PowerPoint assignment – due in 36 hours

The questions will be posted in the attachments. When Posting the answer, can you post each chapter answers on different documents?

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Chapter 2 Powerpoint Assignment

Chapter 2 focuses on the basic economics. It explains what capitalism is and how free markets work. It also discusses the importance of entrepreneurs to the creation of wealth. Chapter 2 discusses in detail, the effects of economic system of the United States, including disinheritance of key economic indicators (especially GDP), productivity and the business cycle. Chapter 2 focuses on fiscal policy and monetary policy and explain how each affects the economy. Please refer to the power point slides for more detail.

EXAMPLE:

Question 1. What is socialism?

Answer 1. Socialism is an economic system based on the premise that some businesses should be owned by the government.

REFERENCE PURPOSE ONLY:

Click on “COURSE DOCUMENTS” button and then click on the link ‘chapter 2 powerpoint slides’ to view chapter 2 lecture on powerpoint slides.

ASSIGNMENT:

At the end of the chapter answer the questions under CriticalThinking.

Chapter 3 Powerpoint Assignment

CHAPTER 3 DOING BUSINESS IN GLOBAL MARKETS

Chapter 3 focuses on the importance of the global market and the roles of comparative advantage and absolute advantage in globe trade. It explains the importance of importing exporting, and understand key terms used in global business. It also evaluate the forces that affect trading in global markets. Chapter 3 discusses in detail, the changing landscape of the global market and the issue of offshore outsourcing. Chapter 3 focuses on the advantages and disadvantages of trade protectionism. Please refer to the power point slides for more detail.

EXAMPLE:

Question 1. What is an embargo?

Answer 1. An embargo prohibits the importing or exporting of certain products.

REFERENCE PURPOSE ONLY:
ASSIGNMENT:

Answer the Critical Thinking Questions at the end of Chapter 3

Chapter 4 Powerpoint Assignment

CHAPTER 4

DEMANDING ETHICAL AND SOCIALLY RESPONSIBLE BEHAVIOR

Chapter 4 focuses on the importance of obeying the law is only the first step in behaving ethically. It describes how management’s role in setting ethical standards. It also discusses the three questions to answer when faced with a potentially unethical action. Chapter 4 discusses in detail, the role of U.S. businesses influencing ethical behavior and social responsibility in global markets. Please refer to the power point slides for more detail.

EXAMPLE:

Question 1. What is corporate social responsibility?

Answer 1. Corporate social responsibility is the concern businesses have for society.

REFERENCE PURPOSE ONLY:

Click on chapter 4 powerpoint slides’ to view chapter 4 lecture .

ASSIGNMENT:

Answer the Critical Thinking Questions, at the end of Chapter 4.

Chapter 5 Powerpoint Assignment

CHAPTER 5

HOW TO FORM A BUSINESS

Chapter 5 focuses on the advantages and disadvantages of sole proprietorships. It describes the differences between general and limited partners and compare the advantages and disadvantage of partnerships. It also discusses the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations and limited liability companies. Chapter 5 discusses in detail, the advantages and disadvantages of franchises and the opportunities for diversity in franchising and the challenges of global franchising. Please refer to the power point slides for more detail.

EXAMPLE:

Question 1. Why do people incorporate?

Answer 1. Two important reasons for incorporating are special tax advantages and limited liability.

REFERENCE PURPOSE ONLY:

You can refer to the powerpoint slides to guide you in learning the concepts within this chapter.

ASSIGNMENT:

Answer the Critical Thinking Questions, at the in end of Chapter 5

Chapter 6 Powerpoint Assignments

CHAPTER 6

ENTREPRENEURSHIP AND STARTING A SMALL BUSINESS

Chapter 6 focuses on why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs and describes entrepreneurial teams, intrappreneurs and home-and Web-based businesses. It also discusses the importance of small business to the American economy and summarize the major causes of small-business failure. Chapter 6 discusses in detail, summarize ways to learn about how small businesses operate. Chapter 6 focuses on what it takes to start and operate a small business. Please refer to the power point slides for more detail.

EXAMPLE:

Question 1. What are the attributes of successful entrepreneurs?

Answer 1. Successful entrepreneurs are self-directed, self-nurturing, action-oriented, highly energetic, and tolerant of uncertainty.

REFERENCE PURPOSE ONLY:
ASSIGNMENT:

Answer the Critical Thinking Questions, at the end of Chapter 6.

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Chapter Six
Entrepreneurship and Starting a Small Business
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

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First African-American woman to become a billionaire and first to own 3 professional sports teams.

BET debuted in 1980.
Johnson developed many of the network’s most successful shows like, Teen Summit.
Now a part owner in Mistral and CEO of Salamander Hospitality.
Profile
SHEILA C. JOHNSON
Black Entertainment Television (BET)
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The Job-Creating Power of Entrepreneurship in the U.S.
Entrepreneurship — Accepting the risk of starting and running a business.
WHAT is ENTREPRENEURSHIP?
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The Job-Creating Power of Entrepreneurship in the U.S.
French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.
David McConnell borrowed $500 from a friend to start Avon.
George Eastman started Kodak with a $3,000 investment in 1880.
Jeff Bezos started Amazon.com with investments from his family and friends.
NOTABLE ENTREPRENEURS
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See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
This slide will help in starting the chapter discussion. Students enjoy stories about how companies began and these short vignettes will supplement additional information about the history of successful entrepreneurs in the chapter.
Ask the students: Do you know of any interesting stories about how some other businesses got started? (This can also be assigned as a team project to generate a good discussion.)
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Leanna Archer – At 12 years old, she has her own hair care line.
Alexis Holmes – Started baking for a fundraiser, now the 16-year-old owns her own bakery.
Jack Short & Daniel Lyons – The two medical students started Factory Green, a carbon neutral apparel company, as undergrads.
Mark Zuckerberg – Launched Facebook as a Harvard freshman.
YOU’RE NEVER TOO YOUNG
to be an ENTREPRENEUR
(Spotlight on Small Business)
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Source: Entrepreneur, www.entrepreneur.com, March 2009.
The Job-Creating Power of Entrepreneurship in the U.S.
YOU’RE NEVER TOO OLD to be
an ENTREPRENEUR EITHER!
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Age Range Percent Identified as Self-Employed
55 to 59 28%
60 to 65 36%
66 to 70 42%

See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
You’re Never Too Old to be an Entrepreneur Either
This slide gives the student a good understanding of the percentages of people who identify themselves as self-employed .
1. 28% of people between the ages of 55-59 identify themselves as self-employed, why? (Discuss the individual assessment of career choice.)
2. 36% of new businesses are started by people between the ages of 60-65, why? (Greater business experience.)
3. 42% of people between the ages of 66-70 identify as self-employed. Ask the students to explain why this number is so high? (Many are nearing or already have retired; the accumulation of a lifetime’s worth of experience can be applied to other businesses.)
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Why People Take the Entrepreneurial Challenge
Opportunity
Profit
Independence
Challenge
LG1
WHY TAKE the RISK?
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Why People Take the Entrepreneurial Challenge
Self-directed
Self-nurturing
Action-oriented
Highly energetic
Tolerant of uncertainty
LG1
WHAT DOES IT TAKE to be an ENTREPRENEUR?
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Turning Your Passion and Problems into Opportunities
It fills customers’ needs.
You have the skills and resources to start a business.
You can sell the product or service at a reasonable price and still profit.
LG1
An IDEA is a
GOOD OPPORTUNITY IF…
You can get your product or service to customers before the window of opportunity closes.
You can keep the business going.
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Gary Hirshberg of Stonyfield Yogurt wanted to run a profitable business that didn’t hurt the environment.

Stonyfield Yogurt is a 100% organic operation.
It’s green practices save the company millions of dollars each year.
After just 15 years, Stonyfield outsells Kraft Foods yogurt.
THINKING GREEN LOGO
SOCIAL ENTREPRENEURSHIP:
RESPONSIBLE and PROFITABLE
(Thinking Green)
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Entrepreneurial Teams
Entrepreneurial team — A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product.
An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success.
LG1
ENTREPRENEURIAL TEAMS
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Micropreneurs and Home-Based Businesses
Micropreneur — Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle.
Many micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc.
Nearly 60% of home-based micropreneurs are men.
LG1
MICROPRENEURS
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Micropreneurs and Home-Based Businesses
Computer technology has leveled the playing field.
Corporate downsizing has led many to venture on their own.
Social attitudes have changed.
New tax laws have loosened restrictions on deducting expenses for home offices.
LG1
HOME-BASED BUSINESS
GROWTH
6-*

See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
In the United States home-based businesses have experienced growth due to a variety of reasons. One of the most important reasons for the growth in home-based businesses is that technology has made it easier for home-based businesses to compete against their larger competitors.
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Source: St. Louis Small Business Monthly, February, 2004.
Ability to start your business immediately
Minimal startup capital needed
No rent or excessive set-up charges
Comfortable working conditions
Micropreneurs and Home-Based Businesses
LG1
BENEFITS of HOME-BASED BUSINESSES
Reduced wardrobe expenses
No commuting
Tax benefits
Elimination of office politics
Low risk for trial and error
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See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
Ups of Home-Based Businesses
This slide walks students through some of the benefits of a home-based business.
Before showing this slide have students work alone, then with a partner, then with a group (doing all three will help promote discussion of students’ ideas) to see if they can come up with a list of positive characteristics of home-based businesses. Then reveal the slide and have students compare their lists to the slide.
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Source: St. Louis Small Business Monthly, February, 2004.
Difficult to establish work habits
Limited support system
Isolation
Work space may be limited
Disruption of personal life
Clients may be uncomfortable coming to your home
Zoning restrictions
Success is based 100% on your efforts
Micropreneurs and Home-Based Businesses
LG1
DOWNSIDES of HOME-BASED BUSINESSES
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See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
Downs of Home-Based Businesses
This slide walks students through some of the benefits of a home-based business.
Before showing this slide have students work alone, then with a partner, then with a group (doing all three will help promote discussion of students’ ideas) to see if they can come up with a list of disadvantages of home-based businesses. Then reveal the slide and have students compare their lists to the slide.
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The latest outsourcing trend is using the Internet to find affordable labor around the world.

Elance provides small businesses with a hub to find low-cost contractors.
Thanks to the inexpensive freelancers, Elance now has 48,500 clients, up 70% since 2007.
OUTSOURCING YOUR SMALL BUSINESS
(Reaching Beyond Our Borders)
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Web-Based Businesses
Affiliate Marketing — An Internet-based marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.
LG1
ONLINE BUSINESS
Web-based businesses have more unique products than most brick and mortar stores.
Online sales reached $165.9 billion in 2007, 8% of all retail sales.
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Entrepreneurship Within Firms
Intrapreneur — A creative person who works as an entrepreneur within a corporation.
Intrapreneurs use a company’s existing resources to launch new products for the company.
Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.
LG1
INTRAPRENEURS
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See Learning Goal 1: Explain why people take the risks of entrepreneurship, list the attributes of successful entrepreneurs, and describe entrepreneurial teams, intrapreneurs, home-based and Web-based businesses.
In order to develop new ideas engineers at Google are allowed to work on projects that interest them for up to twenty percent of the time at work. The idea is to support creative people and ideas in an effort to launch new products. This work can be more motivating than working on someone else’s ideas.
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Encouraging Entrepreneurship: What Government Can Do
Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S.
Enterprise Zones — Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support.
Incubators — Offer new businesses low-cost offices with basic services.
LG1
GOVERNMENT and ENTREPRENEURSHIP
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
Small-business is the economic engine of the United States economy. Due to the economic power of small-businesses the government has used “investor visas”, enterprise zones and business incubators to encourage entrepreneurship. A good website to further explore incubators is http://www.nbia.org/.
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Progress Assessment
Why are people willing to take the risks of entrepreneurship?
What are the advantages of entrepreneurial teams?
How do micropreneurs differ from other entrepreneurs?
What are some opportunities and risks of web-based businesses?
PROGRESS ASSESSMENT
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1) The primary reasons people are will to take the risk of entrepreneurship are:
Opportunity to share in the American dream.
Profit, the potential to become wealthy and successful.
Independence, becoming you own boss.
Challenge, the desire to take a chance.
2) Whereas an entrepreneur has to wear many hats and take huge responsibility, a team allows members to combine creative skills with production and marketing skills right from the start. Having a team can also ensure more cooperation and coordination later among functions in the business.
3) Most entrepreneurs are committed to the quest for growth in their business. Mircorpreneurs know they can be content even if their companies never appear on a list of top-ranked businesses. Many micropreneurs are home-based businesses.
4) The Internet has opened the world of entrepreneurship wider than ever. Online sales have grown six times faster than retail sales and in 2007 topped over $165 billion. Today anything that can be offered in a retail environment can be offered online. However, a Web-based business is not an automatic ticket to success. It can often be a shortcut to failure. Web-based businesses must remember that they need to offer unique products or services that customers cannot easily purchase at retail locations.
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Small Versus
Big Business
Small Business — Independently owned and operated, not dominant in its field of operation and meets certain standards of size.
Businesses are “small” in relationship to other businesses in their industries.
LG2
SMALL BUSINESSES
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
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Small Versus
Big Business
There are 26.8 million small businesses in the U.S.
Of all nonfarm business in the U.S., almost 97% are considered small.
Small businesses account for over 50% of the GDP.
Small businesses generate 60-80% of new jobs.
About 80% of U.S. workers first jobs were in small business.
LG2
SMALL BUSINESS STATISTICS
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
The power of small business is immense. Students are often shocked to see how small businesses contribute to the U.S. economy.
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Importance of Small Business
More personal customer service.
The ability to respond quickly to opportunities.
LG2
ADVANTAGES of SMALL OVER
BIG BUSINESS
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
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Small Business Success & Failure
Owner closing a business to start another is reported as a “failure.”
Changing forms of ownership is reported as a “failure.”
Retirement is reported as a “failure.”
LG2
BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE…
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
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Source: World Features Syndicate, 2009.
Tommy Hilfiger – First store went bankrupt
Milton Hershey – First confectionary failed
H.J. Heinz – Company went bankrupt six years after start
Small Business Success & Failure
LG2
THEY DID WHAT?
Famous Business Failures
Walt Disney – First film company went bankrupt
Henry Ford – First two car companies failed
L.L. Bean – Almost went bankrupt in first year
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See Learning Goal 2: Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.
They Did What?
Starting a successful new business is never easy and many famous entrepreneurs failed at their first and subsequent attempts.
Ask students: How can a business failure actually be a positive experience? (While failure is never a goal it often gives the entrepreneur an invaluable experience – old adage: Learn from your mistakes.)
Ask the student: If your first business failed, would you try again? Why or why not?
How can businesses survive such poor performances? (Determination and passion of the owners and founders plays a big role.)
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Learning About Small Business Operations
Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs.
Get Some Experience – Gain three years experience in the field; then start a part-time small business.
Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down.
LG3
LEARNING ABOUT
SMALL BUSINESS
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See Learning Goal 3: Summarize ways to learn about how small businesses operate.
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Suppose you worked in a company for two years and you see signs of it faltering. You and a coworker have ideas about how to succeed and are considering quitting to start your own company.
Should you approach other coworkers about working for your new venture?
Will you try to lure your old boss’ customers?
What are the alternatives?
What are the consequences?
What is the most ethical choice?
GOING DOWN WITH the SHIP
(Making Ethical Decisions)
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See Learning Goal 3: Summarize ways to learn about how small businesses operate.
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Managing a Small Business
Planning
Financing
Knowing customers
Managing employees
Keeping records
LG4
MAJOR BUSINESS FUNCTIONS
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See Learning Goal 4: Analyze what it takes to start and run a small business.
Starting a business is when the real work begins. It is important that entrepreneurs understand the major business functions such as planning, financing, understanding your customer, managing employees and keeping good records. Many entrepreneurs create business plans which may in part outline the major business functions.
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Begin with Planning
Business Plan — A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners qualifications.
A business plan forces potential owners to be specific about what they will offer.
A business plan is mandatory for talking with bankers or investors.
LG4
BUSINESS PLANS
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See Learning Goal 4: Analyze what it takes to start and run a small business.
The business plan is the entrepreneur’s road map to success. While a well designed business plan will not guarantee success the lack of one may surely lead to failure. To borrow money or to seek investors a business plan is a must.
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Writing a Business Plan
A good plan takes a long time to prepare.
A good executive summary catches interest and tempts potential investors to read on.
LG4
WRITING a BUSINESS PLAN
Getting the plan into the right hands is almost as important as getting the right information in it.
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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Source: Business Week Small Biz, www.businessweek.com, February/March, 2008.
Clarify Expectations – What will each person contribute?
Discuss Work/Family Boundaries – What is the line that separates work from personal relationships?
Develop Good Communication – Agree about types of decisions you’ll make jointly and on own.
Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business.
Have an Escape Hatch – Have a Plan B.
Writing a Business Plan
LG4
A FAMILY AFFAIR
What to Consider Before Starting a Family Business
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See Learning Goal 4: Analyze what it takes to start and run a small business.
A Family Affair
This slide illustrates what needs to be considered before starting a business with family members.
Communication and the establishment of clear expectations are the keys to making a family business work.
To start a discussion in class about issues faced by family run businesses have students read the following article: http://www.postbulletin.com/newsmanager/templates/localnews_story.asp?z=7&a=399177
After reading the article ask students: Why do family businesses need extra care?
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Getting Money to Fund a Small Business
Personal savings
Relatives
Former employers
Banks & finance companies
Government agencies
Angel investors
Venture capitalists — Individuals or companies that invest in new businesses in exchange for partial ownership.
LG4
SOURCES of CAPITAL
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See Learning Goal 4: Analyze what it takes to start and run a small business.
One reason that businesses fail is a lack of capital. Capital can come from internal sources (personal saving, employees etc.) or from external sources (relatives, banks and angel investors). One source of external funding is via venture capital. Venture capitalist are individuals or companies that invest in new businesses in exchange for a stake in ownership. Many well known businesses such as Google, Zappos and Apple received a first round of funding from venture capitalists.
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Source: CFO Magazine, www.cfo.com, September 2008.
Getting Money to Fund a Small Business
LG4
ANGELS ABOVE
Industry Sectors Favored by Angel Investors
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See Learning Goal 4: Analyze what it takes to start and run a small business.
Angels Above
Angel investors are private investors who invest in fast growing businesses before they go public.
This slide gives students insight into the industry sectors favored by angel investors.
Ask students: Why are software and health/biotech the top two industry sectors? (These two industry sectors offer the potential for fast growth which is very attractive to outside investors).
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Chart1

