© Goodheart-Willcox Co., Inc.. 4 The Global Economy.


4The Global Economy


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.


Flow of Goods and Services

• Globalization—the process of becoming worldwide in scope

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• 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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• 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


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– telecommunicatio

ns– 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


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


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


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


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


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


U.S. Trade

• The U.S. is world’s largest importer• Over 20 percent of world’s 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


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


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


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


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


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


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


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 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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• Factors that affect exchange rates:– Political and economic stability—

stable countries draw foreign investors

– Interest rates—higher interest rates draw foreign investors, raise demand for a currency

– U.S. dollar is the international reserve currency


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


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


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


Government’s Role in Global Trade

• Governments regulate trade

• Free trade is policy of limited government trade restrictions

• Protectionism refers to government policies that restrict trade


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


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


How Governments Restrict Trade

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


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


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


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


World Trade Organization

• The World Trade Organization is an international organization created in 1995

• Consists of 151 member nations• WTO’s mission is

– to establish fair trade practices – to mediate trade disputes among

member nations


Other Important Global Organizations

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


In Your Opinion

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


Globalization and You, the Student

• You already buy goods and services from other countries

• Globalization will present you with both opportunities and challenges


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


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


Central Ideas of the Chapter

• Globalization is the growing economic interconnectedness of people around the world.

• Globalization presents new opportunities and dilemmas.


Glossary of Key Terms

• 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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• 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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• 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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• 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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• 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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• 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.

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© Goodheart-Willcox Co., Inc.. 4 The Global Economy.

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