international BUSINESS BASICS
TRADING AMONG NATIONS
Most business activities occur within a country's own borders. Domestic business is the making, buying, and selling of goods and services within a country. International business refers to business activities needed for creating, shipping, and selling goods and services across national borders. International business is frequently referred to as foreign or world trade . Evidence of foreign trade is everywhere.
Although the United States has many natural resources, a skilled labor force, and modern production facilities, American companies and consumers go beyond the U.S. borders to obtain many things. The United States conducts trade with more than 180 countries.
In the past, economies were viewed in terms of national borders. With international trade expanding every day, these boundaries are no longer fully valid in defining economies. Countries are interdependent and so are their economies. Consumers have come to expect goods and services from around the world.
Absolute Advantage
Two economic principles define buying and selling among companies in different countries. Absolute advantage exists when a country can produce a good or service at a lower cost than other countries. This may result from an abundance of natural resources or raw materials in a country. For example, some South American countries have an absolute advantage in coffee production, and Saudi Arabia has an absolute advantage in oil production.
Comparative Advantage
A country may have an absolute advantage in more than one area. If so, it must decide how to maximize its economic wealth. A country may be able to produce both computers and clothing better than other countries. The world market for computers might be stronger than the market for clothing. This means it would be better for the country to produce computers but to buy clothing from other countries. Comparative advantage is a situation in which a country specializes in the production of a good or service at which it is relatively more efficient.
Importing
Imports are items bought from other countries. Did you know that imports account for the total supply of bananas, coffee, cocoa, spices, tea, silk, and crude rubber in the United States? The United States buys about half of its crude oil and fish from other countries. Imports also account for 20 to 50 percent of the supply of carpets, sugar, leather gloves, dishes, and sewing machines. U.S. companies must import tin, chromium, manganese, nickel, copper, zinc, and other metals to manufacture certain goods. Figure 3-1 shows how dependent the United States is on imported raw materials.
Most business activities occur within a country's own borders. Domestic business is the making, buying, and selling of goods and services within a country. International business refers to business activities needed for creating, shipping, and selling goods and services across national borders. International business is frequently referred to as foreign or world trade . Evidence of foreign trade is everywhere.
Although the United States has many natural resources, a skilled labor force, and modern production facilities, American companies and consumers go beyond the U.S. borders to obtain many things. The United States conducts trade with more than 180 countries.
In the past, economies were viewed in terms of national borders. With international trade expanding every day, these boundaries are no longer fully valid in defining economies. Countries are interdependent and so are their economies. Consumers have come to expect goods and services from around the world.
Absolute Advantage
Two economic principles define buying and selling among companies in different countries. Absolute advantage exists when a country can produce a good or service at a lower cost than other countries. This may result from an abundance of natural resources or raw materials in a country. For example, some South American countries have an absolute advantage in coffee production, and Saudi Arabia has an absolute advantage in oil production.
Comparative Advantage
A country may have an absolute advantage in more than one area. If so, it must decide how to maximize its economic wealth. A country may be able to produce both computers and clothing better than other countries. The world market for computers might be stronger than the market for clothing. This means it would be better for the country to produce computers but to buy clothing from other countries. Comparative advantage is a situation in which a country specializes in the production of a good or service at which it is relatively more efficient.
Importing
Imports are items bought from other countries. Did you know that imports account for the total supply of bananas, coffee, cocoa, spices, tea, silk, and crude rubber in the United States? The United States buys about half of its crude oil and fish from other countries. Imports also account for 20 to 50 percent of the supply of carpets, sugar, leather gloves, dishes, and sewing machines. U.S. companies must import tin, chromium, manganese, nickel, copper, zinc, and other metals to manufacture certain goods. Figure 3-1 shows how dependent the United States is on imported raw materials.
Without foreign trade, many things you buy would cost more or not be available. Other countries can produce some goods at a lower cost because they have the needed raw materials or have lower labor costs. Some consumers purchase foreign goods, even at higher prices, if they perceive the quality to be better than domestic goods. They may simply enjoy products made in other countries. French perfumes, Norwegian sweaters, and Swiss watches are examples.
