ISOM Ch. 3 - Competing in the Global Marketplace

What is the European Union? Will there ever be a United States of Europe?

A collection of European member states created to develop a unified European Market and promote economic progress of member countries (eliminate trade barriers, differences in tax laws, and product standards) It's possible but many think it's unlikely due to conflicting political ideologies among member states

countertrade

A form of international trade in which part or all of the payment for goods or services is in the form of other goods and services.

devaluation

A lowering of the value of a nation's currency relative to other currencies.

balance of payments

A summary of a country's international financial transactions shows the difference between the country's total payments to and its total receipts from other countries.

preferential tariff

A tariff that is lower for some nations than others

embargo

A total ban on imports or exports of a product.

direct foreing investment

Active ownership of a foreign company, manufacturing, or marketing facilities in a foreign country.

trade deficit

An excess of imports over exports

European Union

An international organization of European countries formed after World War II to reduce trade barriers and increase cooperation among its members. comprised of 28 European nations

Why do nations trade?

Because no national economy can produce all the goods it needs The result of comparative advantage is more goods at lower prices than if each country produced everything it needed by itself

Explain the concept of natural trade barriers.

Can be physical or cultural Can include distance, language, etc.

What are some cultural factors that a company involved in international trade should consider?

Cultural values regarding family, educational system, religion, and social class system Language Customs and traditions

protectionism

Economic policy of shielding an economy from imports.

floating exchange rates

Prices of different currencies move up and down based on the demand for and the supply of each currency

What are the pros and cons of NAFTA?

Pros: end of tariffs, access to new markets, access to new technology, more human resources, increased competition Cons: lack of the domestic jobs, lack of quality control

What are the advantages of multinational corporations?

Sidestepping restrictive trade/licensing restrictions (multiple headquarters in multiple countries) Ability to move operations from country to country depending on favorability of economic conditions Vast resources (tech, knowledge, etc.)

contract manufacturing

The practice in which a foreign firm manufactures private-label goods under a domestic firm's brand name.

How do governments and institutions foster world trade?

WTO: lowered trade barriers worldwide World Bank: makes loans to developing nations International Monetary Fund: males loans to member nations

import quota

a limit on the amount of a good that can be imported

Uruguay Round

a trade agreement to dramatically lower trade barriers worldwide; created the World Trade Organization created in 1994

What trends will foster continued growth in world trade?

market expansion - need for businesses to expand their markets due to finite domestic markets resource acquisition - greater availability of scarce raw materials, tech, capital, and cheaper/more skilled labor available in global marketplace

free trade

international trade free of government interference

nationalism

national consciousness that boosts culture and interests in one's country

What are the advantages of multinationals?

overcoming trade problems, ability to sidestep regulatory problems and shift production from one plant to another as market conditions change, access to technological developments, ability to save a lot in labor costs

balance of trade

difference between the value of a country's exports and the value of its imports during a specific time.

imports

goods brought into a country

exports

goods sold to other countries

G20

group of 20 largest economies in the world

tariff

tax on imports

infrastructure

the basic framework of a building or a system that an economy's development depends on

licensing

the legal process whereby a licensor allows another firm to use its manufacturing process, trademarks, patents, trade secrets, or other proprietary knowledge

Explain the impact of a currency devaluation.

this is when a country's currency value is decreased makes a country's exports cheaper and should, in turn, help the balance of payments

absolute advantage

when a country can produce/sell a product at a lower cost than any other country or when it is the only country that can provide the product.

trade surplus

when a country exports more than it imports

joint venture

when a domestic firm buys part of a foreign company or joins with a foreign company to create a new entity

North American Free Trade Agreement (NAFTA)

Agreement that created a free-trade area among the United States, Canada, and Mexico. Created in 1993

What is global vision? Why is it important?

Global vision is recognizing and reacting to international business operations, being aware of threats and competition, and effectively using international distribution networks It's important in order to remain competitive both domestically and internationally

outsourcing

Hiring workers in other countries to do a set of jobs limits opps. for domestic workers

What are international economic communities?

