{"id":596,"date":"2015-04-22T19:31:48","date_gmt":"2015-04-22T19:31:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&#038;p=596"},"modified":"2016-06-17T18:19:40","modified_gmt":"2016-06-17T18:19:40","slug":"reading-the-globalization-of-business","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/chapter\/reading-the-globalization-of-business\/","title":{"raw":"Reading: The Balance of Trade","rendered":"Reading: The Balance of Trade"},"content":{"raw":"<h2>Why Nations Trade<\/h2>\r\nWhy does the United States import automobiles, steel, digital phones, and apparel from other countries? Why don\u2019t we just make them ourselves? Why do other countries buy wheat, chemicals, machinery, and consulting services from us? Because no national economy produces all the goods and services that its people need.\r\n<ul>\r\n\t<li>Countries are <em>importers<\/em> when they buy goods and services from other countries;<\/li>\r\n\t<li>When they sell products to other nations, they\u2019re <em>exporters<\/em>.<\/li>\r\n<\/ul>\r\nThe monetary value of international trade is enormous. In 2014, the total value of worldwide trade in merchandise and commercial services was $22.5 <em>trillion<\/em>.\r\n<h2>How Do We Measure Trade between Nations?<\/h2>\r\nTo evaluate the nature and consequences of its international trade, a nation looks at two key indicators: balance of trade and balance of payments. We determine a country\u2019s <strong><span class=\"im_margin_term\"><span class=\"im_glossterm\">balance of trade<\/span><\/span><\/strong> by subtracting the value of its imports from the value of its exports. If a country sells more products than it buys, it has a favorable balance, called a <span class=\"im_margin_term\"><span class=\"im_glossterm\">trade surplus<\/span><\/span>. If it buys more than it sells, it has an unfavorable balance, or a <span class=\"im_margin_term\"><span class=\"im_glossterm\">trade deficit<\/span><\/span>.\r\n<p style=\"text-align: center;\"><em>Balance of trade = Value of exports - Value of imports<\/em><\/p>\r\nFor many years, the United States has had a trade deficit: we buy far more goods from the rest of the world than we sell overseas. This fact shouldn\u2019t be surprising. With high income levels, we not only consume a sizable portion of our own domestically produced goods but enthusiastically buy imported goods. Other countries, such as China and Taiwan, which manufacture primarily for export, have large trade surpluses because they sell far more goods overseas than they buy.\r\n<h2 class=\"im_title im_editable im_block\">Managing the National Credit Card<\/h2>\r\nAre trade deficits a bad thing? Not necessarily. They can be positive if a country\u2019s economy is strong enough both to keep growing and to generate the jobs and incomes that permit its citizens to buy the best the world has to offer. That was certainly the case in the United States in the 1990s. Some experts, however, are alarmed at our rapidly accelerating trade deficit. Investment guru Warren Buffet, for example, cautions that no country can continuously sustain large and burgeoning trade deficits. Why not? Because creditor nations will eventually stop taking IOUs from debtor nations, and when that happens, the national spending spree will have to cease. \u201cOur national credit card,\u201d he warns, \u201callows us to charge truly breathtaking amounts. But that card\u2019s credit line is not limitless.\u201d<span id=\"fwk-collins-fn03_002\" class=\"im_footnote\">\r\n<\/span>\r\n\r\nBy the same token, trade surpluses aren\u2019t necessarily good for a nation\u2019s consumers. Japan\u2019s export-fueled economy produced high economic growth in the 1970s and 1980s. But most domestically made consumer goods were priced at artificially high levels inside Japan itself\u2014so high, in fact, that many Japanese traveled overseas to buy the electronics and other high-quality goods on which Japanese trade was dependent. CD players and televisions were significantly cheaper in Honolulu or Los Angeles than in Tokyo. How did this situation come about? Though Japan manufactures a variety of goods, many of them are made for export. To secure shares in international markets, Japan prices its exported goods competitively. Inside Japan, because competition is limited, producers can put artificially high prices on Japanese-made goods. Due to a number of factors (high demand for a limited supply of imported goods, high shipping and distribution costs, and other costs incurred by importers in a nation that tends to protect its own industries), imported goods are also expensive.<span id=\"fwk-collins-fn03_003\" class=\"im_footnote\">\r\n<\/span>\r\n<div id=\"collins-ch03_s01_s03_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Balance of Payments<\/h2>\r\nThe second key measure of the effectiveness of international trade is <strong><span class=\"im_margin_term\"><span class=\"im_glossterm\">balance of payments<\/span><\/span><\/strong>: the difference, over a period of time, between the total flow of money coming into a country and the total flow of money going out.