Goals:

• Describe importing and exporting activites
• Compare balance of trade and balance of payments
• List factors that affect the value of global currencies

Key Terms:

• imports
• exports
• balance of trade
• balance of payments
• exchange rate

Lesson 3-1    International Business Basics 

• Most business activities occur within a country’s own borders.
• Domestic Business – the making, buying and selling of goods and services within a country.
• International Business – business activities needed for creating, shipping, and selling goods and services across national borders; also referred to as foreign trade or world trade.
• The United States has many natural resources, a skilled labor force, and modern production facilities.
• American companies and consumers go beyond U.S. Borders to obtain many things.
• The U.S. does business with more than 180 countries.
• With international trade expanding all the time, national borders are no longer fully valid in defining economies.
• Consumers now expect goods and services from around the world.
• 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.
  • May result from an abundance of natural resources or raw materials in a country.
  • South America – coffee
  • Saudi Arabia – oil
• Comparative Advantage – a situation in which a country specializes in the production of a good or service at which it is relatively more efficient
  • A country has an absolute advantage in more than one area.
  • Must decide how to maximize economic wealth
  • Must decide which product to produce to be most beneficial for the country
• Imports – items bought from other countries
• U.S. imports ALL bananas, coffee, cocoa, spices, tea, silk and crude rubber
• U.S. imports about half its crude oil and fish
• 20% to 50% of the U.S. supply of carpets, sugar, leather gloves, dishes and sewing machines are imported
• U.S. companies must import tin, chrome, magnesium, nickel, copper, zinc and several other metals to manufacture certain goods.
• Without foreign trade, many things you buy would cost more or not be available.
  • Needed raw materials
  • Lower labor costs
  • Better quality

• Exports – goods and services sold to other countries  
• Major U.S. expotsd
  • Factory and farm machinery are used throughout the world
  • Cat food made from U.S. agricultural products
• Chemicals, fertilizers, medicines, and plastics
• Movies
• Television programs
• Books, magazines, and newspapers
• Goods and services
• 1 in every 6 jobs in the U.S. depends on international business.
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  Measuring Trade Relations
• A major reason people go to work is to earn money to buy things. They spend the major part of those wages for goods and services. People usually try to keep their income and spending in balance.
• If they spend more than they earn, they can have financial problem
• When people buy more than their income allows, they go into debt
• When a country buys more goods than it sells, it has an unfavorable trade balance – it owes money to others.
• Foreign Debt – the amount a country owes to others
• Balance of Trade – the difference between a country’s total exports and total imports.
• Trade Surplus – when a country exports (sells) more than it imports (buys). Also referred to as a favorable trade position.
• Trade Deficit – when a country imports (buys) more than it exports (sells) – an unfavorable trade position.
  • 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
  • After a long history of a favorable balance of trade, the U.S. has had a trade deficit in recent years/
• Balance of Payments -  the difference between the amount of money that comes into a country and the amount that goes out of it.
  • Positive orFavorable Balance of Payments – occurs when a nation receives more money in a year than it pays out
  • Negative orUnfavorable Balance of Payments – the result of a country sending more money out than it brings in
  • in addition to goods and services, other forms of exchange take place among nations.
  • Money goes from one country to another
  • Investments
  • Tourism
  • A citizen of one country may invest in a business in another country
  • A business may invest in a factory in another country
  • One government might give financial or military aid to another country
  • Banks may deposit funds in foreign banks
  • Some countries limit the amount of money their citizens can take out of the country when they travel.

• International Currency
• Foreign Exchange Market – the process of exchanging one currency for another occurs here
• Exchange Rate – the value of a currency in one country compared with the value in another country.
  • Affected by supply and demand
  • Travelers and business people must deal with exchange rates
  • Investors
• Factors Affecting Currency Values
  • Balance of Payments – When a country has a favorable balance of payments, the value of its currency is usually constant or rising.
  • Caused by an increased demand for the nation’s products and its currency
  • Unfavorable balance of payments usually results in a decline in value of that nation’s currency
  • 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 a country would decrease demand for its currency
  • Interest rates are the cost of using someone else’s money
    • Higher interest rates usually decrease demand
    • Decreased demand causes a decline in a currency’s value
  • Political Stability – companies and individuals want to avoid risk when they do business with other nations
  • Sudden changes in government
    • Revolts           
    • Elections
    • New laws
  • Uncertainty reduces the confidence that business people have in a currency