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2-1 2-2 2-3 2-4 2-5 Economics and Decision Making Basics of Economics Economic Systems Achieving Economic Development Resources Satisfy Needs Chapter 2 OUR GLOBAL ECONOMY ©Getty Images/PhotoDisc

Transcript of ©Getty Images/PhotoDisc hapter OUR GLOBAL...

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Economics and Decision Making

Basics of Economics

Economic Systems

Achieving Economic Development

Resources Satisfy Needs

Chapter 2OUR GLOBAL ECONOMY

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An Economic Plan for Mexico

In the early 1980s, Mexico had several economic difficulties. The coun-try’s governmental policies created barriers to international trade. Thesedecisions meant fewer foreign companies wanted to do business inMexico. Therefore, fewer jobs were available.

The government created programs to help those without jobs. TheMexican government had to borrow money to pay for this state assis-tance program. Soon, the government was using more and more of itsmoney to pay back the loans. Little money was left to spend on publicservices.

One problem led to another until the country decided to take a newcourse of action. Mexico then took several steps toward economicreform. The Mexican government

● Allowed more foreign businesses to produce and sell goods and serv-ices in Mexico

● Reduced government spending and created programs that servedonly the neediest people in the country

● Sold several unprofitable government-owned businesses that werecosting the taxpayers money

● Worked out a new plan to reduce government debt

The Mexican government chose actions to help the country competein the global marketplace while also improving the economic situation ofits citizens. In recent years, Mexico has seen improved economic condi-tions. The prices of goods in the country have not increased as quicklyas in the past. Global business activities helped to create more jobs andhigher incomes for Mexican workers.

Think Critically1. Obtain current information on the Internet about doing business in

Mexico. Prepare a one-page summary of your findings.2. What factors created economic difficulties for Mexico?

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THE BASIC ECONOMIC PROBLEM

Each day people throughout the world make economic decisions. Forexample, selecting what groceries to buy is an economic choice.

Choosing whether to buy a shirt or a compact disc is an economic choice. Asyou make choices, you probably are not able to obtain everything you want.These choices are the basis of economics.

You are limited by the amount of time and money you have available toacquire the things you want. Countries and individuals have limitedresources available. As a result, decisions are necessary to make the best useof resources.

Scarcity refers to the limited resources available to satisfy the unlimitedneeds and wants of people. All people and all nations face scarcity every day.A country must decide whether to grow its own food or to import agricul-tural products so its workers can produce other items. Many factors affectthe choices made by an individual, a company, or a country. The study ofhow people choose to use limited resources to satisfy their unlimited needsand wants is called economics.

Economics can be an exciting topic to study. Knowledge of economicshelps people understand why some earn more than others and why certainitems cost more at different times of the year. Economic principles canexplain why business managers make one choice over another.

What is economics?

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� Describe the basiceconomic problem.

� List the steps of thedecision-makingprocess.

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MAKING ECONOMIC DECISIONS

P eople and countries cope with scarcity by making decisions. Every timeyou decide how to use your time, money, and energy, you are making an

economic decision. Companies and nations also have to make choices.

❙ THE DECISION-MAKING PROCESSOne way to help make economic choices is to use the decision-makingprocess. Using the steps shown in Figure 2-1 can help people make wiserdecisions and get the best use of resources. This process can help consumersmake faster and better choices. Saving time and money when making a pur-chase is something most people want.

There are six steps in the decision-making process.

Step 1 Define the problem What do I need or want?Step 2 Identify the alternatives What are the different ways myproblem can be solved?Step 3 Evaluate the alternatives What are the advantages and dis-advantages of each of the choices available?Step 4 Make a choice Based on the advantages and disadvantages,which would be my best choice? Can I live with the consequences of thatchoice?Step 5 Take action on the choice What needs to be done to putthe decision into action?Step 6 Review the decision Did your decision solve the problem?As time goes by, what different actions might be necessary? Were thereconsequences you did not predict when you evaluated the alternatives?

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5. Takeaction onthe choice

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decision

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Figure 2-1 The decision-making process helpsindividuals, companies,and nations make wisereconomic decisions.

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WORK ASA GROUP

Discuss an important deci-sion that you might have to make in life, such asbuying a car or going tocollege. Work through thesix steps of the decision-making process to helpyou make your decision.

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❙ DECISION MAKING IN ACTIONHow do companies use the decision-making process? An example of eco-nomic decision making for international business could involve a companyin the United States that wants to increase the sales of its product.

Step 1 Define the problem The problemmight be “How can the Benson Electric Companycontinue to increase its sales over the next fiveyears?” Right now, the company only sells homeaudio and electronic products in the United States.Step 2 Identify the alternatives Solutionsinclude● Increasing advertising to attract new customers● Reducing prices to attract more customers● Selling products over the Internet and mailing

information to customers in other countries● Shipping products to sell in other countries● Producing and selling products in other countriesStep 3 Evaluate the alternatives Each ofthese choices has costs and benefits. The process ofevaluating these options involves comparing the risksand costs of each alternative. Benson Electric mustconsider the expected increase in sales from eachalternative. For example, reducing prices mayincrease the number of customers but could reducetotal dollar sales. The cost of producing products inanother country could be greater than the moneyearned from additional sales.