\r\n<p style=\"text-align: center;\"><em>Balance of Payments = Total flow of money coming into a country - Total flow of money going out\u00a0<\/em><\/p>\r\nAs in its balance of trade, the biggest factor in a country\u2019s balance of payments is the money that comes in and goes out as a result of imports and exports. But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid. For example, if a U.S. company buys some real estate in a foreign country, that investment counts in the U.S. balance of payments, but not in its balance of trade, which measures only import and export transactions. In the long run, having an unfavorable balance of payments can negatively affect the stability of a country\u2019s currency. Some observers are worried about the U.S. dollar, which has undergone an accelerating pattern of unfavorable balances of payments since the 1970s. For one thing, carrying negative balances has forced the United States to cover its debt by borrowing from other countries. The figure below provides a brief historical overview to illustrate the relationship between the United States\u2019 balance of trade and its balance of payments.\r\n\r\n[caption id=\"attachment_5872\" align=\"aligncenter\" width=\"1024\"]<img class=\"wp-image-5872 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2016\/06\/17181912\/because-1024x435.jpg\" alt=\"Chart depicting U.S. imports, exports, and balance of payments from 1996 to 2010. While both imports and exports have been rising (though they both had a downturn in 2009), the balance of payments has been going down (with an uptick in 2009). Because we buy more products from foreign companies than we sell to foreign companies and consumers, we import more than we export. The gap between what we spend and what we take in is reflected in our balance of payments.\" width=\"1024\" height=\"435\" \/> Figure 1.\u00a0U.S. Imports, Exports, and Balance of Payments, 1994\u20132010[\/caption]\r\n\r\n<div id=\"collins-ch03_s01_s03_s02_f01\" class=\"im_figure im_large im_medium-height im_editable im_block\">\r\n\r\n&nbsp;\r\n\r\n&nbsp;\r\n\r\n<em class=\"im_emphasis\">Note<\/em>: Figures are for \u201cgoods\u201d only, not \u201cgoods and services.\u201d\u00a0Source: U.S. Census Bureau, Foreign Trade Division.\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"keytakeaways\">\r\n<h3>KEY TAKEAWAYS<\/h3>\r\n<ul>\r\n\t<li>Nations trade because they don\u2019t produce all the products that their inhabitants need.\r\n<ul>\r\n\t<li>They import those that they need but don\u2019t produce and export those that are needed elsewhere.<\/li>\r\n\t<li>To understand why certain countries import or export certain products, you need to realize that not all countries are good at producing or are able to produce the same products.<\/li>\r\n\t<li>The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world.<\/li>\r\n<\/ul>\r\n<\/li>\r\n\t<li>To evaluate the impact of its international trade, a nation looks at two key indicators: balance of trade and balance of payments.<\/li>\r\n\t<li>We determine a country\u2019s <strong>balance of trade<\/strong> by subtracting the value of its imports from the value of its exports.\r\n<ul>\r\n\t<li>If a country sells more products than it buys, it has a favorable balance, called a <strong>trade surplus<\/strong>.<\/li>\r\n\t<li>If it buys more than it sells, it has an unfavorable balance, or a <strong>trade deficit<\/strong>.<\/li>\r\n<\/ul>\r\n<\/li>\r\n\t<li>The <strong>balance of payments<\/strong> is the difference, over a period of time, between the total flow coming into a country and the total flow going out.\r\n<ul>\r\n\t<li>As in its balance of trade, the biggest factor in a country\u2019s balance of payments is the money that comes in and goes out as a result of exports and imports.<\/li>\r\n\t<li>But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid.<\/li>\r\n<\/ul>\r\n<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Reflection Questions<\/h2>\r\n<ul>\r\n\t<li>Should the U.S. buy fewer foreign goods and seek to improve its balance of trade?<\/li>\r\n<\/ul>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<h2>Check Your Understanding<\/h2>\r\nAnswer the question(s) below to see how well you understand the topics covered in this section. This short quiz does <strong>not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.\r\n\r\nUse this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/162","rendered":"<h2>Why Nations Trade<\/h2>\n<p>Why does the United States import automobiles, steel, digital phones, and apparel from other countries? Why don\u2019t we just make them ourselves? Why do other countries buy wheat, chemicals, machinery, and consulting services from us? Because no national economy produces all the goods and services that its people need.<\/p>\n<ul>\n<li>Countries are <em>importers<\/em> when they buy goods and services from other countries;<\/li>\n<li>When they sell products to other nations, they\u2019re <em>exporters<\/em>.<\/li>\n<\/ul>\n<p>The monetary value of international trade is enormous. In 2014, the total value of worldwide trade in merchandise and commercial services was $22.5 <em>trillion<\/em>.