Page 109 - Business Principles and Management

Unit 1

owned a TV, sales leveled off—the maturity stage. When color TVs appeared,
the sales of black-and-white sets started falling—the decline stage.
How does the product life cycle theory relate to trade and investment? When
sales begin to slow in a country (the mature stage), Company A that makes the
product starts selling it to foreign countries where the product may be in the intro-
ductory or growth stage. However, selling abroad is expensive because of trans-
portation, tariffs, quotas, and other nontariff barriers. Companies in the foreign
country find it attractive to make and sell the product at lower prices. To counter-
act this action, Company A sets up a factory in the foreign country where it makes
and sells the product. Company A may even sell some of the products back to the
home country.
Many American companies move to foreign countries when sales at home
start lagging. Examples are fast-food restaurants and soft-drink companies.
Because of technological changes, the life cycle of new products is much shorter.
New products are regularly introduced. Their sales grow, then flatten, and even-
tually decline. To prolong the life of the product, firms first ship their products
abroad, and later build factories there.

CHECKPOINT
Explain the comparative advantage theory and product life
cycle theory.

Balance of Trade

Goods and services sold abroad by American companies bring money into the
United States. Money also comes from foreigners who buy American companies or
set up new businesses in the United States or lend money to Americans. At the same
time, money leaves the country when Americans buy foreign products, vacation
abroad, invest in foreign businesses, or give aid to refugees in a troubled nation.
National governments and international organizations such as the United Nations
and WTO keep records of international transactions, and
governments use these to develop economic policies.
business note counting statement called the balance of payments. The
All international transactions are recorded in an ac-
balance-of-payments statement has two parts: the current
account and the capital account. The current account
records the value of goods and services exported and
How long can a country run a negative those imported from foreigners, as well as other income
account balance? This is a question that many and payments. The capital account records investment
people have about the U.S. negative account funds coming into and going out of a country. Investment
balance. If the negative account balance funds include bank loans or deposits, purchase and sale
were to continue for too long, foreign coun- of a business, and investing in a new business.
tries could lose confidence in the U.S. dollar, For several decades, the United States has had a con-
leading to higher interest rates for U.S. sistent deficit on its current account. Figure 4-6 shows
bonds. This not only increases the expense to how the deficit has ballooned over time. The balance-of-
the U.S. taxpayer but also can raise all other payments deficit means that Americans have been buy-
interest rates, slowing economic growth. ing more goods and services made abroad than they
have been selling to foreigners. How long can a country
continue to buy more than it sells? Not indefinitely, of

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