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Global Economy

Global Economy

Author: James Howard

This lesson is an overview of international trade and the intersection of globalization and business.

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Video Transcription

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Hello, and welcome to this short tutorial on the global economy. Now as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you'll spend here.

Well, the world is getting smaller. It's also getting more connected. The question is, is this a good thing, or is it a bad thing? Now as it relates to the global economy, we're going to take a look at it in this lesson. What we're going to be covering specifically are the basis of trade, products in and out, globalization and the balance, and business and trade.

The key terms for this lesson are going to be international business, imports, exports, globalization, comparative advantage, and absolute advantage. So let's talk about the basis of trade. Now the way countries trade is based on a couple of key concepts. The first is absolute advantage. Now this is the capacity to produce a higher number of goods or services using the same amount of resources as its competitors. Think Saudi Arabia and oil. They have an absolute advantage, because they can produce more oil with the same amount of resources as other countries around the world.

The other one is a comparative advantage. Now this is a trading advantage achieved over another company due to lower opportunity cost. For here, you could think China and shirt manufacturing. There's less of an opportunity cost loss in China to manufacture shirts than other places around the world. Think of it this way.

Let's say I have the Wichita Widgets football team, and I have a brand new player coming to play for me. He can run faster than anybody else, and he can throw the ball farther than anybody else. So he has an absolute advantage in throwing and running. But I can only have him play one position.

Do I put him at the end, or do I make him a quarterback? Well, he can only throw a little bit further than the other quarterbacks, but he can run a whole lot faster than the other ends I'm going to be playing with. So I put him at end. That gives my team a comparative advantage over the rest of the teams in the league.

Now countries talk about a national competitive advantage, and it's a combination of conditions that support an industry. An example here might be Toyota and the manufacture of cars. Now I know the picture is a Toyota. A guy can dream, right? Now this was especially true back in the early 1980s. Toyota was producing a product that was-- they specialized in quality.

Quality for their automobiles was better than anybody else's. So when it came time to trade and compete against the United States in their own backyard, they had an absolute advantage and the amount of quality that they had. But choosing to produce these cars and specialize in that industry gave the nation of Japan a comparative advantage over the US and auto production.

The next thing we're going to look at is products in or out. Products in or out is defined by two terms. The first one is import, so these are goods that are domestically sold that were produced in a foreign country. These are things that are brought into a particular country. And exports are goods that are produced domestically that are sold in foreign nations. As an example, the US grows lots of peanuts, and they're sold all over the world. They're exported to other places in the world, where if you want to buy a good French wine, you're going to have to import that from France.

Now when it comes to international trade, countries take a look at the balance of trade between themselves and other countries. One country at a time, specifically. They have trade surpluses and trade deficits. Now trade surpluses is when the balance of trade between two particular countries is in one country's favor, and a trade deficit is when that balance of trade is in another country's favor.

Let's take a look at Japan from 1979 to 2008. You'll see the net exports there, right here on the graph. This is the net exports for the country for that particular year. And you have the imports here in red and the exports here in blue. As you could see, Japan for this period of time, '79 to 2008, has a balance of trade that is positive, so they have a trade surplus.

Globalization and the balance-- now globalization is the expansion of business into international markets. Now a lot of this is due to less restriction. For instance, physical and nonphysical. We have better modes of transportation. There's also fewer trade restrictions on countries around the world. And it's becoming a flattening world.

In his book, The World Is Flat by Thomas Friedman, he talks about the world flattening. And what he means is the world is going through a globalization process where countries are freer to trade globally, and goods and services from all over the world are available in lots and lots of different places. Now this all started happening since World War II when international trade really started to take off because of a lot of different trade agreements.

International business is what we've been talking about this whole time, and it's defined as business is conducted between two or more nations. And simply the fact that we're talking about globalization, and the fact that it's become such a huge part of everyday business no matter what company you work for, kind of goes to show that Friedman is probably right.

So let's talk about business and trade on an international level for a second. Now international management of trade can be kind of unique. You see, products that may work well at home may not necessarily work well overseas, and we have to consider the demand, the actual demand for that product we're going to sell overseas depending on the cultures and the norms of that particular nation. We also have to worry about, will the product be accepted?

And are there any changes that we have to make in packaging or marketing that will improve the acceptance of that product overseas? Now some other things we need to watch for are, do we need to use, perhaps, an independent agent? Do we need to hire somebody within that country that understands the lay of the land to help market that product for us? Would a strategic alliance with a company already doing business in that same sector be a good idea?

For instance, Pepsi Cola getting together with drink manufacturers in other countries who already understand the taste preferences and the uniqueness of that culture in the country to help us move our products along in that nation. Will there be licensing required? Are there legal loopholes that I have to jump through in order to sell my product? Do I have to get it certified or licensed in order to sell that product overseas, like medical devices or drugs? Will I need to open additional offices overseas?

Will the volume that I foresee happening overseas require me to open an office there, because that is going to affect my decision to market and sell that product there. It is also going to affect my bottom line as far as selling that product. What are the legal requirements? What are the taxes that I'm going to have to pay, if any, on the money that I make overseas? Are there employee restrictions?

What's the law on owning buildings or owning offices? Will I have to simply rent them? What's the risk of a national takeover of my business? These are all things that I have to consider, and that's several reasons why doing business on an international level is kind of unique.

The last thing I have to look at is, will I make the product domestically and ship it overseas? Will I make it in the place I'm going to be selling it? Or will it be a combination of both? Which one of these three is going to work best and be most advantageous for my company?

So let's recap real quick. We talked about the basis of trade, products in and out, we looked at globalization and the balance of trade, and we talked about business and trade-- those unique problems that are associated with managing international trade that don't exist working purely domestically.

I want to thank you, as always, for spending some time with me, and have a great day.

  • International Business

    Business conducted between two or more nations.

  • Imports

    Goods domestically sold that were produced in a foreign nation.

  • Exports

    Goods produced domestically and sold to a foreign nation.

  • Globalization

    The expansion of business into international markets.

  • Comparative Advantage

    A trading advantage achieved over another company due to lower opportunity cost.

  • Absolute Advantage

    The capacity to produce a higher number of goods or services using the same production resources as competitors.