<\/p>\n<h2>How Do We Measure Trade between Nations?<\/h2>\n<p>To evaluate the nature and consequences of its international trade, a nation looks at two key indicators: balance of trade and balance of payments. We determine a country\u2019s <strong><span class=\"im_margin_term\"><span class=\"im_glossterm\">balance of trade<\/span><\/span><\/strong> by subtracting the value of its imports from the value of its exports. If a country sells more products than it buys, it has a favorable balance, called a <span class=\"im_margin_term\"><span class=\"im_glossterm\">trade surplus<\/span><\/span>. If it buys more than it sells, it has an unfavorable balance, or a <span class=\"im_margin_term\"><span class=\"im_glossterm\">trade deficit<\/span><\/span>.<\/p>\n<p style=\"text-align: center;\"><em>Balance of trade = Value of exports &#8211; Value of imports<\/em><\/p>\n<p>For many years, the United States has had a trade deficit: we buy far more goods from the rest of the world than we sell overseas. This fact shouldn\u2019t be surprising. With high income levels, we not only consume a sizable portion of our own domestically produced goods but enthusiastically buy imported goods. Other countries, such as China and Taiwan, which manufacture primarily for export, have large trade surpluses because they sell far more goods overseas than they buy.<\/p>\n<h2 class=\"im_title im_editable im_block\">Managing the National Credit Card<\/h2>\n<p>Are trade deficits a bad thing? Not necessarily. They can be positive if a country\u2019s economy is strong enough both to keep growing and to generate the jobs and incomes that permit its citizens to buy the best the world has to offer. That was certainly the case in the United States in the 1990s. Some experts, however, are alarmed at our rapidly accelerating trade deficit. Investment guru Warren Buffet, for example, cautions that no country can continuously sustain large and burgeoning trade deficits. Why not? Because creditor nations will eventually stop taking IOUs from debtor nations, and when that happens, the national spending spree will have to cease. \u201cOur national credit card,\u201d he warns, \u201callows us to charge truly breathtaking amounts. But that card\u2019s credit line is not limitless.\u201d<span id=\"fwk-collins-fn03_002\" class=\"im_footnote\"><br \/>\n<\/span><\/p>\n<p>By the same token, trade surpluses aren\u2019t necessarily good for a nation\u2019s consumers. Japan\u2019s export-fueled economy produced high economic growth in the 1970s and 1980s. But most domestically made consumer goods were priced at artificially high levels inside Japan itself\u2014so high, in fact, that many Japanese traveled overseas to buy the electronics and other high-quality goods on which Japanese trade was dependent. CD players and televisions were significantly cheaper in Honolulu or Los Angeles than in Tokyo. How did this situation come about? Though Japan manufactures a variety of goods, many of them are made for export. To secure shares in international markets, Japan prices its exported goods competitively. Inside Japan, because competition is limited, producers can put artificially high prices on Japanese-made goods. Due to a number of factors (high demand for a limited supply of imported goods, high shipping and distribution costs, and other costs incurred by importers in a nation that tends to protect its own industries), imported goods are also expensive.<span id=\"fwk-collins-fn03_003\" class=\"im_footnote\"><br \/>\n<\/span><\/p>\n<div id=\"collins-ch03_s01_s03_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Balance of Payments<\/h2>\n<p>The second key measure of the effectiveness of international trade is <strong><span class=\"im_margin_term\"><span class=\"im_glossterm\">balance of payments<\/span><\/span><\/strong>: the difference, over a period of time, between the total flow of money coming into a country and the total flow of money going out.<\/p>\n<p style=\"text-align: center;\"><em>Balance of Payments = Total flow of money coming into a country &#8211; Total flow of money going out\u00a0<\/em><\/p>\n<p>As in its balance of trade, the biggest factor in a country\u2019s balance of payments is the money that comes in and goes out as a result of imports and exports. But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid. For example, if a U.S. company buys some real estate in a foreign country, that investment counts in the U.S. balance of payments, but not in its balance of trade, which measures only import and export transactions. In the long run, having an unfavorable balance of payments can negatively affect the stability of a country\u2019s currency. Some observers are worried about the U.S. dollar, which has undergone an accelerating pattern of unfavorable balances of payments since the 1970s. For one thing, carrying negative balances has forced the United States to cover its debt by borrowing from other countries. The figure below provides a brief historical overview to illustrate the relationship between the United States\u2019 balance of trade and its balance of payments.