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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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