Business and the International Economy

Business and the International Economy

The International Economy and its Implications

Exchange Rates

  • Exchange rates refer to the value of one country’s currency in relation to another. They fluctuate due to demand and supply forces in the foreign exchange market.
  • A strong currency might reduce the competitiveness of a country’s exported goods, as their prices will appear high to foreign buyers.
  • A weak currency can drive up the cost of importing raw materials and products, leading to potential inflation.

Globalisation

  • Globalisation is the increasing integration and interdependence of national economies.
  • Globalisation can lead to increased competition, as businesses can source products from around the world.
  • Globalisation also presents opportunities, allow firms to enter new markets and access a larger customer base.

Trade Blocks and Agreements

  • Trade blocks such as the European Union (EU) and the North American Free Trade Agreement (NAFTA) enable tariff-free trading among member countries.
  • However, non-member countries may face tariffs or quotas, making their products less competitive.

Influence of International Economic Trends on Businesses

Opportunities and Threats from International Trade

  • Businesses can expand to foreign markets, reaching new customers and diversifying their revenue streams.
  • However, businesses can suffer if foreign markets experience economic downturns, or if host countries impose restrictive trade policies.

Managing Economic Risk

  • Businesses can reduce economic risk by hedging, which involves protecting against potential losses by making an ‘offsetting’ trade.
  • Companies can also spread risk through diversification, operating in multiple geographical markets and sectors.

Governments and International Trade

  • Governments can influence international business through policies such as tariffs, quotas, and exchange controls.
  • Governments can also negotiate trade agreements to secure better trading conditions for their home-grown businesses.

Impact of Exchange Rate Fluctuations

  • Exchange rate fluctuations can affect businesses’ profitability, particularly those involved in import/export.
  • For importers, a fall in their own currency makes foreign goods more expensive, impacting the cost of goods sold.
  • For exporters, a rise in their own currency can make their products more expensive for foreign customers, potentially reducing demand.