Include the EU, NAFTA, CAFTA, and Mercosur reduce trade barriers among themselves while often establishing common tariffs and other trade barriers toward nonmember countries.

What are the benefits of globalization?

Increased productivity Reduced inflation (as result of global competition and cheaper imports) Encouraged innovation Chance for economic development in developing nations Improved international relations

Why do people fear globalization?

Loss of domestic jobs due to imports and international production

What is the purpose and role of the WTO?

Lower trade barriers for member countries Reducing trade barriers, opening markets

How can political factors affect international trade?

Nationalism - strongly nationalistic countries may discourage investment by foreign companies, hinder foreign operations, or expropriate a foreign company's assets

What are the barriers to international trade?

Natural barriers (distance, language) Tariff barriers (taxes on imported goods) Nontariff borders (import quotas, embargoes, buy-national regulations, exchange controls)

Mercosur

Pact among Argentina, Brazil, Paraguay, Peru, and Uruguay to establish a free trade area

What threats and opportunities exist in the global marketplace?

Politics: government trade policies, nationalism, changing governments Economy: lack of economic infrastructure Culture: demographic influences

What are the roles of the World Bank and the IMF in world trade?

World Bank - offer loans to developing nations to relieve debt burdens IMF - promote trade through financial cooperation and eliminate trade barriers

International Monetary Fund

a United Nations agency to promote trade by increasing the exchange stability of the major currencies founded in 1945

global vision

recognizing and reacting to international marketing opportunities, using effective global marketing strategies, and being aware of threats from foreign competitors in all markets

exchange controls

regulations that restrict the amount of currency that can be bought or sold require companies earning foreign currency to sell the foreign exchange to a control agency (central bank)

dumping

charging a lower price for a product in foreign markets than in the firm's home market.

How do companies enter the global marketplace?

Exporting, licensing, contract manufacturing, joint ventures, direct investment, etc.

Describe the policy of free trade and its relationship to comparative advantage.

Free trade is the policy of permitting the people and businesses of a country to buy and sell where they please without restrictions comparative advantage argues that free trade works even if one partner in a deal holds absolute advantage in all areas of production

What are the trends in the global marketplace?

Global business activity will continue to grow due to firms seeking vaster resources (expanding beyond domestic resources)

buy-national regulations

Government rules that give special privileges to domestic manufacturers and retailers.

Why is global trade important in the US? How is it measured?

International trade improves international relations, helps bolster economies, raises standards of living, and improves quality of life Measured through... - Balance of trade: the difference in value between a country's exports and its imports over some period - Balance of payments: the difference between a country's total payments to other countries and its total receipts from other countries

protective tariffs

Taxes places on imported goods, often to raise prices and thus protect domestic producers.

How can economic conditions affect trade opportunities?

The more developed the country the more sophisticated and developed the infrastructure and industries larger incomes = greater purchasing power/demand

World Bank

an international bank that offers low-interest loans, advice, and information to developing nations

World Trade Organization

an international organization based in Geneva that monitors and enforces rules governing global trade established by Uruguay Round in 1994

What is a multinational corporation?

business firm with operations in several countries

multinational corporations

companies that operate across national boundaries; also called transnational corporations

principle of comparative advantage

each good should be produced by the individual that has the smaller opportunity cost of producing that good specialization

What are some tariff and nontariff barriers to trade?

Tariff: tax imposed on imported goods - charge per unit, percentage of the value of goods, etc. Nontariff - import quotas: limits on the quantity of a certain good that can be imported - embargo: complete an on importing/exporting of a certain product - buy-national regulations: Government rules that give special privileges to domestic manufacturers and retailers - exchange controls: laws that require a company earning foreign exchange (foreign currency) from its exports to sell the foreign exchange to a control agency,

What impact does international trade have on the US economy?

The United States is the world's largest economy and the largest exporter and importer of goods and services. Trade is critical to America's prosperity - fueling economic growth, supporting domestic jobs, raising living standards and helping Americans provide for their families with affordable goods and services.

European integration

The process of creating a closer political and economic union between states in the EU.

exporting

selling products to another country