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88      PART 1  The Nature of Contemporary Business


             LEARNING OBJECTIVE 5                           for regional integration. They generally begin with
             Compare the rationales behind countries’ choices of  some form of economic integration to promote trade
             exchange rate regimes.                         and investment within a group of countries. The main
                                                            objectives here are economic gain—to increase eco-
        An exchange rate is nothing but the price of one cur-  nomic growth and efficiency, to raise employment
        rency compared with that of another currency; the   opportunities and the quality of life for citizens of the
        exchange of currencies takes place in foreign exchange  region, and to promote peace and harmony within the
        markets. In a free market system, currency values are  region.
        determined by the demand for and supply of curren-     Economic integration could involve the following
        cies; this is called the floating exchange rate system.  sequence of events: First, two or more countries may
        The values of the world’s major currencies, namely, the  create a free trade area by eliminating all barriers to
        U.S. dollar, the euro, and the yen, are largely market  trade among them. Second, these countries may form a
        determined. The values of some currencies are partly  customs union in which all free trade member countries
        determined by demand and supply in the foreign      will adopt a common external tariff with nonmember
        exchange market and partly by active government (cen-  countries. Third, the countries in the customs union
        tral bank) intervention (purchases and sales of their  may remove barriers to the free movement of capital
        own currency to manage the exchange rate) in the for-  and labor within the customs union, thereby creating a
        eign exchange market; this is called the managed float-  common market. Fourth, the member states of the
        ing exchange rate system. The reason for central bank  common market may choose to implement common
        intervention is to keep the country’s currency stable  social programs and coordinated economic policies that
        and encourage exports and foreign investment inflows.  would lead to the creation of a single regional currency
        The central banks of major countries at times also  and an economic and monetary union. Finally, since
        intervene in the foreign exchange market. Some coun-  member countries of the economic and monetary
        tries conduct the bulk of their international transac-  union would work closely with each other on all major
        tions with a major trade partner or in a major currency,  business and economic issues, the urge to have com-
        so they link their currency’s value to that of the major  mon policies in other fields like defense and foreign
        trade partner. Such a system is called the fixed    policies may lead to the creation of a political union—a
        exchange rate system.
                                                            group of countries that will behave as a single country.
                                                               The benefits of regional integration include creating
             LEARNING OBJECTIVE 6
                                                            a large pool of somewhat similar consumers; encourag-
             Describe the evolution of globalization.
                                                            ing economies of scale in production; freeing the flow
        The dawn of globalization can be traced back to the fif-  of capital and labor; increasing cooperation, peace, and
        teenth century, when Portuguese navigator and       security in the region; and encouraging member states
        explorer Vasco de Gamma made voyages to Kerala      to enhance their level of social welfare to that of the
        State, on India’s west coast, in search of spices to satisfy  most progressive states. The costs of regional integra-
        European palates. It was about the same time when   tion include undermining the most-favored-nation sta-
        Arabs and Chinese traders were making similar voyages  tus rule that the lowest tariff applicable to one member
        to facilitate trade in spices and silk. Goods, people, and  must be extended to all members; imposing uniform
        ideas have been traveling across the globe ever since.  laws and regulations that at times do not take into
        Globalization began to accelerate after World War II,  account national economic, cultural, and social differ-
        starting in 1944 with the implementation of free and  ences; losing sovereignty, national independence, and
        open economic policies by such multilateral institu-  identity; and rising crime because of the ease of the
        tions as the World Bank, the International Monetary  cross-border movement of labor.
        Fund, and later the General Agreement on Tariffs and
        Trade (GATT), now called the World Trade Organization    LEARNING OBJECTIVE 8
        (WTO). While globalization is good for all concerned,    Identify the major regional trading blocs and explain
        much depends on how the “rules of the game”—fair         why some have succeeded while others have not.
        trade and investment policies and harnessing the Inter-
                                                            Regions in all continents of the world have entered into
        net—are implemented.
                                                            various forms of cooperation agreements, primarily to
                                                            enhance issues of mutual interest. Following are some
             LEARNING OBJECTIVE 7
                                                            of the major regional economic blocs of importance to
             Summarize the stages of regional integration and  business: The European Union (EU) is the most highly
             explain its pros and cons.
                                                            evolved example of regional integration in the world,
        Economic integration occurs when two or more coun-  since it is already in the fourth stage of the economic
        tries join together to form a larger economic bloc.  integration process and is quickly moving toward the
        Countries have economic, social, or political reasons  final step, which calls for political union with


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