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6.3 – Business and the
International Economy
Home Notes Business Studies – 0450 6.3 – Business and the
International Economy
Globalization
Globalization is a term used to describe the increases in worldwide trade and
movement of people and capital between countries. The same goods and
services are sold across the globe; workers are finding it easier to find work by
going abroad for work; money is sent from and to countries everywhere.
Some reasons how globalization has occurred are:
Increasing number of free trade agreements– these are agreements between
countries that allows them to import and export goods and services with no
tariffs or quotas.
Improved and cheaper transport (water, land, air) and communications
(internet) infrastructure
Developing and emerging countries such as China and India are becoming
rapidly industrialized and so can export large volumes of goods and services. This
has caused an increase in the output and opportunities in international trade,
allowing for globalisation
Advantages of globalisation
Allows businesses to start selling in new foreign markets, increasing sales and
profits
Can open factories and production units in other countries, possibly at a
cheaper rate (cheaper materials and labour can be available in other
countries)
Import products from other countries and sell it to customers in the domestic
market- this could be more profitable and producing and selling the good
themselves
Import materials and components for production from foreign countries at a
cheaper rate.
Disadvantages of globalisation
Increasing imports into country from foreign competitors- now that foreign
firms can compete in other countries, it puts up much competition for domestic
firms. If these domestic firms cannot compete with the foreign goods’ cheap
prices and high quality, they may be forced to close down operations.
Increasing investment by multinationals in home country- this could further
add to competition in the domestic market (although small local firms can
become suppliers to the large multinational firms)
Employees may leave domestic firms if they don’t pay as well as the
foreign multinationals in the country- businesses will have to increase pay and
conditions to recruit and retain employees.
When looking at an economy’s point of view, globalisation brings consumers
more choice and lower prices and forces domestic firms to be more efficient (in
order to remain competitive). However, competition from foreign producers can
force domestic firms to close down and jobs will be lost.
Protectionism
Protectionism refers to when governments protect domestic firms from
foreign competition using trade barriers such as tariffs and quotas; i.e. the
opposite of free trade.
Import quota is a restriction on the quantity of goods that can be imported into
the country.
Tariffs are taxes on imports.
Imposing these two measures will reduce the number of foreign goods in the
domestic market and make them expensive to buy, respectively. This will
reduce the competitiveness of the foreign goods and make it easy for domestic
firms to produce and sell their goods. However, it reduces free trade and
globalisation.
Free trade supporters say that it is better to allow consumers to buy imported
goods and domestic firms should produce and export goods and services that
they have a competitive advantage in. In this way, living standards across the
globe will improve.
Multinational Companies (MNCs)
Multinational businesses are firms with operations (production/service) in
more than one country. Also known as transnational businesses. Examples:
Shell, McDonald’s, Nissan etc.
Why do firms become multinationals?
To produce goods with lower costs– cheaper material and labour may be
available in other countries
To extract raw materials for production, available in a few other countries. For
example: crude oil in the Middle East
To produce goods nearer to the markets to avoid transport costs.
To avoid trade barriers on imports. If they produce the goods in foreign
countries, the firms will not have to pay import tariffs or be faced with a quota
restriction
To expand into different markets and spread their risks
To remain competitive with rival firms which may also be expanding abroad
Advantages to a country of a multinational setting up in their country:
More jobs created by multinationals
Increases GDP of the country
The technology that the multinational brings in can bring in new ideas and
methods into the country
As more goods are being produced in the country, the imports will be
reduced and some output can even be exported
Multinationals will also pay taxes, thereby increasing the government’s tax
revenue
More product choice for consumers
Disadvantages to a country of a multinational setting up in their country:
The jobs created are often for unskilled tasks. The more skilled jobs will be
done by workers that come from the firm’s home country. The unskilled workers
may also be exploited with very low wages and unhygienic working conditions.
Since multinationals benefit from economies of scale, local firms may be
forced out of business, unable to survive the competition
Multinationals can use up the scarce, non-renewable resources in the
country
Repatriation of profit can occur. The profits earned by the multinational could
be sent back to their home country and the government will not be able to levy
tax on it.
As multinationals are large, they can influence the government and
economy. They could threaten the government that they will close down and
make workers unemployed if they are not given financial grants and so on.
Exchange Rates
The exchange rate is the price of one currency in terms of another currency.
For example, €1= $1.2. To buy one euro, you’ll need 1.2 dollars. The demand and
supply of the currencies determine their exchange rate. In the above example,
if the €’s demand was greater than the $’s, or if the supply of € reduced more
than the $, then the €’s price in terms of $ will increase. It could now be €1= $1.5.
Each € now buys more $.
A currency appreciates when its value rises. The example above is an
appreciation of the Euro. A European exporting firm will find an appreciation
disadvantageous as their American consumers will now have to pay more $ to
buy a €1 good (exports become expensive). Their competitiveness has reduced.
A European importing firm will find an appreciation of benefit. They can buy
American products for lesser Euros (imports become cheaper).
A currency depreciates when its value falls. In the example above, the Dollar
depreciated. An American exporting firm will find a depreciation advantageous
as their European consumers will now have to pay less € to buy a $1 good
(exports become cheaper). Their competitiveness has increased. An American
importing firm will find a depreciation disadvantageous. They will have to buy
European products for more dollars (imports become expensive).
In summary, an appreciations is good for importers, bad for exporters; a
depreciation is good for exporters, bad for importers; given that the goods are
price elastic (if the price didn’t matter much to consumers, sales and revenue
would not be affected by price- so no worries for producers).
Confused? Don’t worry, it is a confusing topic. Check out our more detailed
Economics notes on exchange rates.
Notes submitted by Lintha
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13 thoughts on “6.3 – Business and
the International Economy”
Ahmed Sami says:
May 20, 2022 at 9:05 am
My exam is in 2 hours tnx alot this really helped me u all wish me luck…<3
! Like
REPLY
Lintha says:
May 20, 2022 at 4:24 pm
Hope you did well!
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khadija kerani says:
May 19, 2022 at 11:16 am
I love how you have your own little touch to the notes, “confused? don’t worry, it
is a confusing topic”, and the exam tips are so so helpful, thank you from the
bottom of my heart, you’re doing an incredible job!
! Liked by 1 person
REPLY
Lintha says:
May 20, 2022 at 4:32 pm
Love to hear it ! You’re welcome.
! Like
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Hashim Jaku says:
March 7, 2022 at 10:10 am
Thanks very useful lintha
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kudzie says:
January 4, 2022 at 11:19 am
wonderful notes. may GOD bless you
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Lintha says:
January 5, 2022 at 4:51 am
Thank you!
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Manuel says:
December 24, 2021 at 4:30 pm
Honestly the best notes ever. Thank you so much.
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Lintha says:
January 5, 2022 at 4:30 am
So glad to hear it! You’re welcome!
! Like
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jedu says:
February 11, 2021 at 8:16 am
thanks
this notes were pretty cool i appreciate it
it aided a lot to me while preparing for exams
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Lintha says:
February 16, 2021 at 1:34 pm
Welcome!
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Basavaraj says:
December 26, 2020 at 9:06 am
Good work..please continue the notes
! Liked by 1 person
REPLY
Basavaraj says:
December 26, 2020 at 9:05 am
Good work
! Liked by 1 person
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