Step 4 Make a choice Every time a choice is made, something else isgiven up. So, once Benson Electric selects a course of action, it probablywill not be able to choose other alternatives. Opportunity cost is themost attractive alternative given up when a choice is made. In your ownlife, a decision to go to college, for example, could mean you would notbe able to use your time to earn money in a job right now. Generally, thebenefits of a decision should be more valuable to you than the opportuni-ty cost. So, the decision to continue your education is likely to benefit youthroughout your life with higher earnings.Step 5 Take action on the choice Finally, the Benson Companymust put its choice into action.Step 6 Review the decision Over the weeks, months, and yearsthat follow, the company should review this decision to determinewhether it needs to be changed or if other decisions need to be made.Remember that decision making is an ongoing process in your life.

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List the six steps of the decision-making process. Give an example of each step from a recent decision you have made.

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSDefine each of the following terms.

1. scarcity

2. economics

3. opportunity cost

REVIEW GLOBAL BUSINESS CONCEPTSREVIEW GLOBAL BUSINESS CONCEPTS4. What is the basic economic problem?

5. Describe the six steps of the decision-making model.

6. Why does every decision have an opportunity cost?

SOLSOLVE GLOBAL BUSINESS PROBLEMSVE GLOBAL BUSINESS PROBLEMSFor each of the following international business situations, describe the problemand list two or three alternatives that the company could take to solve the prob-lem.

7. A food company is having trouble selling its frozen products in other coun-tries because it is very expensive to transport frozen foods.

8. A computer store is losing business to a competitor. The competitor is sell-ing imported software at a very low price.

9. Buyers of a tool exported to Bermuda are not following the safety direc-tions, and users are being injured.

THINK CRITICALLTHINK CRITICALLYY10. Explain how scarcity affects you and your family, school, and community.

11. What are some examples of situations in which you make decisions withoutthinking about every step of the decision-making process?

12. Think of three choices you have made recently. What were the opportunitycosts of those choices?

MAKE CONNECTIONSMAKE CONNECTIONS13. COMMUNICATION Talk to a person who works in the business world.

Obtain an example of a business decision that the person has made.

14. TECHNOLOGY Explain how new computer systems have improved deci-sion making for companies involved in international business.

15. MATHEMATICS A cloth manufacturer has the opportunity to purchasenew machinery for its factory for $1 million. The machinery will require fiveequal annual payments while the equipment is being installed. How muchwill the company have to pay each year for the machinery? During installa-tion, the company can expect profits to rise by $100,000 per year. Afterthat, they can expect profits to rise by $250,000 per year. How long will it bebefore the increase in profit pays for the machinery entirely?

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� Describe how themarket sets prices.

� Explain the causes ofinflation.

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PRICE-SETTING ACTIVITIES

P rice is one of the most visible economic factors you encounter every day.The amount paid for goods and services results from economic decisions

made by consumers, businesses, and governments. Daily economic decisionsaffect you in many ways. For example, if people rent many videos, morestores will make DVDs available. In addition, more jobs will be available forpeople working in video stores. If consumers no longer want to purchase acertain video, the availability or price of that video will decrease.

Have you ever noticed that when something has limited availability andmany people want to buy it, the price increases? If many people want to buytickets for a hockey game or a concert, for example, ticket prices are likely togo up. When freezing temperatures destroy the fruit blossoms and reduce thenumber of oranges available, prices go up.

The opposite is also true. If a musical group is no longer popular, the pricesof its posters, CDs, and T-shirts are likely to go down. The price system is amethod of balancing unlimited needs and wants with limited resources.

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Determining prices involves two main elements—supply and demand.Supply is the relationship between the amount of a good or service thatbusinesses are willing and able to make available and the price. The amountof an item supplied tends to go up when producers see an opportunity tomake money. For example, many years ago only a couple of companies madebaseball and other sports cards for collecting. As these cards became morepopular, other companies got involved in the sports card business.

Supply also works the other way. If companies can no longer make moneyproducing an item, they will get out of that business. As video replaced film,most companies that made film projectors for schools and libraries went intoother types of businesses. The number of film projectors available declined.

On the buyer’s side is demand, which is the relationship between theamount of a good or service that consumers are willing and able to purchaseand the price. In general, as the amount of a good or service that peoplewant increases, the price of that item goes higher. If more people want ticketsto a sports event or concert, the price of admission can be set higher forthose events. If fewer people want tickets, the price will likely be lower. Forexample, near the end of the summer, swimsuits are usually at their lowestprices.

The downward sloping line marked D in Figure 2-2 shows that as pricedeclines, demand increases. This is called the law of demand. For example, ata price of $12, ten videos are demanded, but if the price is $2, sixty videosare demanded. On the supply side (the S line), higher prices mean a greateramount supplied since businesses can make a larger profit. At a price of $2,twenty videos are offered for sale, while at $8, fifty videos are available.

The point at which supply and demand cross is called the market price.Look at Figure 2-2. At a price of $6 sellers are willing to offer 40 videos andconsumers are willing to buy 40 videos. The market price, therefore, is $6.This point is also known as the equilibrium price. While supply and demandin the real world do not work as neatly as the graph shows, market forces docause prices to rise and fall.

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PriceperVideo

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Figure 2-2 The point where supply equals demand is known as the market price.

MARKET PRICE IS SET BY SUPPLY AND DEMAND

WORK ASA GROUP

Explain how new technolo-gy and bad weather couldaffect the supply (ordemand) for products andhow prices might change.

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CHANGING PRICES

P rices constantly change. The price of a gallon of gasoline over the past 30years has gone from less than fifty cents to more than two dollars,

depending on supply and demand. When the supply of oil (used to makegasoline) was threatened during various Middle East crises, gasoline priceswent up. As hostilities lessened, prices dropped.