Exporting
Goods and services sold to other countries are called exports . Just as imports benefit you, exports benefit consumers in other countries. Workers throughout the world use factory and farm machinery made in the United States. They eat food made from U.S. agricultural products and use chemicals, fertilizers, medicines, and plastics from the United States. People in other countries like to view U.S. movies. They also watch CNN and ESPN. They read books, magazines, and newspapers published by U.S. companies. The goods and services exported by the United States create many jobs. One of every six jobs in the United States depends on international business. Figure 3-2 shows U.S. balance of trade with its top trading partners.
MEASURING TRADE RELATIONS
A major reason people work is to earn money to buy things. First, they sell their labor for wages. They then spend the major part of those wages on goods and services. People usually try to keep their income and spending in balance. They know that if they spend more than they earn, they can experience financial problems. Nations are also concerned about balancing income with expenditures. When people buy more than their income allows, they go into debt. In the same way, when a country has an unfavorable balance of trade it owes money to others. Foreign debt is the amount a country owes to other countries.
Balance of TradeThe difference between a country's total exports and total imports is called the balance of trade . If a country exports (sells) more than it imports (buys), it has a trade surplus . Its trade position is said to be favorable. If it imports more than it exports, it has a trade deficit and its trade position is unfavorable.
A country can have a trade surplus with one country and a trade deficit with another. Overall, a country tries to keep its international trade in balance. Figure 3-3 shows the two possible trade positions. After a long history of a favorable balance of trade, the United States has had a trade deficit in recent years.
Balance of PaymentsIn addition to exporting and importing goods and services, other forms of exchange take place among nations. Money goes from one country to another through investments and tourism. A citizen of one country might invest in a corporation in another country. A business may invest in a factory in another country. One government might give financial or military aid to another nation. Banks may deposit funds in foreign banks.
When tourists travel, they add to the flow of money from their country to the country they are visiting. Some countries limit the amount of money their citizens can take out of the country when they travel.
The balance of payments is the difference between the amount of money that comes into a country and the amount that goes out of it. A positive or favorable balance of payments occurs when a nation receives more money in a year than it pays out. A negative balance of payments is unfavorable. It is the result of a country sending more money out than it brings in.
Exporting
Goods and services sold to other countries are called exports . Just as imports benefit you, exports benefit consumers in other countries. Workers throughout the world use factory and farm machinery made in the United States. They eat food made from U.S. agricultural products and use chemicals, fertilizers, medicines, and plastics from the United States. People in other countries like to view U.S. movies. They also watch CNN and ESPN. They read books, magazines, and newspapers published by U.S. companies. The goods and services exported by the United States create many jobs. One of every six jobs in the United States depends on international business. Figure 3-2 shows U.S. balance of trade with its top trading partners.
MEASURING TRADE RELATIONS
A major reason people work is to earn money to buy things. First, they sell their labor for wages. They then spend the major part of those wages on goods and services. People usually try to keep their income and spending in balance. They know that if they spend more than they earn, they can experience financial problems. Nations are also concerned about balancing income with expenditures. When people buy more than their income allows, they go into debt. In the same way, when a country has an unfavorable balance of trade it owes money to others. Foreign debt is the amount a country owes to other countries.
Balance of TradeThe difference between a country's total exports and total imports is called the balance of trade . If a country exports (sells) more than it imports (buys), it has a trade surplus . Its trade position is said to be favorable. If it imports more than it exports, it has a trade deficit and its trade position is unfavorable.
A country can have a trade surplus with one country and a trade deficit with another. Overall, a country tries to keep its international trade in balance. Figure 3-3 shows the two possible trade positions. After a long history of a favorable balance of trade, the United States has had a trade deficit in recent years.
Balance of PaymentsIn addition to exporting and importing goods and services, other forms of exchange take place among nations. Money goes from one country to another through investments and tourism. A citizen of one country might invest in a corporation in another country. A business may invest in a factory in another country. One government might give financial or military aid to another nation. Banks may deposit funds in foreign banks.
When tourists travel, they add to the flow of money from their country to the country they are visiting. Some countries limit the amount of money their citizens can take out of the country when they travel.
