efficiency due to specialization and trade based on comparative advantage
    • Lower prices for consumers due to increased competition and economies of scale
    • Greater variety of goods and services available to consumers
    • Increased foreign direct investment and technology transfer between countries
    • Improved international relations and cultural exchange
  • Drawbacks:
    • Potential job losses in certain industries due to increased competition from foreign producers
    • Widening income inequality within countries as some workers benefit more from globalization than others
    • Environmental concerns due to increased transportation of goods and potential exploitation of natural resources
    • Loss of national sovereignty and control over economic policies as countries become more interdependent
    • Cultural homogenization as local traditions and practices may be replaced by global norms and values
  • Policymakers must carefully consider potential benefits and drawbacks when designing international economic policies
    • Trade agreements (WTO, regional trade blocs) can help regulate international trade and address potential drawbacks
    • Domestic policies (education and training programs, social safety nets, environmental regulations) can help mitigate negative impacts on affected communities and industries
    • Governments may implement trade barriers (such as tariffs or quotas) to protect domestic industries or address trade imbalances

International Economic Factors

Balance of Trade and Exchange Rates

  • Balance of trade refers to the difference between a country's exports and imports
    • A trade surplus occurs when exports exceed imports
    • A trade deficit occurs when imports exceed exports
  • Exchange rates play a crucial role in international trade by determining the relative value of currencies
    • Fluctuations in exchange rates can impact the competitiveness of a country's exports and the cost of imports

International Monetary System and Economic Interdependence

  • The international monetary system facilitates global trade and financial transactions
    • It includes institutions, agreements, and mechanisms for currency exchange and international payments
  • Economic interdependence among nations has increased due to globalization
    • Countries rely on each other for resources, goods, services, and financial markets
    • This interconnectedness can lead to both opportunities and vulnerabilities in the global economy

Key Terms to Review (23)

Carrier: A carrier in the context of international trade is a company that transports goods or people from one place to another, especially across countries. They play a critical role in enabling and facilitating global commerce by providing the necessary logistics and transportation solutions.
G20: The G20, or Group of Twenty, is an international forum for governments and central bank governors from 19 countries and the European Union to discuss and promote international financial stability. It plays a key role in global economic governance by addressing issues that go beyond the responsibilities of any one organization.
Principle of comparative advantage: The principle of comparative advantage is the economic theory suggesting that countries should specialize in producing and exporting goods and services for which they have a lower opportunity cost than other nations. This specialization can lead to increased efficiency and mutual benefits through trade.
Balance of trade: The balance of trade is the difference between the value of a country's exports and the value of its imports over a certain period. A positive balance indicates more exports than imports (a trade surplus), while a negative balance indicates more imports than exports (a trade deficit).
Free trade: Free trade is a policy adopted by some international markets, in which countries' governments do not restrict imports from, or exports to, other countries. It allows for the unobstructed exchange of goods and services between nations without punitive tariffs, quotas, or prohibitive regulations.
Floating exchange rates: Floating exchange rates are a system in which the value of a currency is determined by the foreign exchange market based on supply and demand relative to other currencies. Unlike fixed exchange rates, these are not maintained by a country's government or central bank.
Absolute advantage: Absolute advantage occurs when a country can produce a good more efficiently, using fewer resources, than another country. It is the ability to produce a product at a lower cost, in terms of labor and resources, than its trading partners.
Specialization: Specialization in the context of building organizational structures refers to the process of dividing work into specific tasks or roles aimed at increasing efficiency and productivity. It allows individuals or departments to focus on a narrow aspect of the company's operations, harnessing their skills and expertise for maximum impact.
IBM: IBM, short for International Business Machines Corporation, is a global technology and consulting company headquartered in Armonk, New York. It provides hardware, software, cloud-based services, and cognitive computing.
Trump: Trade barriers are government-imposed restrictions on international trade, designed to protect domestic industries from foreign competition. These can include tariffs, quotas, embargoes, or stringent regulations.
Globalization: Globalization refers to the increasing interconnectedness and interdependence of economies, societies, and cultures across the world. It involves the integration of international trade, investment, information technology, and labor markets, leading to a more global economy and shared cultural experiences.
Exchange Rates: Exchange rates refer to the value of one currency in relation to another. They determine the rate at which one currency can be exchanged for another and play a crucial role in international trade, investment, and financial markets across the topics of Understanding the Business Environment, Why Nations Trade, Fostering Global Trade, Participating in the Global Marketplace, and Threats and Opportunities in the Global Marketplace.
Opportunity Cost: Opportunity cost is the value of the best alternative forgone when making a decision. It represents the trade-offs involved in choosing one option over another, as every choice comes with an associated cost in the form of the next best opportunity that must be given up.
Balance of Trade: The balance of trade refers to the difference between a country's exports and imports of goods and services. It represents the net flow of goods and services between a country and its trading partners, indicating whether a country has a trade surplus or deficit.
Absolute Advantage: Absolute advantage refers to a country's ability to produce a good more efficiently than another country, using fewer inputs of labor and resources. It is a fundamental concept in the theory of why nations engage in international trade.
Economic Interdependence: Economic interdependence refers to the interconnected nature of national economies, where countries rely on each other for resources, goods, and services. It highlights the mutual reliance and influence that economies have on one another in the global marketplace.
Comparative Advantage: Comparative advantage is the ability of an individual or country to produce a particular good or service at a lower opportunity cost than another individual or country. It is the foundation of international trade, as it allows countries to specialize in the production of goods and services in which they have a relative efficiency, leading to increased overall productivity and economic growth.
Trade Barriers: Trade barriers are government-imposed restrictions on international trade, designed to protect domestic industries and markets from foreign competition. These barriers can take various forms, such as tariffs, quotas, or regulations, and can significantly impact the flow of goods and services between countries.
Foreign Direct Investment: Foreign direct investment (FDI) refers to the investment made by an individual or company from one country into business interests located in another country. This type of investment involves the acquisition of foreign assets with the intent of controlling or influencing the management of the foreign entity. FDI is a crucial component of global trade and economic integration, as it allows companies to expand their operations internationally and access new markets and resources.
World Trade Organization: The World Trade Organization (WTO) is an international organization that oversees and facilitates global trade by establishing rules, resolving trade disputes, and promoting free trade among its member countries. It plays a crucial role in shaping the landscape of international commerce and economic cooperation.
Specialization: Specialization refers to the process of focusing on a particular task, skill, or area of expertise within a broader field or organization. It involves the division of labor and the concentration of effort on specific activities to increase efficiency, productivity, and expertise.
International Monetary System: The international monetary system refers to the global framework that governs currency exchange rates, international payments, and the flow of capital between countries. It serves as the foundation for financial transactions and economic interactions between nations in the global economy.
Free trade: Free trade is an economic policy that allows goods and services to be traded across international borders with minimal government restrictions, such as tariffs or quotas. This concept promotes open markets and competition, enabling countries to specialize in producing what they do best and benefiting from importing goods that are cheaper or better made elsewhere. Free trade facilitates global economic integration, impacting domestic economies, trade relations, and government policies.