Software

Health/Biotech

Business Products & Services

Consumer Products & Services

Hardware

Media/Entertainment

Other

%
0.19
0.18
0.16
0.15
0.12
0.07
0.12

Sheet1

Software 19%

Health/Biotech 18%

Business Products & Services 16%

Consumer Products & Services 15%

Hardware 12%

Media/Entertainment 7%

Other 12%

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The Small Business Administration
Small Business Administration (SBA) — A U.S. government agency that advises and assists small businesses by providing management training and financial advice.

SBA started a microloan program in 1991 that provides very small loans to small business owners.
Program judges worthiness on belief of the borrower’s integrity and soundness of their business ideas.
LG4
The SMALL BUSINESS ADMINISTRATION
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See Learning Goal 4: Analyze what it takes to start and run a small business.
The importance of small business to the U.S. economy cannot be overstated. The Small Business Administration or SBA is the government agency that advises and assists small businesses with financial advice and management training. For more information on the SBA visit their website www.sba.gov.
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The Small Business Administration
Small Business Investment Company (SBIC) — A program through which private investment companies licensed by the SBA lend money to small businesses.
A SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.
SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.
LG4
The SMALL BUSINESS
INVESTMENT COMPANY
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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The Small Business Administration

Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.
SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge.
LG4
SMALL BUSINESS
DEVELOPMENT CENTERS
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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Knowing Your Customers
Market — Consumers with unsatisfied wants and needs who have both resources and willingness to buy.
Set out to fill the market’s needs by offering top quality and great service at a fair price.
One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.
LG4
The MARKET
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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Managing Employees
Hiring, training and motivating employees is critical.
Employees of small companies are often more satisfied with their jobs – they feel challenged and respected.
Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.
LG4
MANAGING EMPLOYEES
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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Keeping Records
Computers simplify the process by helping with inventory control, customer records and payroll.
A good accountant can help in:
Deciding whether to buy or lease equipment.
Deciding whether to own or rent a building.
Tax planning.
Financial forecasting.
Choosing sources of financing.
Writing requests for funds.
LG4
ACCOUNTING ASSISTANCE
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See Learning Goal 4: Analyze what it takes to start and run a small business.
The most important assistance to small business owners is in accounting.
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Looking for Help
Owners need outside consulting advice early in the process.
Small and medium-sized firms cannot afford to hire experts as employees.
A competent lawyer can help with:
Leases
Contracts
Partnership agreements
Protection against liabilities
LG4
LEGAL HELP
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See Learning Goal 4: Analyze what it takes to start and run a small business.
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Looking for Help
Marketing decisions need to be made long before introducing a product or opening a store.
A marketing research study can help you:
Determine where to locate.
Whom to select as your target market.
What is an effective strategy for reaching the market.
LG4
MARKETING RESEARCH
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See Learning Goal 4: Analyze what it takes to start and run a small business.
If marketing is about finding and filling customer needs, how can an entrepreneur better understand what customers need? Market research helps determine where to locate customers, whom to target as customers, and an effective strategy for reaching the market.
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Looking for Help
LG4
OTHER FORMS OF HELP
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See Learning Goal 4: Analyze what it takes to start and run a small business.
Asking good questions is the key to success in any business. Fortunately for entrepreneurs some of the best advice comes free. Commercial loan officers can help with the creation of a business plan as well as financial advice. Insurance agents can help new entrepreneurs understand and insure against risk. One interesting and free source of information is SCORE, Service Corps of Retired Executives. To start a discussion in class have students research SCORE (www.score.org) and the programs offered at local SCORE offices.
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Progress Assessment
Can you describe at least five sections of a business plan?
PROGRESS ASSESSMENT
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1) A business plan needs to start with a strong cover letter. The nine key sections are:
Executive summary.
Company background.
Management team.
Financial plan.
Capital Required.
Marketing plan.
Location analysis.
Manufacturing plan.
Appendix.
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Going International: Small Business Prospects
Small and medium-sized businesses accounted for 99% of recent export growth.
Advantages of global trade for small businesses:
Overseas buyers enjoy dealing with individuals.
Small companies can usually begin shipping much faster.
They provide a wide variety of suppliers.
They can give more personal service and attention.
LG5
SMALL BUSINESS PROSPECTS ABROAD
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See Learning Goal 5: Outline the advantages and disadvantages small businesses have in entering global markets.
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Progress Assessment
Why do many small businesses avoid doing business overseas?
What are some of the advantages small businesses have over large businesses in selling in global markets?
PROGRESS ASSESSMENT
6-*

1) Key reasons why many small businesses avoid doing business overseas include:
Financing is often difficult to find.
Would-be exporters don’t know how to get started and do not understand the cultural differences between markets.
The bureaucratic paperwork can threaten to bury a small business.
2) Small businesses have several advantages over large businesses in global markets. These include:
Overseas buyers often enjoy dealing with individuals rather than with large corporate bureaucracies.
Small companies can usually begin shipping much faster.
Small companies can provide a wide variety of suppliers.
Small companies can give global customers personal service and undivided attention because each overseas account is a major source of business to them.
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Chapter Five
How to Form a Business
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

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Bought a used truck and started Rubbish Boys, later changed the name to http://www.1800gotjunk.com.
$130 million in annual earnings from locations across North America and Australia.
Expanded through franchising.
Profile
BRIAN SCUDAMORE
1-800-GOT-JUNK?
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Basic Forms of Business Ownership
Sole Proprietorship — A business owned, and usually managed, by one person.
Partnership — Two or more people legally agree to become co-owners of a business.
Corporation — A legal entity with authority to act and have liability apart from its owners.
MAJOR FORMS of OWNERSHIP
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See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships.
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Basic Forms of Business Ownership
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FORMS of
BUSINESS OWNERSHIP
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See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships.
Although corporations make up only 20 percent of the total number of businesses, they make 81 percent of the total receipts. Sole proprietorships are the most common form (72 percent), but they earn only 6 percent of the receipts.
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Advantages of Sole Proprietorships
Ease of starting and ending the business
Being your own boss
Pride of ownership
Leaving a legacy
Retention of company profit
No special taxes
MAJOR BENEFITS of SOLE PROPRIETORSHIP
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See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships.
This slide helps students understand why sole proprietorships account for the largest number of businesses in the United States.
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Disadvantages of Sole Proprietorships
Unlimited Liability — Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else.
Limited financial resources
Management difficulties
Overwhelming time commitment
Few fringe benefits
Limited growth
Limited life span
DISADVANTAGES of SOLE PROPRIETORSHIPS
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See Learning Goal 1: Compare the advantages and disadvantages of sole proprietorships.
Since the main advantage of sole proprietorships is the ease by which they can be started this slide gives students the reason why this form of ownership only accounts for such a small percentage of overall total revenue. Special emphasis should be given to the disadvantage of unlimited liability (personal assets at risk), and to the time commitment (24 hours, 7 days per week, and 365 days per year).
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Progress Assessment
Most people who start businesses in the United States are sole proprietors. What are the advantages and disadvantages of sole proprietorships?
Why would unlimited liability be considered a major drawback to sole proprietorships?
PROGRESS ASSESSMENT
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The primary advantages of sole proprietors are: Ease of starting and ending the business, being your own boss, pride of ownership. leaving a legacy, retention of company profits, no special taxes. Disadvantages include: Unlimited liability, limited financial resources, management difficulties, overwhelming time commitment, few fringe benefits, limited growth, limited life span.

2) With unlimited liability, the sole proprietor is liable for all debts and obligations of the business and must pay them even if it means selling your home, car, or whatever else you own.
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Partnerships
General Partnership — All owners share in operating the business and in assuming liability for the business’s debts.
Limited Partnership — A partnership with one or more general partners and one or more limited partners.
MAJOR TYPES of PARTNERSHIPS
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Each type of partnership has advantages and disadvantages. In a general partnership resources are pooled and liability is spread among all partners. However in this type of partnership there is the possibility for disagreement and/or personality conflicts. A limited partnership is made up of a mixture of general partners and limited partners. Limited partners cannot actively take part in business dealings.
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Partnerships
Master Limited Partnership — A partnership that looks much like a corporation but is taxed like a partnership and thus avoids the corporate income tax.
Limited Liability Partnership — Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision.
OTHER FORMS of
PARTNERSHIPS
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
There are two less common forms of partnerships outlined in this slide: master limited partnership and the limited liability partnership. The master limited partnership is unique because it combines the tax benefits of a more traditional partnership and the liquidity of a publicly traded security. One example of a master limited partnership is Kinder Morgan Energy Partners which is engaged in energy storage and operates 26,000 miles of pipelines.
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Partnerships
General Partner — An owner (partner) who has unlimited liability and is active in managing the firm.
Limited Partner — An owner who invests money in the business but enjoys limited liability. Limited Liability means that liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk.
TYPES OF PARTNERS
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

The limited partner is not able to exercise any management control over the partnership but maintains limited liability. A limited partner’s liability is limited to the amount invested in the partnership.
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Advantages & Disadvantages of Partnerships
More financial resources
Shared management and pooled skills and knowledge
Longer survival
No special taxes
ADVANTAGES of
PARTNERSHIPS
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Partnerships have some distinct advantages. The key advantage is that partnerships have access to more resources such as financial, management and knowledge.
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Advantages & Disadvantages of Partnerships
Unlimited liability
Division of profits
Difficult to terminate
Disagreements among partners
DISADVANTAGES of
PARTNERSHIPS
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Like the sole proprietorship, a partnership has some serious disadvantages such as unlimited liability and division of profits. One disadvantage that students might not consider is disagreement among partners.
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There is no such thing as a perfect partner but ask these questions when you try to find your best match:
Do you share the same goals?
Do you share the same vision for the company?
What skills does he/she have? Are yours the same?
What can he/she bring to the business?
What type of decision maker is he/she?
Do you trust each other?
How does he/she problem solve?
PICK YOUR PARTNER WISELY
(Spotlight on Small Business)
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See Learning Goal 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.
Successful partnerships start with a shared vision. In order to develop a successful partnership all partners must be honest with each other and bring a variety of different skills to the partnership. Suggestions to discuss with students regarding partnerships:
Partnership agreements must be in writing!
Each individual’s responsibilities to the company must be in writing and included as part of the contract.
Make certain that provisions are in place if one or more partners want to terminate the agreement. (Information outlining the terms and conditions of terminating any agreement, should be outlined in the original contract.)
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Progress Assessment
What’s the difference between a limited partner and a general partner?
What are some of the advantages and disadvantages of partnerships?
PROGRESS ASSESSMENT
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1) A general partner is an owner who has unlimited liability and can be active in managing the firm. A limited partner is an owner who invests money in the business, but does not have any management responsibility or liability for losses beyond his or her investment.
2) Some of the advantages of partnerships are: More financial resources, shared management and pooled/complimentary skills and knowledge, longer survival, no special taxes. Disadvantages of partnerships include: Unlimited liability (for general partners), division of profits, disagreements among partners, difficulty of termination.
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Corporations
Conventional (C) Corporation — A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).
CONVENTIONAL
CORPORATIONS
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
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Advantages of Corporations
Limited liability
Ability to raise more money for investment
Size
Perpetual life
Ease of ownership change
Ease of attracting talented employees
Separation of ownership from management
ADVANTAGES of
CORPORATIONS
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Identify that the major advantage of corporate ownership is the limited liability protection (personal assets are protected).
Interesting facts regarding incorporating a business: the cost for a business to Incorporate ranges from about $50 to over $300, plus states fees. Over half of Fortune 500 companies choose to incorporate in Delaware because the state’s laws makes the process easier than it is in other states.
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Advantages of Corporations
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HOW OWNERS AFFECT MANAGEMENT
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
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Source: Fortune, www.fortune.com, April 2009.
Exxon Mobil
Wal-Mart
Chevron
ConocoPhillips
General Electric
Advantages of Corporations
The BIG BOYS of BUSINESS
America’s Largest Corporations
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General Motors
Ford
AT&T
Hewlett-Packard
Valero Energy
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Ask the students: Several of the companies in the top ten deal with similar products/services. How are the products/services these companies sell similar? (Exxon Mobil, Chevron, ConocoPhillips are all oil majors and Valero Energy is a processor of oil.)
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Source: Forbes, www.forbes.com, November 2008.
Advantages of Corporations
PRIVACY PLEASE
The Ten Largest Private Corporations in the U.S.
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Company State Industry
Cargill MN Farming
Koch Industries KS Chemicals
Chrysler MI Automobiles
GMAC Financial Services MI Financial
PricewaterhouseCoopers NY Business Services
Mars VA Food
Bechtel CA Construction
HCA TN Hospitals
Ernst & Young NY Business Services
Publix Supermarkets FL Grocery

