The Main Idea – Chapter 7This chapter discusses how business is conducted internationally.

7.1 discusses the trading of goods and services between countries and how governments protect their producers

7.2 describes the growing economic interdependence among countries

Objectives:- Describe how the concepts of absolute and

comparative advantage determine what countries produce.

- Explain why businesses export and import- Discuss how foreign exchange rates affect imports

and exports

Quick!

Get a piece of paperIn one minute…Write as many foreign countries as you can

Domestic vs International Business•What is domestic business?

•It is the making, buying, and selling of goods and services within a country

•What is international business?•Business activities needed for creating, shipping, and selling goods and services across national borders.

Who can guess how many countries the US trades with?

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Class exercise

Go to www.bls.gov/oohResearch and discover at least three jobs that deal with international businessOn a piece of paper, list the three jobs and tell me:1. Summarize the nature of the work2. What the job outlook is3. Summarize what the earnings (hourly wage or salary) are for the position.4. Put in bin when finished.

International Trade

What is the main reason for international trade?What impact does it have on the US economy?

International trade

International tradeThe exchange of goods and services by different countries.

Most of the world today depends on international trade to maintain its standard of living.

Absolute and Comparative Advantage•Absolute Advantage-

•Exists when a country can produce a good/service at a lower cost than other countries. •Examples – South America has AA with coffee production and Saudi Arabia has AA in oil production. What do we have an AA in?

Absolute advantage

Absolute advantageThe ability to produce more of a good than another producer.

The US has an absolute advantage in: grains, automobiles, metals including aluminum and copper, electrical and telecommunications equipment and food.

Absolute and Comparative Advantage•Comparative Advantage-

•A situation in which a country specializes in the production of a good/service at which it is relatively more efficient at producing•Example - A 7’ tall rabbi and a 5’ tall priest walk into a strawberry field lined with apple trees. They must harvest both crops before they can meet their maker. Who picks what?

The law of comparative advantage

Comparative advantageProducers should produce the goods they are most efficient at producing and purchase from others the goods they are less efficient at producing.

Individuals, companies, and countries should specialize in what they do best.

Exporting and ImportingWhat’s the difference?Who is the largest exporting country in the world?– No. Not China.

Its us, the US! $700B goods/services a year.Who is the largest importing country?Yep! The US – about $900B

Exporting

exportsGoods and services sold to other countries

*1 of every 6 jobs in the US depends on international business!

Some things the US exports:Factory/farm machinery, food, agricultural products, chemicals, fertilizers, medicines, plastics, movies, tv shows, books, magazines.

Exporting

Why would a company want to export products?Diversification- engaging in a variety of operations.

Importing

ImportsGoods and services purchased abroad

Did you know that bananas, cocoa, spices, tea, silk and crude rubber are 100% imported from other countries?

Imports (cont’d)

The US buys about 20-50% of:

Crude oilFishCarpets

SugarLeather glovesDishes Sewing machines

On a piece of paper…

Please list the top ten imports and exports of the US and list the monetary value of each.

Measuring Trade Relations

Why do we work and have jobs?With that money we buy goods/services that we need. If we spend more than we earn, we get into financial troubles (debt)….nothing different than with countries.

Balance of Trade

If a country exports (sells) more than it imports (buys), it has a trade If a country imports more than it exports, it has a trade , which is unfavorable

Balance of tradeThe difference between the value of a country’s total exports and total imports

(total exports-total imports=balance of trade)

surplus.

deficit

International Currency

• Russia uses the ruble, the European Union uses the euro, Brazil the real, India the rupee, and Saudi Arabia the riyal.

How can all these different countries accept payment from another if they don’t use the same money?

Foreign Exchange Rates

• The process of exchanging one currency for another occurs in the foreign exchange market

• Bunch of banks that buy currencies and resell other ones.

Balance of payments

exchange rateis the value of currency in one country compared with the value in another.

Most large banks provide currency services for businesses and consumers.

Supply and demand affects the value of currency.

Exchange rate calculator

Find an online exchange rate calculatorHow is the U.S. Dollar doing against the EURO?

Protectionism

Trade barriersGovernment actions can create restrictions to free trade

Formal trade barriers are political actions by the governmentInformal trade barriers are when the culture, traditions, and religion of a country hinder trade

International trade barriers/Protectionism

TariffQuotaEmbargo

Protectionism

tariffA tax that a gov’t places on certain imported products

Boston tea party – what happened?

Many people believe that tariffs should be used to protect US jobs from foreign competition. What would happen to the prices at the store for us?

Protectionism

quotaWhen a gov’t sets a limit on the quantity of a product that may be imported or exported

Countries do this to regulate international trade

Why would a country want to set a quota on international trade?

Protectionism

embargoWhen a gov’t stops the export or import of a product completely

Embargos can be placed on an entire country…anyone know who we have an embargo against? Cuba

Gov’ts enact these to protect their products/services more than a quota or tariff can

As of October, 2007, the United States has sanctions (embargos) against:

– Colombia, no drug-related exports, since 1972 (see Colombia-United States relations)

– Côte d'Ivoire/Ivory Coast, since 1986 (see Côte d'Ivoire – United States relations) – Cuba, since 1962 (see United States embargo against Cuba) – Democratic Republic of the Congo, since 1998 (see

Democratic Republic of the Congo – United States relations) – Iran, since 1979 (see Sanctions against Iran) – Republic of the Congo (see Republic of the Congo-United States relations) – Somalia, since 1990 (supplies arms to the Transitional Federal Government, but no

general trade. See Somalia-United States relations) – Myanmar, since 1997 (see Burma – United States relations) – North Korea, since 1950 (see North Korea – United States relations) – Sudan, since 2002 (see Sudan – United States relations) – Syria, since 1986 (see Syria – United States relations)

Source: www.Wikipedia.com