<\/p>\n<div id=\"attachment_5872\" style=\"width: 1034px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-5872\" class=\"wp-image-5872 size-large\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/1120\/2016\/06\/17181912\/because-1024x435.jpg\" alt=\"Chart depicting U.S. imports, exports, and balance of payments from 1996 to 2010. While both imports and exports have been rising (though they both had a downturn in 2009), the balance of payments has been going down (with an uptick in 2009). Because we buy more products from foreign companies than we sell to foreign companies and consumers, we import more than we export. The gap between what we spend and what we take in is reflected in our balance of payments.\" width=\"1024\" height=\"435\" \/><\/p>\n<p id=\"caption-attachment-5872\" class=\"wp-caption-text\">Figure 1.\u00a0U.S. Imports, Exports, and Balance of Payments, 1994\u20132010<\/p>\n<\/div>\n<div id=\"collins-ch03_s01_s03_s02_f01\" class=\"im_figure im_large im_medium-height im_editable im_block\">\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><em class=\"im_emphasis\">Note<\/em>: Figures are for \u201cgoods\u201d only, not \u201cgoods and services.\u201d\u00a0Source: U.S. Census Bureau, Foreign Trade Division.<\/p>\n<\/div>\n<\/div>\n<div class=\"keytakeaways\">\n<h3>KEY TAKEAWAYS<\/h3>\n<ul>\n<li>Nations trade because they don\u2019t produce all the products that their inhabitants need.\n<ul>\n<li>They import those that they need but don\u2019t produce and export those that are needed elsewhere.<\/li>\n<li>To understand why certain countries import or export certain products, you need to realize that not all countries are good at producing or are able to produce the same products.<\/li>\n<li>The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world.<\/li>\n<\/ul>\n<\/li>\n<li>To evaluate the impact of its international trade, a nation looks at two key indicators: balance of trade and balance of payments.<\/li>\n<li>We determine a country\u2019s <strong>balance of trade<\/strong> by subtracting the value of its imports from the value of its exports.\n<ul>\n<li>If a country sells more products than it buys, it has a favorable balance, called a <strong>trade surplus<\/strong>.<\/li>\n<li>If it buys more than it sells, it has an unfavorable balance, or a <strong>trade deficit<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li>The <strong>balance of payments<\/strong> is the difference, over a period of time, between the total flow coming into a country and the total flow going out.\n<ul>\n<li>As in its balance of trade, the biggest factor in a country\u2019s balance of payments is the money that comes in and goes out as a result of exports and imports.<\/li>\n<li>But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/div>\n<h2>Reflection Questions<\/h2>\n<ul>\n<li>Should the U.S. buy fewer foreign goods and seek to improve its balance of trade?<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<h2>Check Your Understanding<\/h2>\n<p>Answer the question(s) below to see how well you understand the topics covered in this section. This short quiz does <strong>not<\/strong> count toward your grade in the class, and you can retake it an unlimited number of times.<\/p>\n<p>Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.<\/p>\n<p>\t<iframe id=\"lumen_assessment_162\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=162&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_162\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-596\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>An Introduction to Business. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/an-introduction-to-business-v2.0\/\">http:\/\/2012books.lardbucket.org\/books\/an-introduction-to-business-v2.0\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":78,"menu_order":8,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"An Introduction to Business\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/an-introduction-to-business-v2.0\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"a3baee58-44fb-4455-9082-2b0327b9ff6a","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-596","chapter","type-chapter","status-publish","hentry"],"part":82,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/596","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/users\/78"}],"version-history":[{"count":27,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/596\/revisions"}],"predecessor-version":[{"id":5873,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/596\/revisions\/5873"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/parts\/82"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapters\/596\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/media?parent=596"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/pressbooks\/v2\/chapter-type?post=596"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/contributor?post=596"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/wp-json\/wp\/v2\/license?post=596"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}