A common economic concern is continually rising prices. An increase inthe average prices of goods and services in a country is known as inflation.Inflation allows people to buy fewer goods and services. Inflation is an indi-cation of the buying power of a country’s monetary unit (such as the U.S.dollar, the British pound, or the Japanese yen).

Inflation has two basic causes. First, when demand exceeds supply, pricesgo up. This is called demand-pull inflation. It can occur when a governmenttries to solve economic problems by printing more money. The increaseddemand comes from the additional currency in circulation. A similar situa-tion can occur if people increase borrowing for spending. Again, demandexceeds supply, and prices tend to rise.

The other cause of inflation occurs when the expenses of a business (such as the cost of salaries or raw materials) increase. This is known as cost-pushinflation. Cost-push inflation results in a higher price charged by a company.

While the United States and Canada have had some periods of high inflation, other countries have experienced more extreme situations.Consumer prices in Peru, for example, increased by 400 percent in onemonth during the early 1990s. This meant an item costing one Peruvian solat the start of the month, cost five sol by month’s end. The government hadto take drastic action to solve the country’s inflation problem.

How do supply and demand determine the market price?

DISAPPEARING LANGUAGES

Language experts predict that inthe next 50 years, almost half of the world’s 6,000 languages will

disappear. The native languages ofpeople are becoming extinct twiceas fast as endangered mammals.This trend could mean a world inthe future dominated by only adozen languages.

Of the 250 languages once spo-ken in Australia, 150 are extinctand 70 are endangered. Some lan-

guage loss is natural and pre-dictable. For a language to remainhealthy, it must be passed on to thenext generation.

Fewer languages may seem bet-ter for business. However, fewerlanguages may also mean fewerdiverse thoughts. Language diversi-ty reflects the music, history, litera-ture, and culture of a society.

Think Critically1. What causes languages to

become extinct?2. Why is language diversity

important?

Why might higher operating costs for a business result in inflation?

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSDefine each of the following terms.

1. supply 2. demand 3. market price 4. inflation

REVIEW GLOBAL BUSINESS CONCEPTSREVIEW GLOBAL BUSINESS CONCEPTS5. What factors affect the supply of a good or service?

6. How does consumer demand create inflation?

7. How can the price of raw materials affect inflation?

SOLSOLVE GLOBAL BUSINESS PROBLEMSVE GLOBAL BUSINESS PROBLEMSIdentify the type of inflation that will result from each of the following situations.

8. The price of silicon used to make computer chips increases.

9. The government prints more money to pay its expenses.

10. Consumers borrow more to buy additional goods and services.

11. Labor unions make employers increase workers’ pay.

THINK CRITICALLTHINK CRITICALLYY12. Sometimes demand goes up even if prices go up. Describe an example

when that might occur.

13. Describe three situations in which inflation has affected you, your family, oryour friends. What were the possible causes of that inflation?

MAKE CONNECTIONSMAKE CONNECTIONS14. MATHEMATICS Figure 2-3 is a graph of the supply and demand for

sweaters at a local clothing store. Use the graph to identify the marketprice. How many sweaters will be bought and sold at that price?

15. HISTORY Research a period in history when a country experienced aperiod of extremely high infla-tion. Where and when did thisperiod of inflation occur? Whatwere the causes of the inflation?What measures were taken toend the period of extreme infla-tion? Did that country laterexperience another period ofextreme inflation?

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� Name the three main factors of production.

� Understand how dif-ferent countries makeeconomic decisions.

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ECONOMIC RESOURCES SATISFY NEEDS

Every country makes economic decisions. These decisions provide a basisfor solving the basic economic problem—unlimited needs and wants

with limited resources. The production of goods and services is a primaryactivity to satisfy the needs and wants of consumers.

To start a company that makes a product requires several elements. Theseelements are the factors of production, which are the three types ofresources used to produce goods and services. These resources are natural,human, and capital, as shown in Figure 2-4.

Natural resources Also known as land, these resources are the rawmaterials that come from the earth, from the water, and from the air. Ironore, gold, silver agricultural products, rivers, and oxygen are examples of nat-ural resources. These items are used in the production of goods and services consumed by individuals, businesses, and governments.

Human resources Also known as labor, these resources are the peoplewho work to create goods and services. While technology has changed oreliminated certain tasks previously performed by people, new types of workare continually being created.

Capital resources Also called capital, these resources include build-ings, money, equipment, and factories used in the production process. Theseitems are expensive and are used over several years by business organizations.

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2-3 ECONOMIC SYSTEMS

FACTORS OF PRODUCTION

Natural Resources

Human Resources

Capital Resources

FACTORS OF PRODUCTIONFOR FAST-FOOD COMPANIES

McDonald’s and KFC were joined byBurger King, Arby’s, and Wendy’s inselling their products to the con-sumers of Mexico. Each of the com-panies combined money, buildings,and equipment (capital resources)with beef, chicken, and wheat (natu-ral resources) and hired local work-ers (human resources) to provide

meals at their restaurants. Some ofthe most popular locations for thefast-food restaurants are Acapulco,Cancun, Tijuana, and suburbanMexico City.

Think Critically1. Go to the web site of one of

these fast-food companies toobtain additional informationabout its business operations in different countries. Prepare aone-page summary of your findings.

2. What might cause problems inobtaining factors of production todo business in another country?

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FACTORS OF PRODUCTION

Figure 2-4 The factors of production are used individually or in combination toproduce the goods and services in any economy.

Name the three factors of production, and give an example of each.

WORK ASA GROUP

List examples of economicresources (land, labor, andcapital) in your community.

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TYPES OF ECONOMIC SYSTEMS

Every nation decides how to use its factors of production to create goodsand services for its people. The way in which these resources are used dif-

fers from country to country. The economic choices of a country relate tothree basic questions.