See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Largest Private Companies
This slide presents America’s top 10 private companies in 2008.
The list has changed recently with the Cerberus Capital purchase of Chrysler from Daimler and their purchase of GMAC Financial Services from General Motors.
Ask the students to debate why a company may want to remain private? (Some of the reasons may be control, privacy, no external pressure, and preference.)
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Disadvantages of Corporations
Initial cost
Extensive paperwork
Double taxation
Two tax returns
Size
Difficulty of termination
Possible conflict with stockholders and board of directors
DISADVANTAGES of
CORPORATIONS
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Double taxation is a major disadvantage of corporations. A corporation is taxed on income earned and then shareholders are taxed on any dividends the company may pay.
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Individuals Can Incorporate
Anyone – truckers, doctors, plumbers, athletes and small business owners can incorporate.
Normally, stock is not issued when individuals incorporate so the advantages and disadvantages are not exactly the same as for large corporations.
Major advantages are limited liability and possible tax benefits.
WHO CAN INCORPORATE?
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
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Individuals Can Incorporate
OLDIES BUT GOODIES
America’s Oldest Corporations
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Company Year Started Type of Company
J.E. Rhoads & Sons 1702 Conveyer Belts
Covenant Life Insurance 1717 Insurance
Philadelphia Insurance 1752 Insurance Contributorship
Dexter 1767 Adhesives & Coatings
D. Landreth Seed 1784 Seeds
Bank of New York 1784 Banking

See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
America’s Oldest Companies
Interesting slide that identifies those companies that have been in business for over 200 years.
A few facts you may wish to address with the students:
JE Rhoads & Sons is the oldest company in the U.S. and started off tanning leather for Buggy Whips.
Philadelphia Contributorship Insurance was formed based on a suggestion by Benjamin Franklin regarding the establishment of a volunteer fire brigade, which eventually developed into an insurance company.
The Bank of New York, New York’s first bank, was opened for business in Lower Manhattan on June 9th, 1784, only a few months after the departure of British Troops from American soil. (Bank of New York merged with Mellon Financial Corporation of Pittsburgh and was renamed Bank of New York Mellon in 2007.
Environmental changes in the business world will always happen; those companies that embrace change and provide quality goods and services, will continue to profit.
Discuss with the students the significant amount of commitment a company must be prepared to do to stay in business. (Some areas that must continually be addressed are changes in societal culture, competition, economy, laws/politics, and technology changes.)
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S Corporations
S Corporation — A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.
S corporations have shareholders, directors and employees, plus the benefit of limited liability.
Profits are taxed only as the personal income of the shareholder.
S CORPORATIONS
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
An S corporation looks like a corporation but is taxed like a sole proprietorship or partnership. The primary advantage of an S corporation is that it avoids the double taxation of a C corporation. Approximately 3 million US companies operate as an S corporation.
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S Corporations
Qualifications for S Corporations:
Have no more than 100 shareholders.
Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.
Have only one class of stock.
Derive no more than 25% of income from passive sources.
If an S corporation loses its S status, it may not operate under it again for at least 5 years.
WHO CAN FORM
S CORPORATIONS?
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Limited Liability Companies
Limited Liability Company (LLC) — Similar to a S corporation but without the eligibility requirements.
Advantages of LLCs:
Limited liability
Choice of taxation
Flexible ownership rules
Flexible distribution of profit and losses
Operating flexibility
LIMITED LIABILITY COMPANIES
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
Advantages and disadvantages of LLCs are listed in this slide. The biggest advantages that should be pointed out with LLCs are limited liability and flexibility.
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Limited Liability Companies
No stock, therefore ownership is nontransferable
Limited life span
Fewer incentives
Taxes
Paperwork
DISADVANTAGES of LLCs
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Since June 2008, Vermont allows a new kind of LLC that exist only online.
Registration documents can be filed online, meetings can be held through online communication, and relationships can be established electronically.
Virtual companies allow online contributors with different skills, availability and interest to interact and be successful.
VERMONT WANTS to be the HOME
of YOUR NEW VIRTUAL COMPANY
(Legal Briefcase)
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See Learning Goal 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.
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Progress Assessment
What are the major advantages and disadvantages of incorporating a business?
What’s the role of owners (stockholders) in the corporate hierarchy?
If you buy stock in a corporation and someone gets injured by one of the corporation’s products, can you be sued? Why or why not?
Why are so many new businesses choosing a limited liability company (LLC) form of ownership?
PROGRESS ASSESSMENT
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Advantages of incorporating a business include: Limited liability, ability to raise more money for investment, size, perpetual life, ease of ownership change, ease of attracting talented employees, separation of ownership from management. Disadvantages of incorporating are: Initial cost, extensive paperwork, double taxation, two tax returns, size, difficulty to terminate, possible conflict with stockholders and board of directors.

2) Stockholders do not have to be employees of the corporation. They are investors who have limited liability. Stockholders elect the board of directors of a company who select the management to control the company.
3) Stockholders in a corporation have limited liability meaning as owners they are responsible for its losses only up to the amount they invested. The corporation could be sued and forced out-of-business but the stockholder would only lose what he/she invested.
4) Limited liability companies have become a popular way to form a business since all fifty states now recognize LLCs. Some of the advantages of LLCs are: Limited liability, choice of taxation (can be taxed as a partnership or corporation, flexible ownership rules, flexible distribution of profit and losses, operating flexibility.
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Corporate Expansion: Mergers and Acquisitions
Merger — The result of two firms joining to form one company.
Acquisition — One company’s purchase of the property and obligations of another company.
MERGERS and AQUISITIONS
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See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
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Corporate Expansion: Mergers and Acquisitions
Vertical Merger — Joins two firms in different stages of related business.
Horizontal Merger — Joins two firms in the same industry and allows them to diversify or expand their products.
Conglomerate Merger — Unites firms in completely unrelated industries in order to diversify business operations and investments.
TYPES of MERGERS
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See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
There are three types of mergers. Horizontal mergers take place in the same industry, i.e., one competitor merging with another. An example of this would be Daimler Mercedes Benz merging with Chrysler to create DaimlerChrysler in the 1990s. Vertical merger takes place between companies in a value chain, for example a supplier and a distributor merging. Conglomerate merger has no relationship between companies, both Tyco and General Electric operate as conglomerates.
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Corporate Expansion: Mergers and Acquisitions
Leveraged Buyout (LBO) — An attempt by employees, management or a group of investors to buy out the stockholders in a company.
LBOs have ranged in size from $50 million to $31 billion and have involved everything from small businesses to giant corporations.
In 2007, foreign investors poured $414 billion into U.S. companies.
LEVERAGED BUYOUTS
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See Learning Goal 4: Describe three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.
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Franchises
Franchise Agreement — An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory.
More than 900,000 franchised businesses operate in the U.S., employing approximately 10 million people.
FRANCHISING
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
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Advantages & Disadvantages of Franchises
Management and marketing assistance
Personal ownership
Nationally recognized name
Financial advice and assistance
Lower failure rate
ADVANTAGES of FRANCHISING
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Franchising has a lower failure rate because the franchisee has support from the franchisor. This support can range from marketing to financial.
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Advantages & Disadvantages of Franchises
Large start-up costs
Shared profit
Management regulation
Coattail effects
Restrictions on selling
Fraudulent franchisors
DISADVANTAGES of
FRANCHISING
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
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Diversity in Franchising
Women own about half of U.S. companies yet receive less than 4% of venture capital.
For the past 20 years, firms owned by women have grown at twice the rate of all companies.
More women are becoming franchisors. Auntie Anne’s, Decorating Den, Jazzercise and Two Men and a Truck are owned by women.
WOMEN in FRANCHISING
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
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The Nationals in D.C. have the first sports stadium to earn the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) Rating.
95% of the stadium’s steel was recycled and low-flow toilets save millions of gallons of water.
New stadiums of the Mets and Twins also have earned LEED certifications.
ROOT, ROOT, ROOT for the
GREEN TEAM
(Thinking Green)
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
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Home-Based Franchises
Advantages:
Relief from commuting stress
Extra family time
Low overhead expenses
Main Disadvantage:
Isolation
HOME-BASED FRANCHISES
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
Benefits of a Home-Based Franchise
Home-based businesses are growing at an enormous rate. This slide helps clarify some of the reasons why. Share with the class some tips on getting started:
Decide on business idea
Set goals for the business
How many hours do you want to work?
How many employees do you want?
How much money will you need to get started?
Visit www.e-myth.com for more online information regarding startups.
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Franchising in International Markets
Canada is the most popular target for U.S. based franchises; South Africa and the Philippines are becoming popular despite high cost.
Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region.
International franchising goes both ways – some foreign franchises have come to the U.S.
GLOBAL FRANCHISING
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
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Source: Richard Gibson, Wall Street Journal, www.wsj.com, February 12, 2008.
Focus on tried-and-true name brands.
Stick to core goods and services.
Be choosy about the site.
Don’t pinch pennies.
Have a fallback choice.
Don’t assume the franchise will pay off.
Franchising in International Markets
WHAT to CHOOSE?
Picking Franchises that May Survive a Recession
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
What to Choose?
This is valuable information that must be examined by anyone wishing to purchase a franchise.
The number-one reason why franchises fail is due to miscalculation of start-up costs and operating costs. Examine all costs carefully. It is important to understand that all franchise opportunities are not created equal.
Suggest to the class that anyone interested in a franchise should also follow these additional guidelines:
Have an attorney experienced in franchise contracts review the agreement.
Hire a CPA to review all financial statements. This is commonly referred to as performing a “Due Diligence.”
Interview other franchise owners.
Have experience in the industry.
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Source: Wall Street Journal, www.wsj.com, February 12, 2008.
Arthur Murray Dance Studios
Banfield Pet Hospitals
Bojangles’ Famous Chicken ‘n Biscuits
Denny’s
Friendly’s
The Melting Pot
Nathan’s Famous
Servpro
Stanley Steamer
Two Men and a Truck
Franchising in International Markets
HIGH FLYERS
Ten High-Performing Franchises
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See Learning Goal 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.
High Flyers
This slide lists ten high-performing franchises.
As mentioned earlier not all franchises are created equal and require careful investigation before considering an investment.
Web sites like www.franchise.com provide information such as the cost of thousands of franchise systems.
Ask students: What makes an effective franchisor? (Answers will vary but should include name recognition, financial stability, innovative product and effective business management.)
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Cooperatives
Cooperatives — Businesses owned and controlled by the people who use it – producers, consumers, or workers with similar needs who pool their resources for mutual gain.
Worldwide, 750,000 cooperatives serve 730 million members – 120 million in the U.S.
Members democratically control the business by electing a board of directors that hires professional management.
COOPERATIVES
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See Learning Goal 6: Explain the role of cooperatives.
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Progress Assessment
What are some of the factors to consider before buying a franchise?
What opportunities are available for starting a global franchise?
What’s a cooperative?
PROGRESS ASSESSMENT
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1) Before buying a franchise be sure to check a company’s (franchisor’s) resources and reputation. Scams are all over franchising. The checklist on page 134 gives extended advice of factors to consider before buying a franchise.
2) Successful franchising in global markets offers the same opportunities as in domestic markets. However, franchisors must be careful to adapt to the region where they wish to expand. McDonalds’ for example has more than 31,000 restaurants in 119 countries.
3) A cooperative is a form of business that is owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain. Cooperatives are a major force in agriculture and other industries today.
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Chapter Four
Demanding Ethical and Socially Responsible Behavior
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

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Profile
Chipotle is dedicated to producing quality food which has led to current annual sales over $1 billion.
STEVE ELLS
Chipotle Mexican Grill
Ells’ mission is to serve “Food With Integrity.”
Chipotle is the leading restaurant buyer of humanely raised meats.
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Ethics is More Than Legality
Scandals have shaken the real estate, mortgage and banking industries.
How do we restore trust in the free market system?
Punish those who have broken the law.
Make accounting records more transparent.
Consider what is ethical, not just what is legal.

LIFE AFTER SCANDAL
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See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
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Ethical Standards are Fundamental
Ethics — The standards of moral behavior. Behaviors that are accepted by society as right versus wrong.
WHAT are ETHICS?
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See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
The reputation of American businesses have been under assault due to numerous scandals over the past twenty years. Use this slide to help students understand that a person can obey the law and still be behaving unethically. Following the law is only the first step in being ethical. Ethics are standards of moral behavior and are accepted by society as right versus wrong.
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Ethical Standards are Fundamental
Right:
Integrity
Respect for human life
Self control
Honesty
Courage
Self-sacrifice
Wrong:
Cheating
Cowardice
Cruelty
BASIC MORAL VALUES
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See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
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Enron: One executive is serving a 24 year sentence for accounting fraud while another will be released in October 2011.
Arthur Andersen: Convicted of tampering with witnesses, the company was dissolved and about 28,000 people lost their jobs.
Tyco International: Two executives stole $600 million from the company and are scheduled to be released from prison in 2030.
Adelphia Communication: Two executives were convicted of conspiracy, bank and securities fraud and given sentences of 15 and 20 years.
WorldCom: Former CEO was convicted of fraud, conspiracy and false filings and sentenced to 25 years.
PAYING the PRICE
(Legal Briefcase)
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See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
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Ethics Begins with Each of Us
Plagiarizing from Internet materials is the most common form of cheating in schools today.
ETHICS and YOU
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Studies found a strong relationship between academic dishonesty and dishonesty at work.
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See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
Studies have shown that dishonesty at school often leads to dishonesty at work.
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Ethics Begins with Each of Us
Ask yourself these questions:
Is it legal?
Is it balanced?
How will it make me feel about myself?
FACING ETHICAL DILEMMAS
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See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
When facing an ethical dilemma it is important that you ask these three basic questions: Is it legal? Is it balanced? How will it make me feel about myself? Asking and answering these three questions will prevent many people from making unethical decisions.
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Every minute, people upload 10 hours of video to YouTube – not all is user-generated content.
Viacom sued YouTube for $1 billion for allowing episodes of its popular shows on the site.
Viacom holds YouTube responsible for carrying the illegal content, rather than the individuals who uploaded it.
Who do you think should be accountable for the copyright violations — the website or those who uploaded the videos?
To TUBE or NOT to TUBE
(Making Ethical Decisions)
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See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
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Progress Assessment
What are ethics?
How do ethics differ from legality?
When faced with ethical dilemmas, what questions can you ask yourself that might help you make ethical decisions?
PROGRESS ASSESSMENT
4-*

1) Ethics are society’s accepted standards of behavior. In other words behaviors accepted by society as right rather than wrong.
2) Ethics reflect people’s proper relationships with one another. Legality is narrower in that it refers to laws we have written to protect ourselves from fraud, theft, and violence.
3) It helps to ask the following questions when faced with an ethical dilemma: Is the proposed action legal? Is it balanced? Would I want to be treated this way? How will it make me feel about myself?
*

*
*
Managing Businesses Ethically and Responsibly
Trust between workers and managers must be based on fairness, honesty, openness and moral integrity.
Leadership can help instill corporate values in employees.
ETHICS START at the TOP
LG3
4-*

See Learning Goal 3: Describe management’s role in setting ethical standards.
Organizational ethics begins at the top. Leadership helps to instill corporate values in employees, so like many aspects of business ethical behavior practiced and modeled by managers and executives will often trickle down to the employees at large.
*

