Do you know the feeling of traveling to another country, going shopping, looking at the price of clothes and thinking, I could never buy a coat for that cheap in the U.S.? It happens with everything from food to clothes to flights. But why are the same goods priced differently in different countries? Short answer, because of globalization, which is what we're going to be talking about today. This is the first video in Unit 2, International Business.
This is a bonus unit, meaning that this topic isn't explicitly included on the official DECA exam breakdown, but it is a foundational concept that you should know for both exams and role plays. Hello and welcome. This is Lesson 2.1 Intro to International Business. Now let's get to work, team.
In this video, we're going to define globalization and differentiate between developed countries and developing countries. Next, we're going to talk about multinational corporations and the four advantages of global trade. We'll discuss exports and imports, foreign exchange rates, and the four things that impact demand for different currencies.
Finally, we'll go over the difference between fixed and floating exchange rates. Before we get into the specifics of international business, we need to define globalization. which is what makes international business possible. Globalization is when countries become more interconnected with one another through international trade.
And in the last few decades, modern technology has made it easier to connect with other countries, so globalization has become a lot more common. But this is challenging for businesses because different countries have different cultures, political structures, and economies, which means that a marketing technique that works in the US won't necessarily work in Japan. Businesses also have to pay attention to international labor laws and legal documents when marketing in different countries. It's a lot.
In our global economy, there are 195 different nations, and each one can be categorized as either a developed or developing country. Sometimes you'll hear these as industrialized or non-industrialized, but international organizations like the United Nations tend to use the terms developed and developing. So what's the difference? It all comes down to socioeconomics. A developed country is one that has a high production level, strong infrastructure, and a high average standard of living for its residents.
Most economists consider a country with a per capita GDP of over $20,000 to be a developed country. Examples include the United States, Canada, and the UK. A developing country is one that has low production levels, weak infrastructure, and a low average standard of living for its residents.
A developing country is known to be an emerging market, since its demand for products or services has the potential to grow. As of 2022, examples include India, Somalia, and Kenya. Some businesses operate in multiple foreign countries in addition to their own. These are called multinationals.
Some examples are Facebook, Amazon, and Tesla. Globalization is complex, but it comes with four big advantages. You can tap into unique natural resources, unique products, lower prices, and growth opportunities. We'll start with how you can access different natural resources. By doing business with companies in different countries, you'll gain access to a variety of different resources that you may not necessarily have access to in your own country.
For example, most coffee in the world is grown in tropical regions near the equator. So American coffee companies like Starbucks have to buy their beans, a natural resource, from foreign countries. Similarly, different countries can specialize in unique products, so doing business with other countries gives you access to different options of finished goods.
For example, American companies buy a lot of silk from China and India. Some countries offer products at lower prices. Maybe that's because the cost of labor is less expensive, or they have lots of natural resources, which drives down their prices. As a result, Many businesses produce goods in countries where it's less expensive to hire workers.
Finally, companies may choose to do business abroad in order to gain access to new markets. For example, many hotel chains set up locations in foreign countries to cater to consumer demand in those areas. Now, we've talked about why it's a good idea to do business abroad, which leads us to exports and imports. Exports are goods that a business sells to another country, while imports are goods purchased from another country.
We can understand how much a country is trading by finding their balance of trade. which is how much they export minus how much they import. If a country has a positive balance of trade, meaning they export more than they import, they have a trade surplus. And most economists agree that a trade surplus is favorable to a trade deficit when there is a negative balance of trade. So there are more imports than exports.
One more thing before you start your multinational company. Exchange rates. As you know, each country has its own currency. In the US, we have the dollar.
Mexico has the peso, Japan has the yen, and so on. When you travel to another country, you'll have to exchange your dollars for pesos yen, pounds, rupees, etc. so that you can spend money in that country. What you may not know though is that there is a cost to exchange the currencies. It is called the foreign exchange rate. All currencies have relative value to each other, meaning that one US dollar can be worth one and a half Canadian dollars, half a euro, etc.
And most currencies are called floating currencies, meaning that the foreign exchange rate of that currency is set by supply and demand. Currencies are exchanged on the foreign exchange market, or forex, which works similarly to a stock market. If the price of a foreign currency decreases relative to the US dollar, we say that the US dollar has become stronger.
For example, if 1 peso was worth 8 cents in 2021, then 7 cents in 2022, the US dollar became stronger relative to the peso. A strong US dollar indicates that imports are cheaper and exports are more expensive. Unfortunately, a stronger US dollar actually hurts US companies who are trying to export their products because it's more expensive for people in foreign countries to buy US goods.
On the other hand, the price of a foreign currency can increase relative to the US dollar, which means that the US dollar is weaker. For example, if 1 euro was $1.3 in 2021 and it's $1.5 in 2022, the US dollar has become weaker. A weak US dollar indicates that exports are cheaper and imports are more expensive.
Therefore, a weaker US dollar hurts American buyers who purchase from other countries because a dollar can no longer get you as much. There are four things that can change a country's currency value. First, high demand for that country's products means more demand for their currency.
Second, high interest rates encourage investments. Third, low inflation makes that country's currency attractive. And finally, political stability makes currencies look stable and safe. When Russia invaded Ukraine in 2022, Russia's currency dropped dramatically in value since many businesses stopped doing business in Russia. There was less demand for their currency, so the price fell.
In the past, countries used a fixed exchange rate, which is exactly what it sounds like. A dollar was always worth a fixed amount of yen or pesos. But these days, countries use a floating exchange rate, which allows the currency's exchange rate to change every day.
But countries still want their currency to be relatively stable. And one way to do that is through managed floats. This is when central banks buy and sell other currencies to stabilize the exchange rate. Now that we've gone over all the content, it's time to test your knowledge with a real deca question.
Pause the video and try to answer. The answer is C, because in John's situation, the domestic currency appreciated against the foreign currency. Therefore, his profits decreased once he exchanged his foreign earnings to the domestic currency.
This is an example of fluctuations in foreign exchange rates. And here are the sources we used for this video. Feel free to check them out if you have any questions.
Alright. Alright, that pretty much sums up Lesson 2.1 Intro to International Business. Great work team and we'll see you in the next video.