● What goods and services are to be produced?● How should the goods and services be produced?● For whom should the goods and services be produced?Every country must decide how to use its productive resources to answer

these three basic economic questions. An economic system is the method acountry uses to answer the basic economic questions. Nations organize forproduction and distribution of goods and services based on customs, politi-cal factors, and religious beliefs.

Economic systems can be categorized based on ownership of resources andgovernment involvement in business activities. The three common types ofeconomic systems are command, market, and mixed economies.

❙ COMMAND ECONOMIESThroughout history, many nations decided to answer the basic economicquestions by using central planning. In a command economy, the govern-ment or a central-planning committee regulates the amount, distribution,and price of everything produced. The government also owns the productiveresources of the country. Any income from these resources is used to helpfund government activities. At the start of the 2lst century, Cuba is one ofthe few countries using a command system of economic decision making.The political and economic environment where the government owns all of

the productive resources of the economy and asingle party controls the government is calledcommunism.

In some command economies, consumers havevery few choices of products to buy. A govern-ment agency could even decide what job a personwill have.

❙ MARKET ECONOMIESIn contrast to command economies, where all ofthe decisions are made by the government, mar-ket economies are based on the forces of supplyand demand. Market economies are those inwhich individual companies and consumers makethe decisions about what, how, and for whomitems will be produced. The economic and politi-cal environment where a market economy exists iscalled capitalism. It has three main characteristics.● Private property Individuals have the right

to buy and sell productive resources and toown business enterprises.

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2-3 ECONOMIC SYSTEMS

● Profit motive Individuals are inspired by the opportunity to be reward-ed for taking business risks and for working hard.

● Free, competitive marketplace Consumers have the power to usetheir choices to determine what is to be produced and to influence theprices to be charged.Since market economies have minimal government involvement with

business, they are commonly called free enterprise systems or private enterpriseeconomies. Since every country has some governmental regulations affectingbusiness activities, no perfect market economies exist. The United States,although not a pure market economy, is one of the best examples of this typeof economic system. Despite strong government involvement in businessactivities, the Japanese, Australian, and Canadian economies are also usuallylabeled as market economies.

❙ MIXED ECONOMIESMany economies are a blend betweengovernment involvement in businessand private ownership. This is knownas a mixed economy. For example,some countries have publicly ownedtransportation companies, communi-cation networks, and major indus-tries. The income from these enter-prises is used to help fund govern-ment activities.

Socialism refers to a political andeconomic system with most basicindustries owned and operated bygovernment with the governmentcontrolled by the people as a whole.In socialism, individuals are usuallyfree to engage in other businessopportunities and free to make buy-ing choices. In recent years, examplesof socialist countries include Swedenand France.

In changing from a commandeconomy to a market economy, acountry may sell government-ownedindustries to private companies. Thisprocess of changing an industry frompublicly to privately owned is calledprivatization. In recent years, local governments in the United States havehired private companies to provide services such as trash collection, land-scaping, road repairs, and fire protection.

What are the three types of economic systems?

PUBLIC SERVICES GOING PRIVATE

In recent years, many countrieshave decided to let private compa-nies buy and operate various government-owned businesses.For example, the Mexican govern-ment sold control of the country’stelephone company, airlines, andbanks to private companies. Thisaction helped to save the countrytax dollars. The businesses alsobecame more profitable. Privatiza-tion was also very popular in thecountries of eastern Europe in the1990s as they changed from com-mand to market economies.

Think Critically1. What are some examples of

privatization in your school orcommunity?

2. What problems might be asso-ciated with privatization?

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSDefine each of the following terms.

1. factors of production 4. market economy

2. economic system 5. mixed economy

3. command economy 6. privatization

REVIEW GLOBAL BUSINESS CONCEPTS REVIEW GLOBAL BUSINESS CONCEPTS 7. List examples of the three factors of production.

8. What are the basic economic questions?

9. What are the three characteristics of capitalism?

SOLSOLVE GLOBAL BUSINESS PROBLEMSVE GLOBAL BUSINESS PROBLEMSIndicate whether each of the following situations describes a command econo-my, market economy, or mixed economy.

10. The government tells you what type of job you will have.

11. The government owns the mill that supplies steel to private constructionfirms.

12. Private investors own a mine that supplies gold to a family jewelry maker.

13. You are free to choose when and where you will buy a new CD for yourfriend.

14. A privately owned clothing store buys electricity from a government-ownedpower company.

THINK CRITICALLTHINK CRITICALLY Y 15. Is one of the three factors of production more important than the others?

Explain your answer.

16. If you could choose to live in communism, capitalism, or socialism, whichone would you choose? Why?

MAKE CONNECTIONSMAKE CONNECTIONS17. HISTORY Conduct research to find examples of countries that have

changed from a command economy to a market economy. What kind ofchanges did the country need to make?

18. SCIENCE Describe how scientific developments have changed the skillsneeded for labor.

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� Describe the factorsthat affect economicdevelopment.

� Identify the differentlevels of economicdevelopment.

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DEVELOPMENT FACTORS

In some countries, people travel on a high-speed bullet train to manage acomputer network in a high-rise building. In other countries, people go by

ox cart to a grass hut to operate a hand loom to make cloth for family mem-bers and other people in their village. These differences in living and workenvironments reflect the level of economic development. The main influ-ences on a country’s economic development are literacy level, technology,and agricultural dependency.● Literacy level Countries with better education systems usually provide

more goods and services that are of higher quality for their citizens.● Technology Automated production, distribution, and communications

systems allow companies to create and deliver goods, services, and ideasquickly.