*
*
Managing Businesses Ethically and Responsibly
FACTORS INFLUENCING MANAGERIAL ETHICS
LG3
4-*

Individual Organizational Environmental
Values
Work Background
Family Status
Personality Top Level Management Philosophy
Firm’s Reward System
Job Dimensions
Competition
Economic Conditions
Social/Cultural Institutions

See Learning Goal 3: Describe management’s role in setting ethical standards.
Factors Influencing Managerial Ethics
Before you put this slide up, you may want to ask the students: What factors influence managerial ethics?
Ethics begins with the individual but is influenced by the organization and the environment in which the business operates.
To bring the discussion to the present, you may ask: How can the firm’s reward system impact ethical behavior? How did these reward systems at large banks and other financial institutions exacerbate the financial crisis in this country? (Students should be able to discuss this point. Excessive risk taking imperiled all of the stakeholders of various financial institutions as well as the world economy.)
*

*
*
Setting Corporate Ethical Standards
An increasing number of companies have adopted written codes of ethics.
Compliance-Based Ethics Code — Emphasize preventing unlawful behavior by increasing control and by penalizing wrongdoers.
Integrity-Based Ethics Code — Define the organization’s guiding values, create an environment that supports ethically sound behavior and stress a shared accountability among employees.
ETHICS CODES
LG4
4-*

See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Setting Corporate Ethical Standards
Top management must adopt and unconditionally support an explicit corporate code of conduct.
Employees must understand that senior management expects all employees to act ethically.
Managers and others must be trained to consider the ethical implications of all business decisions.
(continued)
HOW to IMPROVE AMERICA’S
BUSINESS ETHICS
LG4
4-*

See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Setting Corporate Ethical Standards
An ethics office must be set up with which employees can communicate anonymously. Whistleblowers — People who report illegal or unethical behavior.
HOW to IMPROVE AMERICA’S
BUSINESS ETHICS
LG4
Involve outsiders such as suppliers, subcontractors, distributors and customers.
The ethics code must be enforced.
4-*

See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Source: James Gehrke, Magnify Leadership & Development, November 2008.
Managers must communicate the organization’s vision on ethical behavior.
Organizations must have a code of ethics.
Policies have to be enforced regarding ethical offences.
Ethical responsibility must be taught to all employees.
(continued)
HOW to PREVENT UNETHICAL BEHAVIORS
LG4
Setting Corporate Ethical Standards
4-*

See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
Ways to Prevent Unethical Behavior
Before you put this slide up, you may want to ask the students: What is management’s role in preventing unethical behaviors? What can be done to deter unethical behaviors on the part of employees?
Increasing the penalty and educating employees are among the top methods for deterring unethical behaviors, according to the CMO Ethics Poll. (Source: CMO Magazine, October 2004)
Thirty percent of the respondents in a poll suggested adding new laws to deter unethical behaviors. Ask the students: If ethics is more than legality, would new laws help? (Students should be able to argue this point. Although ethics is more than legality, if something is against the law, people may deter from such behavior. However, it should be pointed out that ethics should be the way of life, i.e., it needs to be ingrained in the employees through culture and role modeling by managers and executives.)
*

*
*
Source: James Gehrke, Magnify Leadership & Development, November 2008.
Discussions of ethics must be included in the decision-making process.
Accountability must be taken seriously at all levels in the organization.
Organizations must act fast when a crisis occurs.
Employees must know they have to defend and maintain the company’s reputation.
HOW to PREVENT UNETHICAL BEHAVIORS
LG4
Setting Corporate Ethical Standards
4-*

*
*
Progress Assessment
What are compliance-based and integrity-based ethics codes?
What are the six steps to follow in establishing an effective ethics program in a business?
PROGRESS ASSESSMENT
4-*

1) Compliance-based ethics codes emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers. Integrity-based ethics codes define the organization’s guiding values, create an environment that support ethically sound behavior, and stress shared accountability.
2) The six steps many believe will improve U.S. business ethics are: (1) Top management must adopt and unconditionally support an explicit corporate code of conduct: (2) Employees must understand that expectations for ethical behavior begin at the top and that senior management expects all employees to act accordingly; (3) Managers and others must be trained to consider the ethical implications of all business decisions; (4) An ethics office must be set up with which employees can communicate anonymously; (5) Outsiders such as suppliers, subcontractors, distributors, and customers must be told about the ethics program; (6) The ethics code must be enforced with timely action if any rules are broken.
*

*
*
Corporate
Social Responsibility
Corporate Social Responsibility (CSR) — The concern businesses have for the welfare of society.
CSR is based on a commitment to integrity, fairness, and respect.
CSR proponents argue that businesses owe their existence to the societies they serve and cannot exist in societies that fail.
CORPORATE SOCIAL RESPONSIBILITY
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
CSR is based on a commitment to such basic principles as integrity, fairness and respect. Many for-profit companies have philanthropic endeavors as a part of their mission. Communities often depend on companies to help with social programs that make the lives of people in the community better. It stands to reason that businesses that strengthen their communities, as proponents of CSR argue, will grow stronger as their communities improve.
*

*
*
Corporate
Social Responsibility
Corporate Philanthropy — Includes charitable donations.
Corporate Social Initiatives — Includes enhanced forms of corporate philanthropy.
CORPORATE PHILANTHROPY
and SOCIAL INITIATIVES
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Corporate
Social Responsibility
Corporate Responsibility — Includes everything from hiring minority workers to making safe products, minimizing pollution, using energy wisely, and providing a safe work environment.
Corporate Policy — The position a firm takes on social and political issues.
CORPORATE RESPONSIBILITY
and POLICY
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Corporate
Social Responsibility
Xerox offers a Social Service Leave program.
Citizen Corps encourages volunteers to help strengthen homeland security by helping in their community.
Two-thirds of MBA students surveyed reported they would take a lower salary to work for a socially responsible company.
POSTIVE IMPACTS
of COMPANIES
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
An ultimate example of a company helping the community is Xerox’s program, Social Service Leave, which allows employees to leave for up to a year and work for a nonprofit while still earning full salary, including benefits and job security.
*

*
*
Source: Wall Street Journal, www.wsj.com, June 23, 2008.
Corporate
Social Responsibility
To WHOM MUCH HAS
BEEN GIVEN…
America’s Charitable Giving
LG5
4-*

Chart1

160

175

205

235

237

240

255

295

305

In $ Billions

Sheet1

In $ Billions Series 2 Series 3

1997 160 2.4 2

1998 175 4.4 2

1999 205 1.8 3

2000 235 2.8 5

2001 235

2002 237

2003 240

2004 255

2005 295

2006 295

2007 305

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
America’s Charitable Giving
For the first time charitable giving exceed $300 billion in this country.
What percentage of the $300 billion was contributed by individuals, businesses and foundations? (Individuals contributed 82.3%, businesses 5.1% and foundations 12.6%)
(Source: http://nonprofit.about.com/od/trendsissuesstatistics/a/giving2008.htm)
Religious organizations continue to receive the biggest share of donations accounting for 33.4% of the total giving. Here is the breakdown for what types of organizations receive these donations:

*
*
Source: Parade Magazine, www.parade.com, September 14, 2008.
Corporate
Social Responsibility
HELPING HANDS
Most Generous Celebrities*
LG5
*Donations made in 2007
4-*

Who? How Much?
Oprah Winfrey $50.2 Million
Herb Alpert $13 Million
Barbara Streisand $11 Million
Paul Newman $10 Million
Mel Gibson $9.9 Million
Angelina Jolie & Brad Pitt $8.4 Million
Michael Jordan $5 Million
Eric Lindros $5 Million
Lance Armstrong $5 Million

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
Most Generous Celebrities
Students will find it interesting to see on this slide what some of their favorite celebrities have donated.
Oprah Winfrey earns well over $200 million per year.
The talk-show host and entertainment mogul is the founder of the Angel Network, a charity that raises money for poverty-stricken children and she has raised money to open schools for girls in South Africa.
*

*
*
Source: Conde Nast Portfolio, www.portfolio.com, January 2008.
California – 12.1%
New Jersey – 8.9%
Pennsylvania – 5.2%
Washington – 5%
New York – 5%
Corporate
Social Responsibility
WHO GIVES?
Five States Contribute More Than
a Third of the Nation’s Donations
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
Who Gives
California has the largest population and it’s residents make the most donations.
*

*
*
Source: Fast Company, www.fastcompany.com, May 2008.
Corporate
Social Responsibility
GENEROUS AMERICANS
Americans Donated $295,020,000,000 in 2006
LG5
4-*

Chart1

0.65

0.35

%
65%
35%

Sheet1

Under $100,000 Income 65%

Over $100,000 Income 35%

3rd Qtr 1.4

4th Qtr 1.2

To resize chart data range, drag lower right corner of range.

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.

*
*
Responsibility
to Customers
The Right to Safety
The Right to be Informed
The Right to Choose
The Right to be Heard
PRESIDENT KENNEDY’S BASIC RIGHTS of CONSUMERS
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Responsibility
to Investors
Insider Trading — Insiders using private company information to further their own fortunes or those of their family and friends.
Unethical behavior does financial damage to a company and investors are cheated.
INSIDER TRADING
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Responsibility
to Employees
Create jobs and provide a chance for upward mobility.
Treat employees with respect.
Offer salaries and benefits that help employees reach their personal goals.
RESPONSIBILITY to
EMPLOYEES
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Source: Fortune, www.fortune.com, March, 2009.
Apple
Berkshire Hathaway
Toyota
Google
Johnson & Johnson
Proctor & Gamble
FedEx
Southwest Airlines
General Electric
Microsoft
Wal-Mart
Coca-Cola
Walt Disney
Wells Fargo
Goldman Sachs
McDonald’s
IBM
3M
Target
J.P. Morgan Chase
Responsibility
to Employees
AMERICA’S MOST ADMIRED COMPANIES
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
America’s Most Admired Companies
1. Before you put this slide up, you may want to ask the students: Are the ideals of maximization of profit and social responsibility in conflict?
Corporate social responsibility is the concern businesses have for the welfare of society, not just for their owners.
3. The vast majority of the companies listed in this slide are not only admired but also financially successful.
*

*
*
Responsibility
to Society and
the Environment
Over one-third of working Americans receive their salaries from nonprofits – who are dependent on funding from others.
The green movement emerged as concern about global warming increased.
Many companies are trying to minimize their carbon footprints – the amount of carbon released during an item’s production, distribution, consumption and disposal.
SOCIETY and
the ENVIRONMENT
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Responsibility
to Society and
the Environment
Environmental efforts may increase costs but can offer good opportunities.
The emerging renewable-energy and energy-efficiency industries account for 8.5 million U.S. jobs.
RESPONSIBILITY to the ENVIRONMENT
LG5
By 2030, as many as 40 million “Green” jobs will be created.
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
With public concern over the environment, companies are finding greener ways of doing business.
Some companies are claiming they are more environmentally responsible than they actually are, a practice called “greenwashing”.
Web sites such as Greener Choices and Greenwashing Index screen ads for greenwashing.
GREEN GREED
(Thinking Green)
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Social Auditing
Social Audit — A systematic evaluation of an organization’s progress toward implementing programs that are socially responsible and responsive.
Four Types of Social Audit Watchdogs
Socially conscious investors
Environmentalists
Union officials
Customers
SOCIAL AUDITING
LG5
4-*

See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*

*
*
Progress Assessment
What’s corporate social responsibility, and how does it relate to each of a business’s major stakeholders?
What’s a social audit, and what kinds of activities does it monitor?
PROGRESS ASSESSMENT
4-*

1) Corporate social responsibility (CSR) is the concern businesses have for the welfare of society not just for their owners. CSR defenders believe that businesses owe their existence to the societies they serve and cannot succeed in societies that fail. CSR must be responsible to all stakeholders not just investors in the company.
2) A social audit is a systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs. Many feel a social audit should measure workplace issues, the environment, product safety, community relations, military weapons contracting, international operations and human rights, and respect for the rights of local people.
*

*
*
International Ethics and
Social Responsibility
Many businesses want socially responsible behavior from their international suppliers.
The Joint Initiative on Corporate Accountability and Workers’ Rights was designed to make creating a single set of labor standards and inspecting factories easier.
In the 1970s, the Foreign Corrupt Practices Act criminalized the act of paying foreign businesses or government leaders in order to get business.
INTERNATIONAL ETHICS
LG6
4-*

See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
*

*
*
Source: Forbes, www.forbes.com, March 24, 2008.
International Ethics and
Social Responsibility
GIVERS AROUND the WORLD
Share of GDP
LG6
4-*

Chart1

1.85

0.84

0.32

0.29

0.18

0.13

0.09

0.05

% of GDP

Sheet1

% of GDP Series 2 Series 3

U.S. 1.85 2.4 2

U.K. 0.84 4.4 2

France 0.32 1.8 3

Brazil 0.29 2.8 5

South Korea 0.18

Germany 0.13

India 0.09

China 0.05

See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
Givers Around the World
To get a discussion moving ask students: Are Americans Cheap? Or Charitable?
This slide shows the world’s top givers based on a share of GDP. Based on this slide Americans appear to be the most charitable in the world based on share of GDP.
*

*
*
Almost half of Motorola’s employees live outside the U.S.
A Motorola employee returns to his home country to work and the company reimburses living expenses so he can live in a safe area. The employee is trying to do the honorable thing for his family and the company is trying to keep the employee safe.
If the employee uses the money to help his family instead, is it right for the company to stop payment?
ETHICAL CULTURE CLASH
(Reaching Beyond Our Borders)
4-*

See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
*

*
*
Progress Assessment
How are U.S. businesses demanding socially responsible behavior from their international suppliers?
Why is it unlikely that there will be a single set of international rules governing multinational companies soon?
PROGRESS ASSESSMENT
4-*

1) Many U.S. businesses now demand that international suppliers do not violate U.S. human rights and environmental standards.
2) It’s unlikely there will be a single set of international rules governing multinational companies because of the widespread disparity among global nations as to what constitutes ethical behavior. For example, a gift in one culture can be a bribe in another. In some nations child labor is expected and an important part of a family’s standard of living. The fairness of adhering to U.S. standards of ethical behavior is not as easy as you may think.
*

