chapter 29 - business and the international economy Flashcards
several reasons for the increase in global trade and movement of products, people and capital (globalization) (3)
- Increasing numbers of free trade agreements and economic unions between countries have reduced protection for industries. Consumers purchase goods and services from other countries with few or no import controls such as tariffs.
- Improved and cheaper travel links and communications between all parts of the world have made it easier to transport products globally. The internet allows easy price comparisons between goods from many countries.
- Many emerging market countries are industrializing very rapidly. China and countries in Southeast Asia used to import many of the goods they needed. Now their own manufacturing industries are so strong they can export in large quantities – at very competitive prices.
opportunities of globalization for business (4m, sub-2each)
- Start selling exports to other countries – opening up foreign markets:
- This increases potential sales, perhaps in countries with fast-growing markets. Online selling allows orders for goods to be sent in from abroad.
- However, it can be expensive to sell abroad, and will foreign consumers buy products?
- Open factories/operations in other countries:
- It could be cheaper to make some goods in other countries than at home.
- But will the quality be as good? Might there be an ethical issue? Etc.
- Import products from other countries to sell to customers in home country:
- With no trade restrictions, it could be profitable now to import goods and services from other countries and sell them domestically.
- However, the products will need maintenance and perhaps, repairs – will the parts and support be available from the producer in the foreign country?
- Import materials and components from other countries – but still produce final goods in home country:
- It could be cheaper to purchase these supplies from other countries now that there is free trade – this will help to reduce costs.
- However, will the suppliers be reliable?
threats of globalization for businesses (3m, 6s)
- Increasing imports into home market from foreign competitors:
- If these competitors offer cheaper products (or of higher quality), sales of local business might fall.
- However, the increased competition could force the local businesses to become more efficient.
- Increasing investment from multinationals to set up operations in home country:
- This will create further competition – and the multinational may have economies of scale and be able to afford the best employees.
- However, some local firms could become suppliers to these multinationals and their sales could increase.
- Employees may leave businesses that cannot pay the same or more than international competitors:
- Employees will now have more choice about where they work and for which business – businesses will have to make efforts to keep their best employees.
- However, this might encourage local businesses to use a range of motivational methods to keep their workers.
why governments might introduce import tariffs and import quotas (4)
- Import tariffs were explained as being one form of taxes that governments can use to raise revenue. There is another important reason why governments might introduce tariffs and quotas on imports.
- They are forms of protectionism – to protect domestic industries from competition that might otherwise close them down.
- Foreign competitors might be able to produce products much more cheaply and if they were allowed to import without any restriction, then local companies might be forced out of business.
- An import tariff is a tax on the imported goods when they arrive into the country. They usually lead to the price of the imported goods being increase, making them less competitive than locally produced goods.
- An import quota is a regulation which limits the import of a good to a certain fixed quantity. This reduces the amount of these goods that can be imported and often leads to an increase in the price of imported goods as they become less available.
benefits to a business of becoming a multinational (4)
- Produce goods in countries with low costs, such as low wages.
- Extract raw materials which the company mayneed for production or refining.
- Produce goods nearer the market to reduce transport costs.
- Avoid barriers to trade put up by countries to reduce the imports of goods.
impacts on a business’s stakeholders of a business becoming multinational
- Shareholders are likely to receive increased dividends from higher profit.
- Employees may have increased opportunities to gain promotion as the business gets larger and has operations across many countries; opportunity to live and work abroad.
- Suppliers may have increased or decreased sales to the multinational, depending on where it operates and is located.
- Government may gain higher tax revenue if profits from operations abroad are repatriated, or it may lose tax revenue if the multinational locates its head office elsewhere.
potential benefits to a country’s economy where a multinational operates (5)
- Increased investment – new investment in buildings and machinery increases output of goods and services in the country. New technology can benefit the country by bringing in new ideas and methods.
- Increased exports – some of the extra output may be sold abroad, which will increase the exports of the country. Also, imports may be reduced as more goods are now made in the country.
- Taxes are paid by the multinationals, which increased the funds to the government.
- Increased consumer choice – there is more product choice for consumers and more competition.
potential drawbacks to a country’s economy where a multinational operates (5)
- The jobs created are often unskilled assembly-line tasks. Skilled jobs are not usually created in the host countries receiving the multinationals.
- Reduced sales for local businesses – local firms may be forced out of business/ multinationals are often more efficient and have lower costs than local businesses.
- Repatriation of profits – profits are often sent back to a multinational’s home country and not kept in the country where they are earned.
- Multinationals often use up scarce and non-renewable primary resources in the host country
- As multinational businesses are very large, they could have a lot of influence on both the government and the economy of the host country. They might ask the government for large grants to keep them operating in the country.
describe depreciation of exchange rate when the euro falls from 1 euro = 1.50 USD to 1 euro = 1USD (3)
. It means the currency euro buys less of the other currency, US dollar. The effect of this is to:
* Make exports cheaper, for example, from Europe sell for a lower price in America as it takes fewer dollars to buy each euro. People in America do not have to spend as many dollars buying euros to buy the exports from Europe.
* Imports are more expensive and do the opposite, for example, imports into Europe now cost more to buy from America, as more euros have to be given to buy the dollars needed for the same amount of imports.
describe the appreciation of exchange rate when the euro rises from 1 euro = 1USD to 1euro = 1.50 USD (3)
It means the currency euro buys more of the other currency, US dollar. The effect of this is to:
* Raise the price of exports, for example, exports from Europe sell for a higher price in America as it takes more dollars to buy each euro. People in America have to spend more dollars buying euros to buy the same amount of exports from Europe.
* Import prices fall and demand for them might rise, for example, imports into Europe now cost less to buy from America, as fewer euros have to be given to buy the dollars needed for the same amount of imports.
How exchange rate changes can affect businesses
as importers and exporters of products,
e.g. prices, competitiveness, profitability
- An importing firm will have higher costs if the exchange rate of its currency depreciates but will lower costs if the exchange rate appreciates. However, an exporting firm will be able to reduce its