● Agricultural dependency An economy that is largely involved inagriculture does not have the manufacturing base to provide citizens witha large number of high quality products.

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What factors influence a country’s economic development?

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TYPES OF DEVELOPMENT

The level of economic development of a country can be categorized inthree different ways. A country can be industrialized, less developed, or

developing. Each of the different levels has unique characteristics.

❙ INDUSTRIALIZED COUNTRIESThe nations with the greatest economic power are usually those with manylarge companies. An industrialized country is a country with strong busi-ness activity that is usually the result of advanced technology and a highlyeducated population. Such countries have attained high levels of industrial-ization with high standards of living for their residents. Population tends tobe centered in large cities and suburbs rather than in rural areas.

Another factor that supports international trade in industrialized countriesis infrastructure. Infrastructure refers to a nation’s transportation, communi-cation, and utility systems. A country such as Germany—with its efficient rail system, high-speed highways, and computers—is better prepared forinternational business activities than many other nations with weaker infrastructures.

Industrialized countries are actively involved in international business andforeign trade. A portion of the wealth of these nations is the result of suc-cessful business activities conducted throughout the world. Countries com-monly described as industrialized include Canada, the United Kingdom,France, Germany, Italy, Japan, and the United States.

TYPES OF INFRASTRUCTURE

The infrastructure of a country usu-ally refers to the transportation,communication, and utility systemsthat facilitate business activities.These may be referred to as thephysical infrastructure.

Countries also have a naturalinfrastructure. This includes climate,waterways, farmland, and other nat-ural resources that contribute to anation’s economic development.

Business activities are alsoaffected by a nation’s social infra-structure. This involves family rela-tionships, labor unions, the church,educational institutions, and othersocial organizations.

Finally, the managerial or entre-preneurial infrastructure involves theability of people to organize andimplement business activities. Forexample, when McDonald’s firstopened a restaurant in Russia, com-pany representatives worked withlocal businesspeople to teach mana-gerial skills. They taught them howto obtain, coordinate, and use thefood products, workers, buildings,and equipment necessary to oper-ate a fast-food restaurant.

Think Critically1. Explain why “infrastructure”

refers to more than just thetransportation, communication,and utility systems.

2. How do the various types ofinfrastructure affect the econom-ic development of a country?

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❙ LESS-DEVELOPED COUNTRIESMany countries of the world have a very low standard of living. A less-developed country (LDC) is a country with little economic wealth and anemphasis on agriculture or mining. Sometimes these countries have abundantresources but no technology to make use of them. Most LDCs have an averageannual income per person of less than $3,000. This compares to the UnitedStates’ average annual income per person of more than $30,000.

As a result of low incomes in less-developed countries, citizens often haveproblems such as inadequate housing, starvation, and poor health care. This situation results in a high death rate among infants, a shorter lifeexpectancy, and the potential for political instability. Examples of LDCsinclude countries such as Bangladesh, Bulgaria, Chad, Ecuador, Ethiopia,Hungary, Kenya, Liberia, Nepal, Nigeria, Pakistan, Peru, and thePhilippines.

Future economic development for less-developed countries presents a chal-lenge for all nations. Industrialized countries tend to assist LDCs with theproblems of poor health care, limited natural resources, low literacy rates,low levels of employment skills, shortage of investment capital, and uncer-tain political environments. As these obstacles are overcome, all countrieswill benefit.

❙ DEVELOPING COUNTRIESBetween the extremes of economic development are the developing countries that are evolving from less developed to industrialized. Thesenations are characterized by improving educational systems, increasing technology, and expanding industries. These factors result in an increasingnational income. Examples of developing countries include Brazil, India,Singapore, South Korea, Taiwan, and Thailand. Figure 2-5 summarizes thefactors that affect a country’s level of economic development.

LEVELS OF ECONOMIC DEVELOPMENT

Low literacy

Less-Developed Country Developing Country Industrialized Country

Limited technology

Agricultural or mining economy

Improving literacy

Improving technology

Decreasing dependence onargriculture or mining

High literacy

Modern technology

Industrial economy

LEVELS OF ECONOMIC DEVELOPMENT

Figure 2-5 Nations vary in their levels of economic development.

2-4 ACHIEVING ECONOMIC DEVELOPMENT

Describe each of the different levels of economic development.

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSDefine each of the following terms.

1. industrialized country

2. infrastructure

3. less-developed country (LDC)

4. developing country

REVIEW GLOBAL BUSINESS CONCEPTSREVIEW GLOBAL BUSINESS CONCEPTS5. What are the main influences on a country’s economic development?

6. Why is infrastructure important to the economic development of a country?

7. What types of business are commonly found in developing countries?

SOLSOLVE GLOBAL BUSINESS PROBLEMSVE GLOBAL BUSINESS PROBLEMSFor each of the following factors, indicate if the item would usually result in animproving or declining level of economic development for a country.

8. Increased spending on schools and education.

9. Government tax reductions to attract businesses that build new factories.

10. Use of manual labor instead of automated machinery to harvest crops.

11. Reduced government spending for literacy programs.

12. Expanded use of computers for record keeping by business organizations.

THINK CRITICALLTHINK CRITICALLYY13. Why would a modern infrastructure give a country an advantage over other

countries?

14. What actions can improve a country’s education level?

15. Use the Internet to research ways that industrialized countries are workingwith less-developed and developing countries to create economic growth.

MAKE CONNECTIONSMAKE CONNECTIONS16. SCIENCE Describe how new scientific discoveries might improve the eco-

nomic development of a country.