See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
*
See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
The reputation of American businesses have been under assault due to numerous scandals over the past twenty years. Use this slide to help students understand that a person can obey the law and still be behaving unethically. Following the law is only the first step in being ethical. Ethics are standards of moral behavior and are accepted by society as right versus wrong.
*
See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
*
See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
*
See Learning Goal 1: Explain why obeying the law is only the first step in behaving ethically.
Studies have shown that dishonesty at school often leads to dishonesty at work.
*
See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
When facing an ethical dilemma it is important that you ask these three basic questions: Is it legal? Is it balanced? How will it make me feel about myself? Asking and answering these three questions will prevent many people from making unethical decisions.
*
See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
*
1) Ethics are society’s accepted standards of behavior. In other words behaviors accepted by society as right rather than wrong.
2) Ethics reflect people’s proper relationships with one another. Legality is narrower in that it refers to laws we have written to protect ourselves from fraud, theft, and violence.
3) It helps to ask the following questions when faced with an ethical dilemma: Is the proposed action legal? Is it balanced? Would I want to be treated this way? How will it make me feel about myself?
*
See Learning Goal 3: Describe management’s role in setting ethical standards.
Organizational ethics begins at the top. Leadership helps to instill corporate values in employees, so like many aspects of business ethical behavior practiced and modeled by managers and executives will often trickle down to the employees at large.
*
See Learning Goal 3: Describe management’s role in setting ethical standards.
Factors Influencing Managerial Ethics
Before you put this slide up, you may want to ask the students: What factors influence managerial ethics?
Ethics begins with the individual but is influenced by the organization and the environment in which the business operates.
To bring the discussion to the present, you may ask: How can the firm’s reward system impact ethical behavior? How did these reward systems at large banks and other financial institutions exacerbate the financial crisis in this country? (Students should be able to discuss this point. Excessive risk taking imperiled all of the stakeholders of various financial institutions as well as the world economy.)
*
See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 4: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 2: Ask the three questions to answer when faced with a potentially unethical action.
Ways to Prevent Unethical Behavior
Before you put this slide up, you may want to ask the students: What is management’s role in preventing unethical behaviors? What can be done to deter unethical behaviors on the part of employees?
Increasing the penalty and educating employees are among the top methods for deterring unethical behaviors, according to the CMO Ethics Poll. (Source: CMO Magazine, October 2004)
Thirty percent of the respondents in a poll suggested adding new laws to deter unethical behaviors. Ask the students: If ethics is more than legality, would new laws help? (Students should be able to argue this point. Although ethics is more than legality, if something is against the law, people may deter from such behavior. However, it should be pointed out that ethics should be the way of life, i.e., it needs to be ingrained in the employees through culture and role modeling by managers and executives.)
*
*
1) Compliance-based ethics codes emphasize preventing unlawful behavior by increasing control and penalizing wrongdoers. Integrity-based ethics codes define the organization’s guiding values, create an environment that support ethically sound behavior, and stress shared accountability.
2) The six steps many believe will improve U.S. business ethics are: (1) Top management must adopt and unconditionally support an explicit corporate code of conduct: (2) Employees must understand that expectations for ethical behavior begin at the top and that senior management expects all employees to act accordingly; (3) Managers and others must be trained to consider the ethical implications of all business decisions; (4) An ethics office must be set up with which employees can communicate anonymously; (5) Outsiders such as suppliers, subcontractors, distributors, and customers must be told about the ethics program; (6) The ethics code must be enforced with timely action if any rules are broken.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
CSR is based on a commitment to such basic principles as integrity, fairness and respect. Many for-profit companies have philanthropic endeavors as a part of their mission. Communities often depend on companies to help with social programs that make the lives of people in the community better. It stands to reason that businesses that strengthen their communities, as proponents of CSR argue, will grow stronger as their communities improve.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
An ultimate example of a company helping the community is Xerox’s program, Social Service Leave, which allows employees to leave for up to a year and work for a nonprofit while still earning full salary, including benefits and job security.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
America’s Charitable Giving
For the first time charitable giving exceed $300 billion in this country.
What percentage of the $300 billion was contributed by individuals, businesses and foundations? (Individuals contributed 82.3%, businesses 5.1% and foundations 12.6%)
(Source: http://nonprofit.about.com/od/trendsissuesstatistics/a/giving2008.htm)
Religious organizations continue to receive the biggest share of donations accounting for 33.4% of the total giving. Here is the breakdown for what types of organizations receive these donations:

Religion, $102.32 billion, 33.4%
Education, $43.32 billion, 12.1%
Human services, $29.64 billion, 9.7%
Health, $23.15 billion, 7.6%
Public-Society benefit (United Way etc), $22.65 billion, 7.4%
Arts, culture and humanities, $13.67 billion, 4.5%
International affairs, $13.22 billion, 4.3%
Environment and animals, $6.96 billion, 2.3%
Foundations, $27.73 billion, 9.1%
Unallocated giving, $23.67, 7.7%
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
Most Generous Celebrities
Students will find it interesting to see on this slide what some of their favorite celebrities have donated.
Oprah Winfrey earns well over $200 million per year.
The talk-show host and entertainment mogul is the founder of the Angel Network, a charity that raises money for poverty-stricken children and she has raised money to open schools for girls in South Africa.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
Who Gives
California has the largest population and it’s residents make the most donations.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.

Generous Americans
Before you put this slide up, you may want to ask the students: What income group donates more — people earning over or under $100,000? (Sixty-five percent of money donated by Americans comes from people earning less than $100,000.)
How does this information impact the fund raising of nonprofit organizations seeking charitable contributions? (Small donations add up and require nonprofit organizations to alter their fund raising efforts to reach these donors.)
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
America’s Most Admired Companies
1. Before you put this slide up, you may want to ask the students: Are the ideals of maximization of profit and social responsibility in conflict?
Corporate social responsibility is the concern businesses have for the welfare of society, not just for their owners.
3. The vast majority of the companies listed in this slide are not only admired but also financially successful.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
See Learning Goal 5: Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.
*
1) Corporate social responsibility (CSR) is the concern businesses have for the welfare of society not just for their owners. CSR defenders believe that businesses owe their existence to the societies they serve and cannot succeed in societies that fail. CSR must be responsible to all stakeholders not just investors in the company.
2) A social audit is a systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs. Many feel a social audit should measure workplace issues, the environment, product safety, community relations, military weapons contracting, international operations and human rights, and respect for the rights of local people.
*
See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
*
See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
Givers Around the World
To get a discussion moving ask students: Are Americans Cheap? Or Charitable?
This slide shows the world’s top givers based on a share of GDP. Based on this slide Americans appear to be the most charitable in the world based on share of GDP.
*
See Learning Goal 6: Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.
*
1) Many U.S. businesses now demand that international suppliers do not violate U.S. human rights and environmental standards.
2) It’s unlikely there will be a single set of international rules governing multinational companies because of the widespread disparity among global nations as to what constitutes ethical behavior. For example, a gift in one culture can be a bribe in another. In some nations child labor is expected and an important part of a family’s standard of living. The fairness of adhering to U.S. standards of ethical behavior is not as easy as you may think.
*

*
*
Understanding How Economics Affects Business
*
Chapter Two
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

*
Profile
MUHAMMAD YUNUS
Grameen Bank
Offers microcredits (very small loans) to the poor to start their own businesses.
Won the Nobel Peace Prize in 2006.

*
2-*

See Learning Goal 1: Explain basic economics.
*

*
What Is Economics?
Economics — The study of how society employs resources to produce goods and services for consumption among various groups and individuals.
Macroeconomics — Concentrates on the operation of a nation’s economy as a whole.
Microeconomics — Concentrates on the behavior of people and organizations in markets for particular products or services.
The MAJOR BRANCHES of
ECONOMICS
LG1
*
2-*

See Learning Goal 1: Explain basic economics.
This slide gives students insight into the definition of economics. When going over this definition it often helps to further define the term resources. The term resources ties back into Chapter 1 and the factors of production: land, labor, capital, knowledge and entrepreneurship.

*
Resource Development — The study of how to increase resources and create conditions that will make better use of them.
What Is Economics?
RESOURCE DEVELOPMENT
LG1
*
2-*

See Learning Goal 1: Explain basic economics.
Businesses can contribute to an economic system by inventing new products that increase the availability of resources.
*

*
New energy sources
Hydrogen fuel
New ways of growing foods
Hydroponics
New ways of creating goods and services
Mariculture
Nanotechnology
What Is Economics?
EXAMPLES of WAYS to
INCREASE RESOURCES
LG1
*
2-*

See Learning Goal 1: Explain basic economics.

*
*
The public’s concern with global warming contributed to the success of the Toyota Prius.

Farmers are growing more corn and other crops to use for biofuels.
What can you do to help lower carbon emissions?
MORE PROFITS FROM the
GREEN REVOLUTION
(Thinking Green)
2-*

See Learning Goal 1: Explain basic economics.

*
The Secret to Creating a Wealthy Economy
Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.
This belief led the writer Thomas Carlyle to call economics “The Dismal Science.”
Neo-Malthusians believe there are too many people in the world and believe the answer is radical birth control.
THOMAS MALTHUS and
the DISMAL SCIENCE
LG1
*
2-*

See Learning Goal 1: Explain basic economics.
Thomas Malthus believed that if people were left to their own devices there would be chaos and that the government needed to be heavily involved in controlling the economy. Malthus’ ideas are still with us today. Neo-Malthusian ideas of overpopulation are still prevalent in books such as Paul Ehrlich’s The Population Bomb (1968) which contains ideas similar to those presented by Thomas Malthus 200 years ago.

*
*
Contrary to Malthus, some economists believe a large population can be a resource.

An educated population is a highly valuable.
Business owners provide jobs and economic growth for their employees and communities as well as for themselves.
The Secret to Creating a Wealthy Economy
POPULATION as a RESOURCE
LG1
2-*

See Learning Goal 1: Explain basic economics.
Malthus viewed a large population as a negative. However, many economists see a highly educated population as a valuable scarce resource. Countries like Japan and Germany have become economically successful in a postwar environment with large well-educated populations producing sophisticated high-value products.

*
Adam Smith & the Creation of Wealth
Smith believed that:

Freedom was vital to any economy’s survival.
Freedom to own land or property and the right to keep the profits of a business is essential.
People will work hard if they believe they will be rewarded.
ADAM SMITH the
FATHER of ECONOMICS
LG1
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2-*

See Learning Goal 1: Explain basic economics.
Adam Smith’s ideas were laid out in his seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed strongly in more “natural liberty” and less government intervention into the economy which was anathema to the ideas of Malthus. Smith argued that allowing people the freedom to own land and the right to keep profit would not create chaos as Malthus had argued, but rather would create greater resources for all.

*
How Businesses Benefit the Community
As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.
Invisible Hand — When self-directed gain leads to social and economic benefits for the whole community.
The INVISIBLE HAND THEORY
LG1
*
2-*

See Learning Goal 1: Explain basic economics.
*

*
A farmer earns money by selling his crops.
To earn more, the farmer hires farmhands to produce more crops.
When the farmer produces more, there is plenty of food for the community.
The farmer helped his employees and his community while helping himself.
How Businesses Benefit the Community
UNDERSTANDING the
INVISIBLE HAND THEORY
LG1
*
2-*

See Learning Goal 1: Explain basic economics.
*

In many countries, a businessperson must bribe the government to gain permission to own land, build and conduct business operations.

Imagine you are a restaurant owner in need of a liquor license, but have been unable to get one. You know people in government. Would you be tempted to make large contributions to their re-election campaign to receive that license?
CORRUPTION DESTROYS ECONOMIES
(Making Ethical Decisions)
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2-*

See Learning Goal 1: Explain basic economics.
*

*
*
What’s the difference between macroeconomics and microeconomics?
What’s better for an economy than teaching a man to fish?
What does Adam Smith’s term “invisible hand” mean? How does the invisible hand create wealth for a country?
Progress Assessment
PROGRESS ASSESSMENT
2-*

1) Macroeconomics looks at the operations of a nation’s economy as a whole. Microeconomics looks at the behavior of people and organizations in markets for particular products or services.
2) To create wealth in an economy, it is better to teach a man to start a fish farm, and he will be able to feed a village for a lifetime.
3) The invisible hand is the term used by Smith to describe the processes that turns self-directed gains into social and economic benefits for all. To become wealthy, people working in their own self-interest producing goods and services hire others providing employment. They also tend to reach out to help the less fortunate over time.
*

*
*
Understanding Free-Market Capitalism
Capitalism — All or most of the land, factories and stores are owned by individuals, not the government, and operated for profit.

Countries with capitalist foundations:
United States
England
Australia
Canada
CAPITALISM
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
This slide gives students the opportunity to apply the concept of capitalism in the United States and analyze the impact government ownership of AIG, Fannie Mae and Freddie Mac will have on the future state of capitalism in the United States.
*

*
*
FINCA lent Pros Magaga, a shop owner in Uganda, $50 to buy supplies that increased her store’s profits.
Magaga was able to pay the $50 back so can now borrow more money.
FINCA has loaned more than $447 million to over 600,000 micro-entrepreneurs in some of the world’s poorest countries.
Its borrowers have a 97.6 percent loan repayment rate.
The KEY to CAPITALISM
is CAPITAL
(Spotlight on Small Business)
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.

*
*
The Foundations of Capitalism
The right to own private property.
The right to own a business and keep all that business’ profits.
The right to freedom of competition.
The right to freedom of choice.
CAPITALISM’S
FOUR BASIC RIGHTS
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
The four basic rights under a capitalist system are straightforward, but which of the four basic rights has been weakened in the United States over the past 30 years? When asked this question, rarely do students touch on the concept of eminent domain and the weakening of right to own private property due to the Kelo vs. New London Supreme Court case from 2005. If time permits students can explore this case and the potential impact the case may have on America capitalism.

*
*
Freedom of speech and expression.
Freedom to worship in your own way.
Freedom from want.
Freedom from fear.
The Foundations of Capitalism
ROOSEVELT’S FOUR
ADDITIONAL RIGHTS
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
*
How Free Markets Work
Free Market — Decisions about what and how much to produce are made by the market.

Consumers send signals about what they like and how they like it.

Price tells companies how much of a product they should produce. If something is wanted but hard to get, the price will rise until more products are available.
FREE MARKETS
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
How Free Markets Work
CIRCULAR FLOW MODEL
LG2
*
*
2-*

Learning Goal 2: Explain what capitalism is and how free markets work.
Circular Flow Model
In a free market economy, business activity involves two major players: individuals (households) who own the resources that are the inputs into the productive process, and businesses who use these inputs (factors of production) to create goods and services.
1. In the Resource Market (top part of the model)
a. Businesses demand resources.
b. Households own the resources (factors of production).
c. Income from providing these resources flows back to the households.
d. The price of these resources set by laws of supply and demand.
2. In the Product Market (lower part of the model)
a. Businesses use these resources to create goods and services.
b. Households (individuals) demand these goods and services.
c. Individuals use their income to purchase goods and services.
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*
*
How Prices are Determined
A seller may want to sell shirts for $50, but only a few people may buy them at that price.
If the seller lowers the price to $30, more people buy the shirts.
The seller establishes a price of $30 based on what consumers are willing to pay.
PRICING
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
Prices are determined by consumers negotiating with the sellers.

*
*
The Economic Concept of Supply
Supply — The quantities of products businesses are willing to sell at different prices.
SUPPLY CURVES
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
*
The Economic Concept of Demand
Demand — The quantities of products consumers are willing to buy at different prices.
DEMAND CURVES
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
*
The Equilibrium Point or Market Price
Market Price (Equilibrium Point) — Determined by supply and demand, this is the negotiated price.
EQUILIBRIUM
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
*
Competition Within Free Markets
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
FOUR DEGREES
of COMPETITION
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.
*

*
*
Benefits and Limitations of Free Markets
Benefits:
It allows for open competition among companies.
Provides opportunities for poor people to work their way out of poverty.

Limitations:
People may start to let greed drive them.
FREE MARKET BENEFITS and LIMITATIONS
LG2
2-*

See Learning Goal 2: Explain what capitalism is and how free markets work.

