• The Global Economy is the interconnected economies of
the nations of the world.
• We live in a global economy fueled by international
– International trade involves the exchange of goods and
services between nations. (also called globalization)
• A Multinational Company or Corporation (MNC)
Is an organization that conducts business in several
countries and has management capable of doing
What is trade?
• Trade has several meanings
– A specific area of business or industry
• Ex. The diamond trade
– A skilled occupation
• Ex. Auto Mechanics
– The people who work in a specific area of business or industry
• Ex. Construction Workers
– The activity of buying and selling goods and services in
domestic or international markets
Why do we trade?
• While America has many natural resources, a skilled
labor force, and modern machines and methods of
production, we cannot provide ourselves with all of the
things we want - We must go outside of our borders to
get some of the things that other countries specialize in.
Types of Trade
• Domestic Business – production, purchase, and sale of
goods and services within a country.
• World Trade– exchange of goods and services across
• Better transportation and telecommunications, along
with a decrease in trade barriers has lead to an increase
in world trade.
Advantages over America
over other countries
Machines, Engines, Pumps
• Imports – goods or services one country BUYS from
• Imports to America account for 100% of:
• Exports – the goods and services one country SELLS to other
• Exports benefit consumers in other countries
Factory and farm machinery made in U.S.
Food grown on U.S. farms
Chemicals, pesticides, medicines and plastics produced in U.S.
U.S. Movies, Television (CNN, MTV, ESPN)
U.S. Books, magazines, newspapers
• 1 out of every 6 U.S. jobs depends on international business
• Without foreign trade, many of the things we buy would cost
more or not be available to our consumers.
• Other countries can produce some goods at lower costs because
they have the needed raw materials or have lower labor costs.
• Some consumers may still purchase foreign goods at higher prices
if they perceive the value to be higher.
• Or they may simply just enjoy owning foreign products:
– French Perfumes, Norwegian Sweaters, Swiss Watches
Measuring trade between
• Just like people try to spend less than they earn,
countries try to maintain a positive balance of trade
Balance of Trade
• Balance of Trade - The difference in value between a country’s
total exports and imports
• Trade surplus – exports are greater than imports
• Trade deficit – imports are greater than exports
• Specialization – to focus on a particular activity, area, or
• Countries specialize in producing certain goods
• By specializing, countries can sell what they
produce best so they can buy the products they
need from other countries.
• Comparative Advantage – the ability of a country or
company to produce a particular good more efficiently
than another country or company.
• Each nation has its own banking system and its own type of
– Mexico: peso
– Japan: yen
– India: rupees
Exchanging one currency
for another occurs in the
foreign exchange market
• The price at which one currency can buy another
currency is called the exchange rate
• Exchange rates change from day to day and from
country to country.
• How much the currency of a country is worth
depends on how many other countries want to buy
• Global competition often leads to trade disputes
• At the heart of most trade disputes is whether there
should be limits on trade.
• Protectionism is the practice of the government putting
limits on foreign trade to protect businesses at home.
• EX. Rice farming and the automobile industries are
extremely important to Japan’s economy. To limit
competition from other countries, Japan practices
protectionism to ensure Japanese consumers buy
Japanese rice and automobiles.
Reasons for Protectionism
• Foreign competition can lower the demand for domestic products.
• Companies at home need to be protected from unfair foreign competition.
• Industries that make products related to national defense need to be protected.
• The use of cheap labor in other countries can lower wages or threaten jobs at
• A country can become too dependent on another country for important products
like oil, steel, or grain.
• Other countries might not have the same environmental or human rights
Barriers to International Trade
• Governments establish international policies that guide
trade with other countries – through control of
importing and exporting
• Quota - a limit set on the quantity of a product that may
• Tariff - A tax placed on imports to increase their price in
the domestic market
• Embargo – complete ban of an import or export
• Free Trade – occurs when there are few or no limits on
trade between countries.
• Supporters of free trade believe there should be no
limits on trade.
• opens up new markets in other countries.
• creates new jobs, especially in areas related to global trade.
• Competition forces businesses to be more efficient and productive.
• Consumers have more choice in the variety, price, and quality of
• promotes cultural understanding and cooperation between countries.
• helps all countries raise their standard of living.
• To reduce limits on trade more countries are
forming trade alliances with each other.
• In a trade alliance, several countries merge their
economies into one huge market.
• Some of the major trade alliances in the world
• European Union (EU)
• Association of Southeast Asian Nations (ASEAN)
• North American Free Trade Agreement
• Combined the economies of the United States, Canada,
• Made it easier for United States to buy oil from Mexico
and Mexico to buy cars from the United States
• Trade among all three nations would increase,
stimulating growth and bringing a wider variety of
lower-cost goods to consumers