Business in the international community – Business Studies notes for IGCSE

Business in the international community

The international dimension
In business, no manager can operate without being affected by the international community.

Exchange rates
Exchange rates is the value of one currency compared to another.

How are exchange rates determined?
There are two type so currencies:

  • Floating rates: The exchange rate of the currency is allowed to change freely depending on market forces, i.e supply and demand of the currency.
  • Fixed rates: The exchange rate of the currency is set by the country’s central bank.

When the exchange rate rises, it is called appreciation. When it falls, it is called depreciation.




How are businesses affected by changing exchange rates?

  • Appreciation:

    • Import prices fall.
    • Export prices rise.
  • Depreciation:
    • Import prices rise.
    • Export prices fall.

These exchange rate movements can cause serious damage to businesses, making business endeavours that would have been profitable make losses because of changes in the currencies. The EU, for example, wants to limit these bad effects, and hence established a common currency, the Euro.

International economic organisations

  • Economic and political unions. (e.g. the EU)
  • Free trade agreements. (e.g. NAFTA)
  • Organisations working for free trade between countries. (WTO)

The European Union

  • Consists of 25 European countries.
  • Creates a single market in the EU.
    • To tariffs, quotas or any trade boundaries.
    • This results in:
      • A huge market benefiting from economies of scale.
      • Increased competition resulting in better products.
  • Common currency.
    • Issue of Euros are controlled by the European Central Bank.
    • Interest rates for the Euro become the same.
  • The social charter:
    • The EU wants to improve working
      conditions and make finding
      josbs equal in the EU.
    • The main conditions include:
      • Workers can look for work anywhere in the EU.
      • Workers must be consulted on important issues.
      • Equal treatment of full/half time workers.
      • Limits on maximum working hours.
      • Improved health and safety rules at work.

Advantages for the UK to join the EU

  • Lower costs because:
    • One price list throughout Europe can be used.
    • No more charge through currency conversion.
  • Easier to:
    • Trade with EU countries.
    • Compare costs of supplies with EU countries.
  • No risk of losing out on exchange rate changes.

 

Disadvantages for the UK to join the EU

  • More competition from non-UK firms.
  • Consumers might buy cheaper products from other EU countries.
  • The rate of interest might no longer suit UK firms.

Free trade unions
Eliminates all trade barriers. Businesses within the free trade union are affected in the following ways:

  • More competition from foreign firms.
    • Consumers have more choice and prices are lower.
  • No ‘protection‘ by governments.
  • More opportunities for exporting.
    • Efficient firms will be more successful.

The long-term aim of the free trade union is to encourage
trade between the member countries, ultimately improving living conditions for the people.

Globalisation

Globalisation is the word used to describe the increased worldwide competition and business
activity. Goods and services that once can only be found in one country has spread all around the world. There are several reasons for this:

  • Free trade agreements encourage international trade.
  • Improved travel links and communication.
  • Countries that have been undeveloped before start to develop and export their own goods, leading to more international competition.

Globalisation results in:

  • More choices and lower prices for the consumer.
  • Businesses look into more ways to become more efficient.
    • Why many businesses merge to become multinationals.
  • Inefficient businesses go out of business.
  • Free trade results in:
    • More workers losing jobs, since governments can no longer protect them from foreign competition.

Multinational businesses
Multinationals are businesses that have factories, services, or operations in more than one country. It is important to note that, for a business to become multinationals, they must produce goods in more than one country.

Why do firms become multinationals

  • To cut costs:

    • Labour costs.
    • Raw material costs.
  • To extract raw materials not found elsewhere.
  • To produce goods nearer to the market.
  • To bypass trade barriers.
  • To expand and spread risks.

Advantages of multinationals operating in a country

  • Jobs are created.
  • New investment increases national output.
  • Imports are reduced since there are more goods in the country. More exports.
  • More taxes are paid to the government.

Disadvantages of multinationals operating in a country

  • Jobs created are usually unskilled jobs.
  • Local firms are forced out of business since they can’t compete with multinationals.
  • Profits flow out of the country.
  • Multinationals use up scarce resources.
  • May influence the government.



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