*
*
Source: The Economist, www.economist.com July 5, 2008.
Benefits and Limitations of Free Markets
The GOVERNMENT NEEDS…
Individual Tax Rates from Industrial Nations
LG2
2-*

Chart1

29.1 11.9

28.3 16

55.4 40.3

31.6 21.5

50.1 41.7

51.8 35.7

25.7 8.1

27.7 24.9

18.2 18.2

33.5 27.1

Single, No Kids
Married, Two Kids

Sheet1

Single, No Kids Married, Two Kids Series 3

United States 29.1 11.9 2

Australia 28.3 16 2

Belgium 55.4 40.3 3

Canada 31.6 21.5 5

France 50.1 41.7

Germany 51.8 35.7

Ireland 25.7 8.1

Japan 27.7 24.9

Mexico 18.2 18.2

United Kingdom 33.5 27.1

See Learning Goal 2: Explain what capitalism is and how free markets work.
Industrialized Nations’ Top Individual Tax Rate
This slide compares the Industrialized Nations’ top individual tax rates.
Students may be surprised at the difference between the rates in the U.S. and many other countries; for example the U.S. rate of 35% seems low compared to Belgium’s rate which exceeds 50%.
To help explain the difference between the U.S. rate and Belgium’s higher rate, you can discuss some of the differences between capitalism and socialism. (Socialism believes that the government should provide increased services for people by redistributing income from the richer people to the poor. Explain to the student that socialist countries are given free education, free health care, and more employee benefits. Therefore they must pay higher taxes to support these benefits.)
Point out the major disadvantages of socialism and the higher tax rate:
* Reduced incentives to work harder resulting in less innovation.
* Marginal tax rates are higher. Use the example of earning up to $20,000, at a tax rate of 40%. For each dollar you earn over $20,000, you could pay up to 85%, or eight-five cents of each dollar earned…. in taxes!
* Loss of professionally trained individuals due to higher taxes.

*
*
What are the four basic rights that people have under free-market capitalism?
How do businesspeople know what to produce and in what quantity?
How are prices determined?
What are the four forms of competition and what are some examples of each?
Progress Assessment
PROGRESS ASSESSMENT
2-*

1) The four rights are: the right to own private property, the right to own a business and keep all that business’s profits, the right to freedom of choice, and the right to freedom of competition.
2) Decisions about what to produce and in what quantity are decided by the market, consumers sending signals about what to make, how many in what color, and so on.
3) Prices are determined by the economic concepts of supply and demand.
4) The four degrees of competition are:
Perfect competition – such as a farmer’s market where good are indistinguishable. Today, however, there are no good examples of perfect competition.
Monopolistic competition – such as fast-food restaurants where products are similar but consumers perceive the products to be different. Product differentiation is a key here.
Oligopoly – a situation where just a few major producers dominate a market such as tobacco, gasoline, automobiles, etc. A few sellers dominate because the initial investment to enter such a market is significant.
Monopoly – a situation where only one producer exists in a market. U.S. law prohibits the creation of monopolies.
*

*
*
Understanding Socialism
Socialism — An economic system based on the premise that some basic businesses, like utilities, should be owned by the government in order to more evenly distribute profits among the people.
Entrepreneurs run smaller businesses
Citizens are highly taxed
Government is more involved in protecting the environment and the poor
SOCIALISM
LG3
2-*

See Learning Goal 3: Compare socialism and communism.
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*
*
The Benefits of Socialism
Social equality
Free education
Free healthcare
Free childcare
Longer vacations
Shorter work weeks
Generous sick leave
SOCIALISM BENEFITS
LG3
2-*

See Learning Goal 3: Compare socialism and communism.
*

*
*
The Negative Consequences
of Socialism
Few incentives for businesspeople to take risks.
Brain Drain: Some of a countries best and brightest workers (i.e. doctors, lawyers and business owners) move to capitalistic countries.
Fewer inventions and innovations because the reward is not as great as in capitalistic countries.
The NEGATIVES of SOCIALISM
LG3
2-*

See Learning Goal 3: Compare socialism and communism.

*
*
Understanding Communism
Communism — An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.

Prices don’t reflect demand which may lead to shortages of items, including food and clothing.

Most communist countries today suffer severe economic depression and citizens fear the government.
COMMUNISM
LG3
2-*

See Learning Goal 3: Compare socialism and communism.
*

*
*
The Trend Toward Mixed Economies
Free-Market Economies — The market largely determines what goods and services are produced, who gets them, and how the economy grows.
Command Economies — The government largely determines what goods and services are produced, who gets them, and how the economy will grow.
TWO MAJOR
ECONOMIC SYSTEMS
LG4
2-*

See Learning Goal 4: Analyze the trend toward mixed economies.

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*
The Trend Toward Mixed Economies
Mixed Economies — Some allocation of resources is made by the market and some by the government.
Neither free-market nor command economies have created sound economic conditions so countries use a mix of the two economic systems.
MIXED ECONOMIES
LG4
2-*

See Learning Goal 4: Analyze the trend toward mixed economies.
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*
*
The Trend Toward Mixed Economies
Communist governments are disappearing.

Mostly socialist governments are cutting back on social programs, lowering taxes and moving toward capitalism.

Mostly capitalist countries are increasing social programs and moving toward more socialism.
TRENDING TOWARD MIXED ECONOMIES
LG4
2-*

See Learning Goal 4: Analyze the trend toward mixed economies.

*
*
Yum Brands earns so much in China that it reports its Chinese earning separately.
Yum is opening Taco Bell stores in Mexico, calling its fare “Es otra cosa” (It’s something else).
What issues might Yum encounter while trying to sell American products abroad?
PROSPERING in
FOREIGN LANDS
(Reaching Beyond Our Borders)
2-*

See Learning Goal 4: Analyze the trend toward mixed economies.

*
*
What led to the emergence of socialism?
What are the benefits and drawbacks of socialism?
What countries still practice communism?
What are the characteristics of a mixed economy?
Progress Assessment
PROGRESS ASSESSMENT
2-*

1) Socialists believe that the distribution of wealth should be more evenly distributed than in free-market capitalism. Government should be empowered to carry out the distribution of wealth.
2) Free education through college, free health care, and free child-care are some of the benefits of socialism. The key drawback of socialism is high taxes often causing a “brain drain” in the economy. Socialism also tends to inspire less innovation.
3) Most nations have drifted away from communism but North Korea, Cuba still espouse communism. Russia, Vietnam, and China still have some communist ideals in place.
4) Mixed economies have systems where the allocation of resources is made by the market and some by the government. Like most nations of the world, the United States is a mixed economy.
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*
*
Gross Domestic Product
Gross Domestic Product (GDP) — Total value of final goods and services produced in a country in a given year. As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
When the GDP changes, businesses feel the effect.

The high U.S. GDP (about $14 trillion) is what enables us to enjoy a high standard of living.
GROSS DOMESTIC PRODUCT
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
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*
*
Source: The Economist, www.economist.com July 5, 2008.
Gross Domestic Product
WHO’S RUNNING the WORLD
Share of Global GDP, %
LG5
2-*

Chart1

41 59

40 60

51 49

62 38

Emerging Economies
Developed Economies

Sheet1

Emerging Economies Developed Economies Series 3

1913 41 59 2

1950 40 60 2

2005 51 49 3

2025 62 38 5

To resize chart data range, drag lower right corner of range.

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Share of World GDP (%)
The GDP is the total value of goods and services produced by a country in a given year.
Note the increase of the world’s GDP by emerging economies – over 50% increase since 1913.
It is important for students to understand that increasing global GDP in the emerging world is not a “zero-sum game.” When emerging economies do well economically that translates into rising levels of prosperity for citizens in the emerging world and an increase in wealth in the developed world.
Ask students – How do rising levels of wealth in the emerging world impact the United States? (Rising levels of wealth lead to greater levels of export sales from companies in the United States as well as greater peace among nations.)
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*
Source: U.S. Bureau of Economic Analysis, www.bea.gov, March 2009.
Gross Domestic Product
The UNITED STATES GDP
LG5
2-*

Chart1

293.8

526.4

1038.5

2789.5

5803.1

9817

14074.2

GDP in $ Billion

Sheet1

GDP in $ Billion Series 2 Series 3

1950 293.8 2.4 2

1960 526.4 4.4 2

1970 1,038.50 1.8 3

1980 2,789.50 2.8 5

1990 5,803.10

2000 9,817

2007 14,074.20

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
U.S. Gross Domestic Product
In 2007, the U.S. gross domestic product was $14,074 billion.
This compares to the GDP of $ 5,803 billion in 1990 and $ 2,789 billion in 1980. As can be seen on the slide the U.S. GDP has grown over 400% since 1980.

*
*
Source: Fortune Magazine, www.fortune.com July21, 2008.
Gross Domestic Product
PLAYING CATCH UP
Countries Challenging the U.S. in GDP
LG5
2-*

Chart1

1.29

1.2

1.14

3.7

13.92

GDP in $ Trillions

Sheet1

GDP in $ Trillions Series 2 Series 3

Brazil 1.29 2.4 2

Russia 1.2 4.4 2

India 1.14 1.8 3

China 3.7 2.8 5

United States 13.92

To resize chart data range, drag lower right corner of range.

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Playing Catch Up
America is often referred to as “the engine that runs the world’s economy.” It is easy to see the truth in this statement with gross domestic product far exceeding the four countries listed on the slide.
While China has grown dramatically since 1975, their economy is still dwarfed by that of the United States.
3. Much is made of the economic growth of China, India, Russia and Brazil, but students must understand the sum of these four countries gross domestic products is approximately half that of the United States.
*

*
*
The Unemployment Rate
Unemployment Rate — The percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.

Four Types of Unemployment
Frictional
Structural
Cyclical
Seasonal

UNEMPLOYMENT
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
While the term unemployment seems simple enough, the Bureau of Labor Statistics (BLS) has a very specific definition. According to the BLS unemployment is the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks. If that was not confusing enough there are four types of unemployment which students are often surprised to discover.
*

*
*
Source: U.S. Bureau of Labor Statistics, www.bls.gov, March 2009.
The Unemployment Rate
UNEMPLOYMENT RATE of the U.S.
LG5
2-*

Chart1

0.053

0.055

0.049

0.071

0.056

0.04

0.047

0.058

0.06

0.055

0.051

0.046

0.058

0.09

% Unemployed
% Unemployed
* As of April 2009

Sheet1

% Unemployed Series 2 Series 3

1950 5.30% 2.4 2

1960 5.50% 4.4 2

1970 4.90% 1.8 3

1980 7.10% 2.8 5

1990 5.60%

2000 4.00%

2001 4.70%

2002 5.80%

2003 6.00%

2004 5.50%

2005 5.10%

2006 4.60%

2007 4.60%

2008 5.80%

*2009 9.00%

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Unemployment Rate of the U.S.
Unemployment is defined as the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.
The unemployment rate in the United States over the past 50 plus years has been as low as 3.9 percent, but more recently has climbed past 9 percent with predictions that it is likely to climb higher.
Although the unemployment rate is climbing in the United States it still has a long way to reach the unemployment rate in Zimbabwe which stands at 80 percent.

*
*
Inflation and
Price Indexes
Inflation — The general rise in the prices of goods and services over time.
Disinflation — When the price increases are slowing (inflation rate declining).
Deflation — Prices are declining because too few dollars are chasing too many goods.
Stagflation — Economy is slowing but prices are going up.
INFLATION
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
When discussing inflation, disinflation, deflation and stagflation, introducing the term hyperinflation is particularly interesting to students. Historical examples of countries suffering from hyperinflation post-World War I and currently Zimbabwe bring this topic to life.
*

*
*
Consumer Price Index (CPI) — Monthly statistics that measure the pace of inflation or deflation.

The government computes the costs of goods and services (housing, food, apparel, medical care, etc.) to see if they are going up or down.

The wages, rent/leases, tax brackets, government benefits and interest rates of some citizens are based upon the CPI.
Inflation and
Price Indexes
PRICE INDEX
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
After discussing hyperinflation in the previous slide students can appreciate the importance of monitoring a nation’s inflation rate to prevent it from spiraling out of control. As inflation is increasing it acts as a hidden tax increase eroding the purchasing power of the population.
*

*
*
Productivity in
the United States
Productivity in the service sector grows slowly because of less new technology.

Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.
PRODUCTIVITY
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

*
*
Productivity in
the Service Sector
The higher the productivity, the lower the costs of producing goods and services. This helps lower prices.
New technology adds to the quality of the services provided but not to the worker’s output.
A new form of measurement needs to be created to account for the quality as well as the quantity of output.
PRODUCTIVITY in the
SERVICE SECTOR
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

*
*
The Business Cycle
Business Cycles — Periodic rises and falls that occur in economies over time.
Four Phases of Long-Term Business Cycles:
Economic Boom
Recession – Two or more consecutive quarters of decline in the GDP.
Depression – A severe recession.
Recovery – When the economy stabilizes and starts to grow. This leads to an Economic Boom.
BUSINESS CYCLES
LG5
2-*

See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Yes, it is true that a recession is two or more consecutive quarters of contracting gross domestic product, but students will be interested in knowing that for a recession to be officially labeled a recession it must be declared by the National Bureau of Economic Research. Their website, www.nber.org, provides numerous resources to further explain this part of the business cycle.
*

*
*
Stabilizing the Economy Through Fiscal Policy
Fiscal Policy — The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Tools of Fiscal Policy:
Taxation
Government Spending
FISCAL POLICY
LG6
2-*

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
*

*
*
National Deficit — The amount of money the federal government spends beyond what it gathers in taxes.

National Debt — The sum of government deficits over time.
National Surplus — When government takes in more than it spends.
Stabilizing the Economy Through Fiscal Policy
NATIONAL DEFICITS, DEBT
and SURPLUS
LG6
2-*

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.

*
*
Stabilizing the Economy Through Fiscal Policy
The National Debt has reached over $11 trillion (March 2009)
If $1 bills were stacked, the National Debt would would equal over 750,000 miles. The moon is only 238,857 miles away.
Follow the U.S. National Debt Clock here.
WHAT’S OUR NATIONAL DEBT?
LG6
2-*

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
How Much is the National Debt?
Discuss with the class the size of the national debt and what impact this has on the economy. (Increased borrowing by the government takes money out of the consumer and business markets, impacting the cost of borrowing.)
The national debt has continued to increase roughly $3.8 billion per day since September 28, 2007.
On a per person basis, each citizen’s share of this debt is roughly $36,000.
A family of four shares the debt burden of about $144,000.

*
*
Stabilizing the Economy Through Fiscal Policy
A million dollars can buy an Egg McMuffin and a large coffee for President Obama and 2,000 Secret Service members every day for six months.
A billion dollars can buy Egg McMuffins and large coffees for them for 489 years.
A trillion dollars can buy Egg McMuffins and large coffees for them for 488,992 years.
WHAT CAN a ____ DOLLARS BUY?
LG6
2-*

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
What Can A ____ Dollars Buy?
Before showing the slide, ask students, “If you were a rich, generous person who wanted to treat President Obama and his 2,000 Secret Services members to an Egg McMuffin every morning, how many days could you treat them if you decided to spend a million dollars? A billion dollars? A trillion dollars?”
Students are usually surprised to see how much a million, billion, or trillion dollars can buy.