17. CULTURAL STUDIES Describe how a country’s customs and traditionscan influence economic development.

18. TECHNOLOGY Use the Internet to research ways a developing countryis trying to improve the quality of life for its people.

Chapter 2 OUR GLOBAL ECONOMY

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� Discuss economicprinciples that explainthe need for interna-tional trade.

� Identify various meas-ures of economicprogress and develop-ment.

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GOALS

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THE ECONOMICS OF FOREIGN TRADE

In the past, economies were viewed solely in terms of national borders. Withinternational trade expanding every day, these boundaries are no longer

completely valid in defining economies. Countries are interdependent witheach other and so are their economies. Consumers have come to expectgoods and services from around the world, not just from suppliers in theirown country.

Buying and selling among companies in different countries is based on twoeconomic principles. Absolute advantage exists when a country can produce agood or service at a lower cost than other countries. This situation usuallyoccurs as a result of the natural resources or raw materials of a country. Forexample, South American countries have an absolute advantage in coffee production, Canada in lumber sales, and Saudi Arabia in oil production.

A country may have an absolute advantage in more than one area. If so, itmust decide how to maximize its economic wealth. For example, a countrymay be able to produce both computers and clothing better than othercountries. The world market for computers, however, might be stronger.This means the country would better serve its own interests by producingcomputers and buying clothing from other countries. This is an example ofthe second economic principle, comparative advantage. In this situation, acountry specializes in the production of a good or service at which it is relatively more efficient.

Describe an absolute advantage a country may have as a result of naturalresources.

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MEASURING ECONOMIC PROGRESSThe World Cup, the World Series, and the Olympics are sports events thatinvolve scorekeeping. As with sports, international business also keeps score.Various economic measures are used to evaluate and analyze the economicconditions of a country.

❙ MEASURE OF PRODUCTIONGross domestic product (GDP) measures the output of goods that a coun-try produces within its borders. It includes items produced with foreignresources. For example, the GDP of the United States would include auto-mobiles manufactured in the United States by foreign-owned companies.

Gross national product (GNP) measures the total value of all goods andservices produced by the resources of a country. GNP is like GDP but alsoincludes production in other countries using resources of the country whoseGNP is being measured.

Since all nations have different populations, comparing total GDP orGNP is not always meaningful. To help compare the economic progress ofcountries, businesspeople use a per capita comparison, which refers to anamount per person. The per capita GDP of the United States is total GDPdivided by the number of people in the country. Figure 2-6 shows per capitaGDP in U.S. dollars for selected countries.

❙ INTERNATIONAL TRADE ACTIVITYAn important measure of a country’s international business activity is its bal-ance of trade. Balance of trade is the difference between a country’s exportsand imports. When a country exports (sells) more than it imports (buys), it

Chapter 2 OUR GLOBAL ECONOMY

The location of a business or another organization onthe Internet is defined by a URL (uniform resource

locator), such as www.swep.com or www.congress.gov.The last section of a URL is the domain name that indi-cates the type of organization and the country location.

The United States, which has the most web sites in theworld, uses the domain names below, as well as others.

.com for commercial organizations

.org for nonprofit organizations

.gov for government agencies

.edu for educational institutions

.mil for military institutions

.net for networking organizations

When conducting international business, you willencounter domain names that indicate other countries.Some examples include:

.ca for Canada .mx for Mexico

.br for Brazil .jp for Japan

.de for Germany .ng for Nigeria

.uk for United Kingdom .za for South Africa

Think Critically1. How can a domain name help an organization

communicate its purpose or location?2. Locate a web site based in another country. What

differences of format, language, and other featuresare present?

International Domain Names

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has a favorable balance of trade. This is also called a trade surplus. However,if a country imports more than it exports, thenation has an unfavorable balance of trade, or atrade deficit. Figure 2-7 shows a comparison ofthe balance of trade for Canada and the UnitedKingdom.

In the process of doing international busi-ness, payments must be made among business-es in different countries. Since different nationshave different monetary units, a comparison ofthe value of currencies is required. The foreignexchange rate is the value of one country’smoney in relation to the value of the money ofanother country. Each day in the business sec-tion of newspapers or online at various websites, you can see the changing value of curren-cies for different countries.

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PER CAPITA GDP FOR SELECTED COUNTRIES

Per Capita GDPCountry in U.S. Dollars

United States $36,300Canada 29,400Japan 28,000Iceland 27,100France 25,700Sweden 25,400Italy 25,000New Zealand 19,500Greece 19,000Israel 19,000South Africa 9,400Mexico 9,000Brazil 7,400Thailand 6,600China 4,600India 2,540Ethiopia 700Tanzania 610

Source: Time Almanac 2004, Pearson Education Company, Needham, MA, 2004.

Figure 2-6 Per capita GDP can be used to compare economic output amongnations.

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When you buy more than your current income allows, you go into debt.In the same way, when a country continually has an unfavorable balance oftrade, it owes money to others. Foreign debt is the amount a country owesto other countries. While owing money to others will affect a country in several ways, the largest effect on the economy is that the nation must usefuture income to pay for current and past spending. This limits the fundsavailable for improving a country’s infrastructure and for providing servicesfor its citizens in the future.

Chapter 2 OUR GLOBAL ECONOMY

Trade Surplus

BALANCE OF TRADE FOR CANADA AND THE UNITED KINGDOM

$238.3 billionCANADA $273.8 billion

Trade Deficit

$287 billion$337 billion

UNITED KINGDOM

BALANCE OF TRADE FOR CANADA AND UNITED KINGDOM

Figure 2-7 In 2001, Canadian exports were greater than imports, and the countryenjoyed a favorable balance of trade (surplus). The United Kingdom, however, experiencedan unfavorable balance of trade (deficit) because it imported more than it exported.

