GHAAZEE SCHOOL Business

Studies Hulhumalè
Grade: 10

BUSINESS AND THE INTERNATIONAL ECONOMY

Globalisation: The process by which countries are connected with each other because of the
trade of goods and services.

Reasons for globalisation

 The use of information and communications technology has helped to make

international expansion easier for many companies by minimising language barriers.

 More efficient methods of transportation have helped to break down geographical

barriers. For example perishable food items such as fruits and vegetables can be shipped
anywhere in the world.

 Free trade agreements also assist business operations by improving economic and
technical cooperation. Free trade agreements are considered to be an important way of
opening up foreign markets. Most free trade agreements aim to reduce trade barriers between
member countries by creating favourable trade and investment policies. Countries wanting to
trade with each other from a trade bloc and reach a common agreement to lower trade barriers
within the member countries.

 Trade bloc: a group of countries that trade with each other and are usually part of a
free trade agreement.

Characteristics of globalisation

 Growth in international trade

 Dependency on the global economy

 Global recognition of brands

 Greater movement of products, services, people and money.

 Company operating in more than one country.

Opportunities and threats of globalisation

Opportunities Threats

 Businesses can access more markets,  Local businesses in the host country may
which may lead to an increase in sales. suffer as foreign companies start to sell
their products at a cheaper price.
 Labour may be cheaper in host nations
and so businesses can gain from lower  Exchange rate fluctuations may cause
costs. lowering of profits.

 Due to increased competition, businesses  Increased competition for both local and
operate more efficiently and reduce costs

©GS/2016/Dept. of Business /Gr10/FT 1

 due to cost effective innovations and international businesses.
economies of scale. Reduction in costs
will lead to greater profits. They can also  The marketing and distribution costs for
offer their products at reduced prices, the international business will increase.
encouraging sales.

Why governments introduce import tariffs and quotas?

Globalisation offers consumers a wider choice of products and services, but this may cause
problems for businesses in the host country. Multinational companies can often supply products
and services at cheaper prices than local businesses. Smaller businesses sometimes cannot
compete and may have to close down, with the loss of jobs. If multinationals start to take over
the trade in the host country, this can have a damaging effect on the local economy. As local
businesses and shops close, there will be less choice for consumers and unemployment may
rise. For these reasons, government often try to control the amount of international trade. Two
of the main ways they use are tariffs and quotas.

Tariffs

A tariff is a tax applied to the value of imported and exported goods. A government may place
a tariff on imports so as to reduce imports into the country. The tariff increases the cost of
imported goods, and businesses then have to sell the goods at a higher price. This reduces
local demand for the goods and benefits local businesses as they have less competition.

Government may also put tariffs on the export of essential items such as foot to ensure that the
country has enough of them. Restriction on imports and exports is important because every
country’s economic objective is to have a positive balance of payments. The import tariff also
earns revenue for the government.

Quotas

A Quota is a physical limit on the quantity of goods that can be imported and exported. Quotas
on imports benefit local producers as there are less foreign goods in the market and they face
less competition. However, customers might be disappointed as there are limited suppliers of
popular products.

Quotas are set on the import of certain commodities, either from specific countries or globally.
The may be set with or without consultation with the exporting countries. Exporting countries
may suffer as they will only be able to sell a limited amount of goods to the country that has a
quota.

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Importance and growth of multinational companies

Multinational Company: An organisation that has operations in more than one country.

Multinationals are businesses that have factories, services, or operations in more than one
country. It is important to note that, for a business to become multinationals, they must produce
goods in more than one country.

Why do firms become multinational?

 To produce goods in countries with low costs.
 To extract raw materials which firm may need for production

 To produce goods nearer the market to reduce transport

 To avoid barriers to trade put up by countries to reduce the imports of goods.

 To expand into different market areas

Advantages of multinationals operating in a country

 More Jobs will be created.
 New investment increases national output.

 Imports could be reduced since there are more goods in the country. More exports.

 Taxes will be paid by the MNC which will increase the funds to the government

Disadvantages of multinationals operating in a country

 Jobs created are usually unskilled jobs.
 Local firms are forced out of business since they can't compete with multinationals.

 Profits flow out of the country.

 Multinationals use up scarce and non-renewable primary resources in the host country.

 They could have a lot of influence on both the government and economy of the country.

The impact of exchange rate changes

 Exchange rate: The rate at which one country’s currency can be exchanged for that of
another.

 Depreciation: if the value of the currency goes down with respect to another.

 Appreciation: If the value of the currency increases with respect to another currency.

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Exchange rates

Every country has its own currency and to be able to buy things in other countries you have to
use the local currency. How much of another currency you get in exchange for your own
country’s money will depend on the exchange rate. The term ‘exchange rate’ refers to the rate
at which two currencies will exchange for each other at a particular moment in time. It is the
price of one currency in terms of another currency. For example, £1: $ 1.5.

How are exchange rates determined?

Most currencies are allowed to vary or float on the foreign exchange market according to the
demand and supply for each currency. Just as the prices of goods can vary according to supply
and demand in a free market. For example, if the demand for £s was greater than the demand for
$s, then the price of the £ would rise. Compared to the exchange rate in the first example, the
new rate might now be £1: $1.75. Each £ now buys more $s than before. Some countries
exchange rates are fixed by the government.

How are businesses affected by changing exchange rates?

Exporting Businesses

Exporting businesses: one which sells goods and services abroad.

Exporters have a serious problem when the currency of their country appreciates. Currency
appreciation occurs when the value of a currency rises. For example, exchange rate of £ might
change from £1: $1.6 to £1: $2. It buys more of another currency than before. If currency
appreciates, managers of exporting firms’ have two options:

 To keep the existing price without any change, but this will mean that the return from
selling the products will be less than before. For example, the existing price of product might be
$480 and according to the change in exchange rate described in above example now that each
product is only earning £240, not £300 as previously.

 To raise the price in export market and continue to earn same amount of return as
previously. For example, increasing the price from $ 480 to $600 and continue to earn £300 from
each product. However, the higher prices could lead to fewer sales and exports are likely to fall.

Importing Businesses

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Now consider how an importing business, one which buys goods and services from abroad,
might be affected by changing exchange rates.

If the value of its currency depreciates an importing firm will have higher costs. Currency
Depreciation occurs when the value of a currency falls; it buys less of another currency than
before. For example, exchange rate of £ might change from £1: $2 to £1: $1.5

An importing firm will have higher costs if the exchange rate of its currency depreciates, but will
have lower costs if the exchange rate appreciates, whilst an exporting firm will be able to reduce
its prices with currency depreciation, but might have to raise prices with a currency appreciation.

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