*
*
Using Monetary Policy to Keep the Economy Growing
Monetary Policy — The management of the money supply and interest rates by the Federal Reserve Bank (the Fed).
The Fed’s most visible role is increasing and lowering interest rates.
When the economy is booming, the Fed tends to increase interest rates.
When the economy is in a recession, the Fed tends to decrease the interest rates.
MONETARY POLICY
LG6
2-*

See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
*

*
*
Name the three economic indicators and describe how well the U.S. is doing based on each indicator.
What’s the difference between a recession and a depression?
How does the government manage the economy using fiscal policy?
What does the term monetary policy mean? What organization is responsible for monetary policy?
Progress Assessment
PROGRESS ASSESSMENT
2-*

The three key economic indicators are the Gross Domestic Product (GDP), the unemployment rate, and the price indexes. The U.S. GDP is approximately about $14 trillion. Our high GDP allows citizens to enjoy a high standard of living. In 2000, the U.S. reached it lowest unemployment rate in over 30 years. However, the recession of 2008-2009 may lead unemployment to at least 10 percent. The consumer price index (CPI) has not risen to high levels keeping inflation in check. However the recession has caused fears of deflation.
A recession is two or more consecutive quarters of decline in the GDP. A depression is a severe recession, usually accompanied by deflation.
Fiscal policy refers to the government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Monetary policy is the management of the nation’s money supply and interest rates. The Federal Reserve controls the money supply in the United States.
*

*
See Learning Goal 1: Explain basic economics.
*
See Learning Goal 1: Explain basic economics.
This slide gives students insight into the definition of economics. When going over this definition it often helps to further define the term resources. The term resources ties back into Chapter 1 and the factors of production: land, labor, capital, knowledge and entrepreneurship.
See Learning Goal 1: Explain basic economics.
Businesses can contribute to an economic system by inventing new products that increase the availability of resources.
*
See Learning Goal 1: Explain basic economics.
See Learning Goal 1: Explain basic economics.
See Learning Goal 1: Explain basic economics.
Thomas Malthus believed that if people were left to their own devices there would be chaos and that the government needed to be heavily involved in controlling the economy. Malthus’ ideas are still with us today. Neo-Malthusian ideas of overpopulation are still prevalent in books such as Paul Ehrlich’s The Population Bomb (1968) which contains ideas similar to those presented by Thomas Malthus 200 years ago.
See Learning Goal 1: Explain basic economics.
Malthus viewed a large population as a negative. However, many economists see a highly educated population as a valuable scarce resource. Countries like Japan and Germany have become economically successful in a postwar environment with large well-educated populations producing sophisticated high-value products.
See Learning Goal 1: Explain basic economics.
Adam Smith’s ideas were laid out in his seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith believed strongly in more “natural liberty” and less government intervention into the economy which was anathema to the ideas of Malthus. Smith argued that allowing people the freedom to own land and the right to keep profit would not create chaos as Malthus had argued, but rather would create greater resources for all.
See Learning Goal 1: Explain basic economics.
*
See Learning Goal 1: Explain basic economics.
*
See Learning Goal 1: Explain basic economics.
*
1) Macroeconomics looks at the operations of a nation’s economy as a whole. Microeconomics looks at the behavior of people and organizations in markets for particular products or services.
2) To create wealth in an economy, it is better to teach a man to start a fish farm, and he will be able to feed a village for a lifetime.
3) The invisible hand is the term used by Smith to describe the processes that turns self-directed gains into social and economic benefits for all. To become wealthy, people working in their own self-interest producing goods and services hire others providing employment. They also tend to reach out to help the less fortunate over time.
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See Learning Goal 2: Explain what capitalism is and how free markets work.
This slide gives students the opportunity to apply the concept of capitalism in the United States and analyze the impact government ownership of AIG, Fannie Mae and Freddie Mac will have on the future state of capitalism in the United States.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
See Learning Goal 2: Explain what capitalism is and how free markets work.
The four basic rights under a capitalist system are straightforward, but which of the four basic rights has been weakened in the United States over the past 30 years? When asked this question, rarely do students touch on the concept of eminent domain and the weakening of right to own private property due to the Kelo vs. New London Supreme Court case from 2005. If time permits students can explore this case and the potential impact the case may have on America capitalism.
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
Learning Goal 2: Explain what capitalism is and how free markets work.
Circular Flow Model
In a free market economy, business activity involves two major players: individuals (households) who own the resources that are the inputs into the productive process, and businesses who use these inputs (factors of production) to create goods and services.
1. In the Resource Market (top part of the model)
a. Businesses demand resources.
b. Households own the resources (factors of production).
c. Income from providing these resources flows back to the households.
d. The price of these resources set by laws of supply and demand.
2. In the Product Market (lower part of the model)
a. Businesses use these resources to create goods and services.
b. Households (individuals) demand these goods and services.
c. Individuals use their income to purchase goods and services.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
Prices are determined by consumers negotiating with the sellers.
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
*
See Learning Goal 2: Explain what capitalism is and how free markets work.
See Learning Goal 2: Explain what capitalism is and how free markets work.
Industrialized Nations’ Top Individual Tax Rate
This slide compares the Industrialized Nations’ top individual tax rates.
Students may be surprised at the difference between the rates in the U.S. and many other countries; for example the U.S. rate of 35% seems low compared to Belgium’s rate which exceeds 50%.
To help explain the difference between the U.S. rate and Belgium’s higher rate, you can discuss some of the differences between capitalism and socialism. (Socialism believes that the government should provide increased services for people by redistributing income from the richer people to the poor. Explain to the student that socialist countries are given free education, free health care, and more employee benefits. Therefore they must pay higher taxes to support these benefits.)
Point out the major disadvantages of socialism and the higher tax rate:
* Reduced incentives to work harder resulting in less innovation.
* Marginal tax rates are higher. Use the example of earning up to $20,000, at a tax rate of 40%. For each dollar you earn over $20,000, you could pay up to 85%, or eight-five cents of each dollar earned…. in taxes!
* Loss of professionally trained individuals due to higher taxes.
1) The four rights are: the right to own private property, the right to own a business and keep all that business’s profits, the right to freedom of choice, and the right to freedom of competition.
2) Decisions about what to produce and in what quantity are decided by the market, consumers sending signals about what to make, how many in what color, and so on.
3) Prices are determined by the economic concepts of supply and demand.
4) The four degrees of competition are:
Perfect competition – such as a farmer’s market where good are indistinguishable. Today, however, there are no good examples of perfect competition.
Monopolistic competition – such as fast-food restaurants where products are similar but consumers perceive the products to be different. Product differentiation is a key here.
Oligopoly – a situation where just a few major producers dominate a market such as tobacco, gasoline, automobiles, etc. A few sellers dominate because the initial investment to enter such a market is significant.
Monopoly – a situation where only one producer exists in a market. U.S. law prohibits the creation of monopolies.
*
See Learning Goal 3: Compare socialism and communism.
*
See Learning Goal 3: Compare socialism and communism.
*
See Learning Goal 3: Compare socialism and communism.
See Learning Goal 3: Compare socialism and communism.
*
See Learning Goal 4: Analyze the trend toward mixed economies.
See Learning Goal 4: Analyze the trend toward mixed economies.
*
See Learning Goal 4: Analyze the trend toward mixed economies.
See Learning Goal 4: Analyze the trend toward mixed economies.
1) Socialists believe that the distribution of wealth should be more evenly distributed than in free-market capitalism. Government should be empowered to carry out the distribution of wealth.
2) Free education through college, free health care, and free child-care are some of the benefits of socialism. The key drawback of socialism is high taxes often causing a “brain drain” in the economy. Socialism also tends to inspire less innovation.
3) Most nations have drifted away from communism but North Korea, Cuba still espouse communism. Russia, Vietnam, and China still have some communist ideals in place.
4) Mixed economies have systems where the allocation of resources is made by the market and some by the government. Like most nations of the world, the United States is a mixed economy.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Share of World GDP (%)
The GDP is the total value of goods and services produced by a country in a given year.
Note the increase of the world’s GDP by emerging economies – over 50% increase since 1913.
It is important for students to understand that increasing global GDP in the emerging world is not a “zero-sum game.” When emerging economies do well economically that translates into rising levels of prosperity for citizens in the emerging world and an increase in wealth in the developed world.
Ask students – How do rising levels of wealth in the emerging world impact the United States? (Rising levels of wealth lead to greater levels of export sales from companies in the United States as well as greater peace among nations.)
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
U.S. Gross Domestic Product
In 2007, the U.S. gross domestic product was $14,074 billion.
This compares to the GDP of $ 5,803 billion in 1990 and $ 2,789 billion in 1980. As can be seen on the slide the U.S. GDP has grown over 400% since 1980.

*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Playing Catch Up
America is often referred to as “the engine that runs the world’s economy.” It is easy to see the truth in this statement with gross domestic product far exceeding the four countries listed on the slide.
While China has grown dramatically since 1975, their economy is still dwarfed by that of the United States.
3. Much is made of the economic growth of China, India, Russia and Brazil, but students must understand the sum of these four countries gross domestic products is approximately half that of the United States.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
While the term unemployment seems simple enough, the Bureau of Labor Statistics (BLS) has a very specific definition. According to the BLS unemployment is the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks. If that was not confusing enough there are four types of unemployment which students are often surprised to discover.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Unemployment Rate of the U.S.
Unemployment is defined as the percentage of civilians at least 16-years-old who are unemployed and tried to find a job within the prior four weeks.
The unemployment rate in the United States over the past 50 plus years has been as low as 3.9 percent, but more recently has climbed past 9 percent with predictions that it is likely to climb higher.
Although the unemployment rate is climbing in the United States it still has a long way to reach the unemployment rate in Zimbabwe which stands at 80 percent.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
When discussing inflation, disinflation, deflation and stagflation, introducing the term hyperinflation is particularly interesting to students. Historical examples of countries suffering from hyperinflation post-World War I and currently Zimbabwe bring this topic to life.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
After discussing hyperinflation in the previous slide students can appreciate the importance of monitoring a nation’s inflation rate to prevent it from spiraling out of control. As inflation is increasing it acts as a hidden tax increase eroding the purchasing power of the population.
*
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
See Learning Goal 5: Discuss the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.
Yes, it is true that a recession is two or more consecutive quarters of contracting gross domestic product, but students will be interested in knowing that for a recession to be officially labeled a recession it must be declared by the National Bureau of Economic Research. Their website, www.nber.org, provides numerous resources to further explain this part of the business cycle.
*
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
*
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
How Much is the National Debt?
Discuss with the class the size of the national debt and what impact this has on the economy. (Increased borrowing by the government takes money out of the consumer and business markets, impacting the cost of borrowing.)
The national debt has continued to increase roughly $3.8 billion per day since September 28, 2007.
On a per person basis, each citizen’s share of this debt is roughly $36,000.
A family of four shares the debt burden of about $144,000.
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
What Can A ____ Dollars Buy?
Before showing the slide, ask students, “If you were a rich, generous person who wanted to treat President Obama and his 2,000 Secret Services members to an Egg McMuffin every morning, how many days could you treat them if you decided to spend a million dollars? A billion dollars? A trillion dollars?”
Students are usually surprised to see how much a million, billion, or trillion dollars can buy.

*
See Learning Goal 6: Define Fiscal Policy and Monetary policy, and explain how each affects the economy.
*
The three key economic indicators are the Gross Domestic Product (GDP), the unemployment rate, and the price indexes. The U.S. GDP is approximately about $14 trillion. Our high GDP allows citizens to enjoy a high standard of living. In 2000, the U.S. reached it lowest unemployment rate in over 30 years. However, the recession of 2008-2009 may lead unemployment to at least 10 percent. The consumer price index (CPI) has not risen to high levels keeping inflation in check. However the recession has caused fears of deflation.
A recession is two or more consecutive quarters of decline in the GDP. A depression is a severe recession, usually accompanied by deflation.
Fiscal policy refers to the government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Monetary policy is the management of the nation’s money supply and interest rates. The Federal Reserve controls the money supply in the United States.
*

*
*
Doing Business in Global Markets
Chapter Three
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

*
*
Profile
First female foreign trade minister of the United Arab Emirates (UAE).
Adapts her personal communication processes to match the culture of the people with whom she is interacting.
SHEIKA LUBNA AL-QUASIMI
Foreign Trade Minister of the UAE
3-*

*
*
The Dynamic Global Market
Over 90% of companies doing business globally believe it is important for employees to have international experience.
U.S. organizations (like UPS, the NFL and the NBA) are also expanding abroad.
BUSINESS in the
GLOBAL MARKET
LG1
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
1. The U.S. is a market of over 300 million potential customers, but the world market is over 6.7 billion.
2. It is easy for student’s in the United States to lose sight of the importance of the global market. This slide helps them see that the international marketplace offers businesses opportunities due to the size of the market. Companies like Procter & Gamble and Wal-Mart have found the international market offers opportunities for additional revenue growth.
*

*
*
The Dynamic Global Market
LG1
WORLD POPULATION
by CONTINENT
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
*

*
*
The Dynamic Global Market
Importing — Buying products from another country.
Exporting — Selling products to another country.
The U.S. is the largest importing and the second largest exporting nation in the world.
IMPORTING and EXPORTING
LG1
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
Germany is the largest exporting nation. China is barely behind the U.S.
*

*
*
Source: World Features Syndicate and Interbrand.com.
U.S. – 51 brands
Germany – 9 brands
Japan – 8 brands
France – 8 brands
U.K. – 6 brands
Switzerland – 5 brands
The Dynamic Global Market
WHERE ARE THEY FROM?
Countries of Origin for World’s Most Powerful Brands
LG1
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
Where Are They From?
A large percentage of the world’s most powerful brands originate from the U.S.
Ask students: What creates a powerful brand? What brands are the most powerful?
Why do the majority of powerful brands trace their origin to the U.S.? (Since the United States has the largest economy in the world brands tend to originate there due to consumer demand.)

Some Top Brands:
USA – Coca-Cola, IBM, Microsoft, Disney, McDonald’s and Apple
Germany – Mercedes-Benz, BMW, Siemans and Adidas
Japan – Toyota, Honda, Sony, Canon and Nintendo
France – Louis Vuitton, L’Oreal, AXA and Chanel
U.K. – Burberry, Reuters, BP and HSBC
Switzerland – Nescafe, Rolex, UBS, Nestle and Cartier
*

*
*
Source: Forbes, www.forbes.com, March 30, 2009.
U.S. – 359 billionaires
Germany – 54 billionaires
Russia – 32 billionaires
China – 28 billionaires
India – 24 billionaires
U.K. – 25 billionaires
Canada – 20 billionaires
The Dynamic Global Market
CAN YOU SPARE a DIME?
Home Countries for Some of the World’s Billionaires
LG1
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
Can You Spare a DIME?
The United States has the most billionaires in the world.
Ask students: Why does the United States have more billionaires than any other country in the world? (There are many reasons why this is true. We have a larger population than some of the other countries on the slide, so it would stand to reason that we would have more billionaires than those countries. However, some of the countries listed have a larger population than the United States, namely India and China. In the United States there is less regulation on businesses and wages/salaries are much higher.)