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THE FOUNDER OF BLACK HISTORY MONTHEach February, the United States celebrates the contributions of AfricanAmericans. Black History Month was the idea of Dr. Carter Godwin Woodson,the son of former slaves, who was born in 1875 in New Canton, Virginia. As ayoung boy, Woodson was only able to attend school a few months of eachyear. The rest of the year he worked in the coal fields of West Virginia.Despite this hardship, Woodson earned a bachelor’s degree from BereaCollege and went on to earn a Ph.D. from Harvard.

Woodson’s many contributions to education include serving as supervisorof a school in the Philippines; serving as a dean at Howard University andWest Virginia State College; and teaching French, Spanish, English, and his-tory in the District of Columbia schools. Despite this success, Woodson gaveup his educational career in 1922 to devote his energies to developing materi-als and programs focusing on the experiences of African Americans. Thiseffort resulted in the publication of 20 books—including The Negro in OurHistory, The Negro Church, and The Miseducation of the Negro. In 1926,Woodson started Negro History Week, which was later expanded andrenamed Black History Month.

Dr. Carter G. Woodson made sure everyone would know about the impor-tant role that Africans and African Americans have played in the history of theUnited States and in the history of the world.

Think Critically1. Conduct Internet research about local and national activities for Black

History Month. Prepare a one-page report of your findings.2. How did Dr. Woodson’s efforts improve the educational and economic

opportunities for African Americans?

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WORK ASA GROUP

Describe situations inwhich a person or countrywould have an absolute orcomparative advantage.

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❙ OTHER ECONOMIC MEASUREMENTSInflation refers to general increases in prices in a country. In the UnitedStates, inflation is measured by the consumer price index (CPI). The CPI isa federal government report published by the Bureau of Labor Statistics.Each month, data are provided on price levels for various products and serv-ices in different regions of the country. This information can help consumersand business managers make buying decisions. Inflation rates for other coun-tries are available on the Internet or in reference books.

A final indicator of a country’s economic situation is the unemploymentrate. When people are not earning an income, they cannot purchase neededgoods and services. This causes other people to lose their jobs. The result is aweaker economy. For any country to operate efficiently, a constant flow ofmoney must be in circulation. When this monetary flow slows down, theeconomic potential of a nation is not realized.

What are common economic measurements of production and internationaltrade activity?

Chapter 2 OUR GLOBAL ECONOMY

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The United States, Germany, and Japan are considered developed coun-tries. However, they still suffer from many of the issues that plagueunderdeveloped countries, such as hunger and homelessness. Accessintlbizxtra.swlearning.com and click on the link for Chapter 2. Read theThinkquest Library article entitled “Development and Underdevelopment:The Dynamics of Economic Progress.” Study the information and write aparagraph detailing some reasons for differences in development levels.

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSDefine each of the following terms.

1. absolute advantage 5. balance of trade

2. comparative advantage 6. foreign exchange rate

3. gross domestic product (GDP) 7. foreign debt

4. gross national product (GNP) 8. consumer price index (CPI)

REVIEW GLOBAL BUSINESS CONCEPTSREVIEW GLOBAL BUSINESS CONCEPTS9. What is the difference between absolute advantage and comparative

advantage?

10. What does gross domestic product (GDP) measure?

11. How does a country’s balance of trade affect its foreign debt?

SOLSOLVE GLOBAL BUSINESS PROBLEMSVE GLOBAL BUSINESS PROBLEMSUsing the data in the Regional Profile at the beginning of this unit, answer thefollowing questions.

12. Which country has the highest per capita GDP? Which has the lowest?

13. Which countries have a trade surplus?

14. Which country had the highest inflation rate of those listed?

THINK CRITICALLTHINK CRITICALLYY15. How can a nation create an absolute advantage through its investment

activities?

16. How would a high inflation rate affect a country’s economic image in theworld?

MAKE CONNECTIONSMAKE CONNECTIONS17. GEOGRAPHY Locate examples of natural resources that would give a

country an absolute advantage.

18. MATHEMATICS A country has exports of $4.2 billion and imports of $4.6billion. (a) What is the country’s balance of trade? (b) Is this amount a tradesurplus or a trade deficit?

19. VISUAL ART Select one or more economic statistics for several coun-tries. Prepare a graph comparing these data.

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Chapter 2 ASSESSMENTCHAPTER SUMMARCHAPTER SUMMARYY

2-1 ECONOMICS AND DECISION MAKINGThe basic economic problem involves scarcity—balancing limited resourceswith unlimited needs and wants.

The steps of the decision-making process are (1) define the problem, (2)identify the alternatives, (3) evaluate the alternatives, (4) make a choice, (5)take action, and (6) review the decision.

2-2 BASICS OF ECONOMICSThe main factors that affect prices are supply and demand.

Inflation occurs when demand exceeds supply or when business operatingcosts increase. There are two basic causes for inflation: demand-pull infla-tion and cost-push inflation.

2-3 ECONOMIC SYSTEMSThe three main factors of production are natural resources (land), humanresources (labor), and capital resources (money and equipment).

Countries make economic decisions using command economies, marketeconomies, and mixed economies.

2-4 ACHIEVING ECONOMIC DEVELOPMENTThe main influences on a country’s economic development are literacylevel, technology, and agricultural dependency.