The balance of payments is the difference between the amount of money that comes into a country and the amount that goes out of it. A positive or favorable balance of payments occurs when a nation receives more money in a year than it pays out. A negative balance of payments is unfavorable. It is the result of a country sending more money out than it brings in.
INTERNATIONAL CURRENCY
One challenge faced by businesses involved in international trade is the various currencies used around the world. Each nation has its own banking system and money. For instance, Russia uses the ruble; the European Union, the euro; Brazil, the real; India, the rupee; and Saudi Arabia, the riyal.
Foreign Exchange RatesThe process of exchanging one currency for another occurs in the foreign exchange market , which consists of banks that buy and sell different currencies. Most large banks provide currency services for businesses and consumers. The exchange rate is the value of a currency in one country compared with the value in another. Supply and demand affect the value of currency. The approximate values of various currencies on a recent date in relation to the U.S. dollar (USD) are given in Figure 3-4.
One challenge faced by businesses involved in international trade is the various currencies used around the world. Each nation has its own banking system and money. For instance, Russia uses the ruble; the European Union, the euro; Brazil, the real; India, the rupee; and Saudi Arabia, the riyal.
Foreign Exchange RatesThe process of exchanging one currency for another occurs in the foreign exchange market , which consists of banks that buy and sell different currencies. Most large banks provide currency services for businesses and consumers. The exchange rate is the value of a currency in one country compared with the value in another. Supply and demand affect the value of currency. The approximate values of various currencies on a recent date in relation to the U.S. dollar (USD) are given in Figure 3-4.
Travelers and businesspeople must deal with currency exchanges as they go from one country to another. Travelers in another country can go to a currency exchange window and buy any amount of local currency they want. The amount of local currency they receive depends on the value of the two currencies at that time. Current rates are posted at exchange windows. Although locations vary throughout the world, exchange windows generally are found at airports, train stations, hotels, and local banks. Operators of exchange windows charge a fee for their services.
Factors Affecting Currency ValuesThree main factors affect currency exchange rates among countries: the country's balance of payments, economic conditions, and political stability.
Balance of Payments When a country has a favorable balance of payments, the value of its currency is usually constant or
rising. An increased demand for both the nation's products and its currency causes this situation. When a nation has an unfavorable balance of payments, its currency usually declines in value.
Economic Conditions When prices increase and the buying power of the country's money declines, its currency is not as appealing. Inflation reduces the buying power of a currency. High inflation in Brazil, for example, would reduce the demand for the real.
Interest rates are the cost of using someone else's money. These rates can affect the value of a country's currency. Higher interest rates usually create lower consumer demand. This often results in a reduced demand for a nation's currency, causing a decline in its value.
Political Stability Companies and individuals want to avoid risk when they do business in other nations. If a government changes suddenly, this may create an unfriendly setting for foreign business. A company could lose its building, equipment, or money on deposit in banks.
Political instability may also occur when new laws are put in place. These laws may not allow foreign businesses to operate as freely as they did under the old laws. Uncertainty in a country reduces the confidence that businesspeople have in its currency.
Factors Affecting Currency ValuesThree main factors affect currency exchange rates among countries: the country's balance of payments, economic conditions, and political stability.
Balance of Payments When a country has a favorable balance of payments, the value of its currency is usually constant or
rising. An increased demand for both the nation's products and its currency causes this situation. When a nation has an unfavorable balance of payments, its currency usually declines in value.
Economic Conditions When prices increase and the buying power of the country's money declines, its currency is not as appealing. Inflation reduces the buying power of a currency. High inflation in Brazil, for example, would reduce the demand for the real.
Interest rates are the cost of using someone else's money. These rates can affect the value of a country's currency. Higher interest rates usually create lower consumer demand. This often results in a reduced demand for a nation's currency, causing a decline in its value.
Political Stability Companies and individuals want to avoid risk when they do business in other nations. If a government changes suddenly, this may create an unfriendly setting for foreign business. A company could lose its building, equipment, or money on deposit in banks.
Political instability may also occur when new laws are put in place. These laws may not allow foreign businesses to operate as freely as they did under the old laws. Uncertainty in a country reduces the confidence that businesspeople have in its currency.