RSM 100 Y1
The Contemporary Global Economy
Globalization: The integration of markets globally.
Imports: Goods that are made abroad but sold domestically.
Exports: Goods that are made domestically but sold abroad.
International trade becoming INCREASINGLY CENTRAL.
1. Governments and businesses more aware of benefits of globalization
2. New technologies made international travel, communication and commerce,
easier, faster and cheaper.
3. Competitive pressures.
1. Exploitation of workers in LDCs and bypass domestic environmental and tax
2. Loss of cultural heritages and benefits the rich more than the poor.
3. Any economic downfall would affect any interconnected economies if
1. The Major World Marketplaces
Use of “per capita income” to divide countries into one of four groups.
i. High-income Countries
Annual “Per capita income” greater than US $11,115
ii. Upper-middle-income Countries
Annual “Per capita income” between US $3595 and $11,115
iii. Low-middle-income Countries
Annual “Per capita income” between US $905 and $3595
iv. Low-income Countries
Annual “Per capita income” less than US $905. Due to low HDI, these
countries are less attractive to international businesses. 1. Geographic Clusters
There are THREE major marketplaces in the world. The THREE are generally
upper-middle and high-income countries, as they include the world’s largest
economies, biggest corporations, most influential financial markets and high-
1. North America
The United States of America is the single largest marketplace and has
the most stable economy in the world. Canada also is quite a large
economy. The US and Canada are each other’s trading partners.
Mexico has also become a major part of the economy, where cheap
labor and low transportation costs have attracted many international
There are TWO DIVISIONS in Europe, WESTERN and EASTERN.
Western is mostly Germany, Italy, France and the UK.
Eastern has many international manufacturing facilities set up, but due
to the government instability, the economic development in regions
such as Russia and Bulgaria have been hampered and the recession
exacerbated the situation.
Japan, Taiwan, China, Thailand, Korea, Indonesia, Singapore,
Philippines and Australia. Strong entries in the automobile, electronics
and banking industries.
Major source of competition for North American firms. 2. Forms of Competitive Advantage
There is trade in the global economy because no country can produce ALL
necessary goods and services. Reasons for why countries engage in
international trade are:
1. Absolute Advantage:
When a country can produce a product a lot cheaper and of better
quality than any other country.
2. Comparative Advantage
When a country is able to produce some products cheaper and of better
quality than it can other products.
3. National Competitive Advantage
When the four conditions are favorable:
i) Factor Conditions
ii) Demand conditions
iii) Related and Supporting Industries
iv) Strategies, structures and rivalries
They determine the environment.
International Competitiveness: Ability of a country to generate more
wealth than its competitors in world markets. 3. Import-Export Balances
There are two measures in measuring the overall balance of imports and
1. Balance of Trade
Difference in value between a nation’s total export and total imports.
A country that EXPORTS MORE has a TRADE SURPLUS.
A country that IMPORTS MORE has a TRADE DEFICIT.
2. Balance of Payments
Difference between money flow into the economy and out of the
economy as a result of trade and other transactions.
Not just trade, but money spent by tourists, money spent on foreign aid
programs and money spent on buying and selling of currency on
international money markets all affect balance of payments.
An UNFAVORABLE SITUATION occurs when more money FLOWS
OUT than into the economy.
4. Exchange Rates
The RATE at which the CURRENCY of one nation can be exchanged for that
A currency is STRONG when there is HIGH DEMAND for the currency.
Fixed Exchange Rate: A value of a currency is CONSTANT compared to
Floating Exchange Rate: A value of a currency is based on MARKET
Example: If the CANADIAN DOLLAR becomes STRONGER than the
British Pound, the PRICES of CANADIAN PRODUCTS would RISE in
ENGLAND and the PRICES of ENGLISH PRODUCTS will fall in
CANADA. The English will buy FEWER Canadian goods and Canadians will
buy MORE English goods. This will lead to a Canadian trade deficit in
1. Exchange Rates and Competition
Companies with international operations must watch for currency rate
fluctuations as that will affect overseas demand for their products.
When a value of a country’s DOMESTIC currency rises
(STRONGER), companies based there find it HARDER to EXPORT
goods to foreign markets and it is EASIER for FOREIGN companies to
enter local markets. It also makes it COST-EFFICIENT for
DOMESTIC companies, to move facilities to lower-cost sites in foreign
countries. When a value of a country’s DOMESTIC currency decreases
(WEAKER), the opposite occurs. As the value of a country’s
CURRENCY FALLS, it’s BALANCE OF TRADE should IMPROVE,
because domestic companies should experience a BOOST of
EXPORTS. There will also be a DECREASE in the INCENTIVES for
foreign companies to sell products DOMESTICALLY.
International Business Management
The difficulty of international business management is that the business operates in
several markets scattered around the world. It is therefore difficult to make decisions for
1. Going International
Gauging International Demand:
A company must decide whether there is demand for their products abroad. The
purpose of the products may also differ according to locations. Bicycles in China are
transportation while in Canada they are recreational. Therefore, MARKET
RESEARCH is KEY.
Adapting to Customer Needs:
1. If there is demand, the business must then consider how to adapt the product to
meet the special demands and expectations of the foreign customers.
Examples: Movies must be translated. McDonald’s in France sell wine, beer in
Germany and meatless sandwiches in India to meet local tastes and preferences.
2. Assessment of the business skills needed to operate in the foreign country is also
2. Levels of Involvement in International Business
1. Exporters and Importers
LOWEST level of involvement.