The three levels of economic development are industrialized countries, less-developed countries, and developing countries.

2-5 RESOURCES SATISFY NEEDS Absolute and comparative advantages are economic principles that explainbuying and selling among companies in different countries.

Measures of economic progress and development include gross domesticproduct, gross national product, balance of trade, foreign exchange rate,foreign debt, and consumer price index.

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Read the Global Focus at the beginning of this chapter, and answer the fol-lowing questions.1. After taking various corrective actions, what future economic problems

might occur in Mexico?2. How has NAFTA (the North American Free Trade Agreement) contributed

to Mexico’s economic development?3. Conduct an Internet search to obtain current information about the

Mexican economy.

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REVIEW GLOBAL BUSINESS TERMSREVIEW GLOBAL BUSINESS TERMSMatch the terms listed with the definitions. Some terms may not be used.

1. The difference between a country’sexports and imports.

2. A situation that exists when a country spe-cializes in the production of a good orservice at which it is relatively more effi-cient.

3. The study of how people choose to uselimited resources to satisfy their unlimitedneeds and wants.

4. The amount of a good or service that busi-nesses are willing and able to make avail-able at a certain price.

5. The process of changing an industry frompublic to private ownership.

6. The limited resources available to satisfythe unlimited needs and wants of people.

7. The amount of a good or service that con-sumers are willing and able to purchase ata certain price.

8. The method a country uses to answer thebasic questions of what to produce, how toproduce it, and for whom to produce it.

9. A measure of the productive output of acountry within its borders, including itemsproduced with foreign resources.

10. The monthly United States federal govern-ment report on inflation.

11. The amount a country owes to other coun-tries.

12. A measure of the total value of all goodsand services produced by the resources ofa country.

13. A nation’s transportation, communication,and utility systems.

14. The three types of resources used to pro-duce goods and services.

15. A country’s ability to produce a good orservice at a lower cost than other countries.

a. absolute advantage

b. balance of trade

c. command economy

d. comparative advan-tage

e. consumer price index(CPI)

f. demand

g. developing country

h. economics

i. economic system

j. factors of production

k. foreign debt

l. foreign exchange rate

m. gross domestic prod-uct (GDP)

n. gross national product(GNP)

o. industrialized country

p. inflation

q. infrastructure

r. less-developed coun-try (LDC)

s. market economy

t. market price

u. mixed economy

v. opportunity cost

w. privatization

x. scarcity

y. supply

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Chapter 2 ASSESSMENTMAKE GLOBAL BUSINESS DECISIONSMAKE GLOBAL BUSINESS DECISIONS16. Describe situations of people, companies, and nations facing the basic eco-

nomic problem of scarcity.

17. Explain how a person goes through the decision-making process manytimes a day, usually without thinking about the specific steps.

18. If the demand for a product in our society is high, what are some thingsthat happen to reduce that demand?

19. Give examples of capital resources that are used by business organizationsto produce goods and services.

20. If you were creating an economic system for a country, what traits wouldyou want it to have? Explain your answer.

21. What problems may arise when a government decides to sell government-owned businesses to private companies?

22. How are people in all countries affected by poor economic conditions inless-developed countries?

23. Name a famous person who is able to do something better than anyoneelse. This is an absolute advantage. Now, for an example of comparativeadvantage, describe a person who does several things well but selects onlyone of these talents to make a living.

24. What actions could a country take to improve its balance of trade?

25. What factors could affect the value of a country’s currency compared to thatof another country?

GLOBAL CONNECTIONSGLOBAL CONNECTIONS26. COMMUNICATIONS Find an article about changes in prices. Prepare a

one-minute oral explanation about how supply and demand influence theseprices.

27. SCIENCE Prepare a poster or display that shows how the factors of pro-duction are used to create a specific product.

28. GEOGRAPHY Prepare a research report on a less-developed country.Describe ways in which that nation could improve its economic develop-ment and the quality of life for its citizens.

29. HISTORY Conduct research on the historic factors of production previousto the Industrial Revolution. What types of factories existed in Europe andAsia before 1870?

30. CAREER PLANNING Find a recent news article that deals with achange in the economy as a result of international business. Describe howthe events in the article could affect the supply and demand for certaininternational jobs.

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ECONOMIC CONDITIONS AROUND THE WORLDObtain data on GDP, per capita income, balance of trade, and unemploymentfor six countries for three recent years. Choose two less-developed countries,two developing countries, and two industrialized countries. (Include the coun-try you chose in Chapter 1.) Use library reference materials (such as TheWorld Almanac or the Statistical Abstract of the United States) or an Internetsearch to obtain your data.

Find additional information about each country. Locate the countries on aworld map or globe. Try to picture their climates, geography, and neighbors.What is it like to live in each of the countries? What natural resources areavailable? What type of economic system operates in each country: com-mand, market, or mixed? What is the literacy rate in each country? Doesmost of the population live in an urban or a rural setting?

1. Prepare four graphs: one that compares GDP for the countries over thepast three years, one that compares per capita income, one that com-pares balance of trade, and one that compares unemployment.

2. Prepare a written report that answers the following questions. Include yourgraphs as part of the report.

● How has the level of economic development changed in recent yearsfor less-developed countries? for developing countries? for industrial-ized countries?

● What do these changes mean for countries involved in internationalbusiness?

● Are GDP, per capita income, balance of trade, and unemployment relat-ed to each other in any way? If so, how are they related?

● How could a company involved in international business use this infor-mation to make better company decisions?

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THE GLOBAL

ENTREPRENEURENTREPRENEURCREATING AN INTERNATIONAL BUSINESS PLAN

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