Hey, everyone welcome, for the last time because this is the last lecture of Business Studies. All that I have taught to you till now, I hope, will remain in your memories especially till you give the paper.
So today we will be studying the business from international perspective. Till now we have regarded the business individually but now we will look at it globally.
Exchange rates can be described as the price of one currency in terms of another. If any of you have ever before travelled to a foreign country, you would have seen that the people over there use a different currency from yours. This leads to the need for exchange rates which can also be described as the face value of a currency with relation to others.
The exchange rate between a $ and a Pakistani Rupee is $1:90Rs.This means that for every dollar there are 90 Rs. The other thing this tells us that out of the two PKR is the weak currency.
Exchange rates are determined by the demand and supply of a currency. If the demand of a currency supersedes others than that currency would rise. One way of this increase in demand is to increase your exports so that when other countries buy your goods, they have to convert their currencies to your currency, thereby increasing its demand and leading to a rise in the value of your currency.
This increase in the value of your currency is known as currency appreciation. On the contrary, if the price or value of a currency decreases it is called currency DE-preciation.
Effects of exchange rates on Business Activity
For a government, the rise in currency value means a good thing. However, this is not the case for all businesses, Exporters for instance, are not happy to hear this news. For them currency appreciation means that their products will sell at a lower price in other counties.
An example will help elucidate this matter, take for example a cloth manufacturer in Pakistan. This manufacturer exports his or her jeans and T-shirts to USA. One jeans costs 750Rs/= in Pakistan if sold locally. But if exported it will cost $15 Dollars, equivalent to 1350Rs/=. This will give the manufacturer a greater profit than if he or she sells the jeans at local rate.
However, a currency appreciation means that 1$ equals 80Rs. This means that one pair of jeans will cost 1200Rs. 150 Rs. Less than the previous export price. Therefore, an appreciation of currency would mean bad news for an exporter.
However for an importer the case would be quite opposite.
This phenomenon of exchange rate affects international trade to a considerable degree, acting to the advantage of some and the disadvantage of others. This has led many countries to sign free trade agreements among themselves. Examples are, European Union, North American Free Trade Agreement (NAFTA) etc. This term free trade indicates that all those countries part of the free trade agreement share a common market, this means that no tariffs or quotas exist between such countries and the selling goods there is as easy as selling it at a domestic market.
Another very important feature about these associations is that they share the same currency. E.g in the European Union all countries including France, Italy, Spain use Euro €. This makes sure that exchange rates don’t come in between.
The advantages of this type of agreement are that :
- There are lower costs as money is not wasted in converting one currency to another.
- It is easier to trade with the member countries as they use the same currency.
- No unfair advantage to either member country with regard to currency inequality.
The disadvantages however are that the competition is very intense because foreign firms will not face any hindrance in introducing their prosucts in a country, this will negatively affect the local forms who, by law, cannot be protected from the much larger businesses.
Globalization and Multinational Businesses
Globalization means the increased worldwide competition of businesses. This is due to the increased technology and communication advancements that hence taken place over the course of the last century. Now businesses all over the world are competing with one another , Toyota, a Japanese brand is at par with companies like Ford, BMW, Chrysler and Mercedes. Each of them having a different place of origin. This is a perfect example of globalization.
All of the above brands are also multinational? Doesn’t this bring in your mind the question that why are they both related this way? You are right, all businesses after having initial success aim to become multinational. Multinationals are those businesses that have factories, production or service operations in more than one country.
Advantages of being a multinational are that the country they are operating in has lower unemployment level due to greater jobs at the company. Also, the government has a new source of revenue which is the tax paid by multinationals. For the multinationals the chief reason for establishing itself in a different country is the prospect of cheap labour in that country, this reduces the per unit cost of a product and leads to profit maximization.
The disadvantages are that the multinational could bring a lot of competition for the local more small firms and force them out of business. It could also deplete the mineral resources in the country if it deals with such things. Another very important drawback is that it sends most of the money it makes back to its home country thereby, taking away money from the host country.
So, this is the end of the last lecture of Business Studies, I hope you will all forgive me if I made any mistakes or errors and if I didn’t discuss which you hve problems with. As always we will end our session with FAQs.
Q:1 What is globalization?
Ans. Globalizations is the increased worldwide competition between businesses caused by the technological advances and communication advances in the world.
Q:2 Analyze the importance of multinationals for the economy of a country?
Ans. A multinational is a business that has factories, production and services in more than one country.
Multinationals have great benefits for the host country theyt are in. For instance, the multinational creates more jobs, this increases employment level of the people and hence raises their living standards. Also, the multinational invests money into the surrounding areas for the welfare of its employees and the local public. These include schools and shops which also help raise GDP of the host country. The government of the host country is also benefitting from the multinational by taking revenue from it in the form of tax and this also improves the condition of government.
However, the multinational takes most or all of the money it makes, back to its home country. This makes the host country a little poorer. The company may also deplete the sources of raw material in the host country. Finally, it may force the local firms out of business by giving them tough competition.
Nevertheless, the overall benefits of the multinational’s role in affecting economy are greater than its drawbacks. Therefore it is important for a country.