*
*
Why Trade With Other Nations?
Countries with abundant natural resources (like Venezuela or Russia) need technological resources from other countries (like Japan).
Global trade allows countries to produce what they make best and buy what they need from others.
Free Trade — The movement of goods and services among nations without political or economic barriers.
TRADING with OTHER NATIONS
LG1
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
No nation can produce all the products its people want and need.
*

*
*
Source: The Progressive Policy Institute, World Health Organization .
Global trade has led the world in a new direction:
Literacy rates worldwide have increased from 56% in 1950 to 84% in 2006.
Life expectancy in less developed areas rose from 40.9 years in 1950 to 70.1 years in 2006.
HOW FREE TRADE
BENEFITS the WORLD
LG1
Why Trade With Other Nations?
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
How Free Trade Benefits the World
Often it is difficult for students to see how world trade has improved the living conditions of millions of the world’s poorest individuals.
This slide shows some of the improvement in literacy rates and life expectancy since 1950. These improvements in the standard of living can be somewhat attributed to free trade.
From The Economist January 26, 2008 print edition: twenty-five years ago two-thirds of the population or 600 million people were living in extreme poverty (on less than $1 a day). Now, the number living on $1 a day is below 180 million and yet the world’s population has increased.
To start a discussion ask the students: Why has China been able to improve the living conditions of so many of its citizens in the last twenty-five years? (More liberal economic policies have led to greater economic growth and an increase in the standard of living for individuals)

*
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The Theories of Comparative and Absolute Advantage
Comparative Advantage — A country should sell the products it produces most efficiently and buy from other countries the products it cannot produce as efficiently.
Absolute Advantage — A country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries.
LG1
COMPARATIVE and ABSOLUTE
ADVANTAGE
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
David Ricardo expanded on Adam Smith’s theory of absolute advantage with the theory of comparative advantage. This theory can be difficult for students to grasp. A country should produce only what it can produce efficiently buying what it cannot produce as efficiently. This theory of international trade along with Adam Smith’s Theory of Absolute Advantage have been guiding tenets of international trade since the late 1700s.
*

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Getting Involved in Global Trade
Small businesses may be the key in global job growth.
They make up almost half of the private sector.
Only 30% of small businesses export.
By 2018, it’s expected half of small businesses will export.
GOING GLOBAL with a
SMALL BUSINESS
LG2
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
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*
*
Source: Investor’s Business Daily, www.investors.com, June 30, 2008.
Getting Involved in Global Trade
WHERE DO THEY INVEST?
Leading Destinations for Foreign Investors
LG2
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
Where Do Foreigners Invest?
Foreign Direct Investment in the process in which a company in one country buys the assets located in another country.
This table shows students the leading destinations for foreign investors.
Ask students: How is foreign direct investment in China a sign of investor confidence? (Foreign direct investment in China is a sign of confidence in the Chinese political and economic structure. When investors make an investment they careful weigh the risk and reward.)

Chart1

U.S. U.S.

China China

U.K. U.K.

Germany Germany

Russia Russia

India India

2008
2014
0.27
0.23
0.17
0.24
0.14
0
0.13
0
0
0.19
0
0.18

Sheet1

2008 2014 Series 3

U.S. 27% 23% 2

China 17% 24% 2

U.K. 14% 0 3

Germany 13% 0 5

Russia 0% 19%

India 0% 18%

To resize chart data range, drag lower right corner of range.

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*
Source: U.S. Dept. of Treasury, www.treas.gov, January 31, 2009.
Getting Involved in Global Trade
WHO DOES the U.S. OWE?
Countries that Own the Most U.S. Debt
LG2
3-*

See Learning Goal 1: Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.
Who Does the U.S. Owe
1. As the world’s largest debtor nation the United States relies on other countries purchasing debt as an investment.
2. OPEC Nations include: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E., Venezuela.
3. Ask students: What are the ramification of U.S. indebtedness on its population? (Answers to this question will vary but may include: lost sovereignty, weakening of the U.S. dollar and a loss of purchasing power as import prices rise, inflation and an increase in taxes.)
*

Chart1

China

Japan

OPEC Nations

Brazil

U.K.

In $ Billions
739
634
186
134
124

Sheet1

In $ Billions Series 2 Series 3

China 739 2.4 2

Japan 634 4.4 2

OPEC Nations 186 1.8 3

Brazil 134 2.8 5

U.K. 124

To resize chart data range, drag lower right corner of range.

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Importing Goods and Services

Starbucks CEO, Howard Shultz, found his importing opportunity in Italy. He transformed a coffee shop in Seattle to mimic the European cafes.
LG2
GETTING INVOLVED in
GLOBAL TRADE
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
*

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*
Exporting Goods and Services
Exporting provides a great boost to the U.S. economy.
It’s estimated every $1 billion in U.S. exports generate over 20,000 U.S. jobs.
LG2
GETTING INVOLVED in
EXPORTING
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
One Web site that can be bring a lecture on exporting alive is http://tse.export.gov. The TradeStats Express website is presented by the U.S. Commerce Department and gives students a look at any number of statistics on exporting. One example that may surprise students is that snow plows/blowers have been sold in Middle Eastern countries, like Saudi Arabia. They are used to clear sand from driveways.
*

*
*

MFG.com is an online exchange for manufacturers and suppliers.
Growing numbers of Chinese manufacturers began visiting the site.
MFG staff had to learn about the Chinese business culture.
China now accounts for 11% of MFG.com’s revenue.
FINDING CRACKS in the
GREAT WALL
(Spotlight on Small Business)
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
*

*
*
Measuring Global Trade
Balance of Trade — The total value of a nation’s exports compared to its imports measured over time.
Trade Surplus — When the value of a country’s exports is more than that of its imports.
Trade Deficit — When the value of a country’s exports is less than that of its imports.
HOW to MEASURE GLOBAL TRADE
LG2
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
Currently, the United States maintains the largest trade deficit in the world.
*

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*
Measuring Global Trade
Balance of Payments — The difference between money coming into a country (from exports) and money leaving the country (from imports) plus other money flows.
The goal is to have more money flowing into a country than out – a favorable balance.
An unfavorable balance is when more money flows out of a country.
BALANCE of PAYMENTS
LG2
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
Since 1975, the U.S. has bought more goods from other nations than it has sold and thus has a trade deficit.
*

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Measuring Global Trade
Dumping — Selling products in a foreign country at lower prices than those charged in the producing country.
Dumping is prohibited.
China, Brazil and Russia have been penalized for dumping steel in the U.S.
UNFAIR TRADE PRACTICES
LG2
3-*

See Learning Goal 2: Explain the importance of importing and exporting, and understand key terms used in global business.
*

*
*
Progress Assessment
What are two of the main arguments favoring the expansion of U.S. businesses into global markets?
What’s comparative advantage? What are some examples of this concept at work in global markets?
How are a nation’s balance of trade and balance of payments determined?
What’s meant by dumping in global trade?
PROGRESS ASSESSMENT
3-*

1) One major argument is the shear size of the global market; 6.7 billion people in the world are too large to ignore. Plus it’s hard for an economy, even one as large as the U.S. economy, to produce all the goods and services its citizens desire.
2) Comparative advantage theory was proposed by David Ricardo and simply states that a country should sell to other countries those products it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively and efficiently. Examples include the U.S. producing goods and services such as software and engineering services and buying goods from other countries such as coffee and shoes from other nations.
3) The balance of trade is the difference in the total value of a nation’s exports compared to its imports. The balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows coming into or leaving a country from other factors such as tourism, foreign aid, military expenditures, and foreign investment.
4) Dumping is the selling of products in foreign countries at lower prices than those charged in the producing country. This tactic is sometimes used to reduce surplus products in foreign markets or gain a foothold in a new market.
*

*
*
Strategies for Reaching Global Markets
Least
Amount of commitment, control, risk and profit potential
Most

Licensing
Exporting
Franchising
Contract
Manufacturing
International joint ventures and strategic alliances
Foreign direct investment
LG3
KEY STRATEGIES for REACHING GLOBAL MARKETS
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
When senior management elects to expand internationally, they have a wide range of options available to them. Such options range from licensing with the least risk all the way to foreign direct investment with the most risk. A few examples to be shared during this portion of the lecture include: Coca-Cola’s use of licensing, McDonald’s use of franchising, Nike’s use of contract manufacturing, Volkswagen’s joint venture in China and Toyota’s foreign direct investment in the United States.
*

*
*
Licensing
LICENSING
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Exporting
EACs provide hands-on exporting assistance and trade-finance support for small and medium-sized businesses that wish to directly export goods and services.
ETCs help companies engage in indirect exporting by:
Matching buyers and sellers.
Dealing with foreign customs offices, documentation, and conversions.
LG3
EXPORT ASSISTANCE CENTERS
and EXPORT TRADING CENTERS
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Franchising
Franchising — A contractual agreement whereby someone with a good idea for a business sells others the rights to use the name and sell a product/service in a given area.
Franchisors need to be careful to adapt their product to the countries they serve.

Pizza Hut and Dominos learned that pizza topping preferences differ all around the world.
FRANCHISING
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
The next few slides offer specific examples of how franchisors have adapted their products for various countries.
*

*
*
Franchising
Source: World Features Syndicate.
Sweet Potato
Honeydew Melon
Corn Crumb Soft Rice Cake
Green Apple
Kiwi Fruit
Mango
Pineapple
Strawberry
TIME to MAKE the DONUTS…
Dunkin’ Donuts Flavors in Taiwan
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
What’s on Your Donuts
Students should enjoy this slide. It shows the cultural influence with donuts preferences.
Ask the students: What type of donuts do they enjoy? Would they prefer sweet potato, or green apple, or mango on their donuts?
Ask the students: What modifications do companies need to make when they go to different countries like the ones shown in this slide? (Students should point out the need to understand and research the market and cultural/customer preferences and then offer what the customers want.)
*

*
*

McDonald’s has more than 31,000 restaurants in over 118 countries.
Maintains varying menus around the world due to the different preferences of its customers.
Responds to challenges by funding research and adding healthier options.
The SUN NEVER SETS
on MICKEY D’S
(Reaching Beyond Our Borders)
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Franchising
Source: McDonalds, www.mcdonalds.com, March 2009.
Malaysia: Bubur Ayam McD – Chicken strips in porridge with onions, ginger, and shallots.
Egypt: Mcarabia – Grilled chicken with tehina sauces, lettuce, tomato and onion on Arabic bread.
Japan: Teritama – Teriyaki burger topped with an egg.
Germany: Want a beer with your burger? You can order one in the German stores.
Israel: Operates using Kosher kitchens.
THAT’S at MCDONALD’S?
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
McDonald’s Items Worldwide
Per the company’s website. McDonald’s is a leader in franchising and the company operates in 118 different countries.
This slide gives students an insight into some of the changes McDonald’s has made to its menu when operating in the world market.
Ask students why the leading provider of American style fast-food adopted different menu items? (Like all successful companies, McDonald’s has adapted its menu to meet the different needs of its customers worldwide.)
*

*
*
Contract Manufacturing
CONTRACT MANUFACTURING
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
International Joint Ventures and Strategic Alliance
JOINT VENTURES
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
International Joint Ventures and Strategic Alliance
STRATEGIC ALLIANCES
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Foreign Direct Investment
FOREIGN DIRECT INVESTMENT
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Foreign Direct Investment
Multinational Corporation — A company that manufactures and markets products in many different countries and has multinational stock ownership and management.
Not all large global businesses are multinational.
Only firms that have manufacturing capacity or some other physical presence in different nations can truly be multinational.
MULTINATIONAL CORPORATIONS
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Foreign Direct Investment
SOVEREIGN WEALTH FUNDS
LG3
3-*

See Learning Goal 3: Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in global markets.
*

*
*
Progress Assessment
What are the advantages of using licensing as a method of entry in global markets? What are the disadvantages?
What services are usually provided by an export-trading company?
What’s the key difference between a joint venture and a strategic alliance?
What makes a company a multinational corporation?
PROGRESS ASSESSMENT
3-*

The key advantages of using licensing as a method of entry are: A) A firm can often gain revenues in a market it would not have generated in its home market; B) Licensees must purchase start-up supplies and consulting services from the licensing firm; and C) Licensors spend little or no money to produce and market their products. Disadvantages to licensing include: A) If a product is extremely successful in another market the licensor does not receive the bulk of the revenues and B) If the foreign licensee learns the company’s technology and product secrets, it may break the agreement and begin producing similar products on its own.
2) Export trading companies provide such services as assistance in associating and establishing the desired trading relationships, matching buyers and sellers from different countries, and help dealing with foreign customs offices, documentation, and weights and measures.
3) A joint venture is a partnership between two or more companies whereby they undertake a major project. Joint ventures generally involve: A) sharing technology and risk; B) sharing marketing and management expertise; C) entry into markets where foreign companies are often not allowed unless goods are produced locally. In a strategic alliance partners do not share costs, risks, management, or even profits. The purpose is to gain advantages in building competitive market advantages.
4) A multinational corporation manufactures and markets products in many different countries and has multinational stock ownership and management. Only firms that have manufacturing capacity or other physical presence in other countries can be called multinational.
*

*
*
Forces Affecting Trading in Global Markets
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
What makes operating in the international environment more complex than operating only in the domestic market is the addition of new uncontrollable forces. Examples of these forces include: sociocultural, economic, financial, legal, regulatory, physical and environmental.
*

*
*
Socio-cultural Forces
CULTURAL DIFFERENCES
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
A lack of cultural understanding can create problems with working in the international market. One book that provides numerous examples to share with students entitled Kiss, Bow or Shake Hands: How to Do Business in Sixty Countries . Never assume what works in one country will work in another.
*

*
*
Socio-cultural
Forces
Braniff Airlines’ slogan “Fly in leather” translated in Spanish as “Fly naked.”
Gerber used their U.S. label – a cute baby – on African products. They found out that labels on African products picture what’s inside the package.
In Italy, Schweppes Tonic Water was mistaken as Schweppes Toilet Water.
LOST in TRANSLATION
Advertisements Gone Wrong
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
Lost In Translation
1. Culture refers to the set of values, beliefs, rules, and institutions held by a specific group of people.
2. One of the basic elements of culture is language and language delineates cultures.
To operate successfully in the international marketplace, a company must never assume what works in one country will work in another.
To avoid the funny and sometimes disastrous advertisements listed above, shrewd marketers must use back translations. Back translation is a process in which the first translation is made by a bilingual native, the work will then be translated back by a bilingual foreigner to see how it compares with the original.
*

*
*
Socio-cultural
Forces
READY to TRAVEL ABROAD?
Know Your Cultural Differences
In Turkey, it’s rude to cross your arms while facing someone.
In many Middle Eastern countries, you shouldn’t eat or shake hands with the left hand because it is considered unclean.
In India, you should never pat anyone’s head. It’s where their soul is kept.
In Brazil, your meeting may not start on time because punctuality isn’t important to the culture.
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
Did you Know?
1. Some very fascinating cultural and social differences exist in other nations.
2. Discuss the following interesting points:
A smile in Japan can mean that a person is uncomfortable or sad.
When traveling to Sweden, make appointments two weeks in advance.
Lack of punctuality is a fact of life in Brazil. Become accustomed to waiting.
3. Review the following helpful hints when dealing globally:
a. Be culturally savvy. Learn about the culture, language, and dress code.
b. Recognize the importance of dealing with cultural differences and consequences of taking no action.
c. Manage and learn to appreciate various cultures.
d. Build a database of information about each country where you have business relationships.
*

*
*
Economic and Financial Forces
EXCHANGE RATES
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
The floating exchange rate system creates transaction risk. If the U.S. dollar is trading for more foreign currency it is said to be getting stronger. When the U.S. dollar is trading for less foreign currency it is said to be getting weaker. Since the breakdown of the Bretton Woods agreement in 1971, the value of the U.S. currency has generally trended downward versus major world currencies.
*

*
*
Economic and Financial Forces
DEVALUATION and COUNTERTRADING
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
One famous example of countertrading involved Pepsi and Russian vodka. Pepsi received the right to market Russian vodka in the United States as payment for Pepsi sold in Russia. More information on countertrading can be found at www.londoncountertrade.org.
*

*
*
Legal and Regulatory Forces
LEGAL CONCERNS OVERSEAS
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
*

*
*
Physical and Environmental Forces
ENVIRONMENTAL FORCES
LG4
3-*

See Learning Goal 4: Evaluate the forces that affect trading in global markets.
*

*
*
Progress Assessment
What are four major hurdles to successful global trade?
What does ethnocentricity mean and how can it affect global success?
How would a low value of the dollar affect U.S. exports?
What does the Foreign Corrupt Practices Act prohibit?
PROGRESS ASSESSMENT
3-*

1) Four major hurdles to successful global trade are: sociocultural forces, economic and financial forces, legal and regulatory forces, and physical and environmental forces.
2) Ethnocentricity is an attitude that your nation’s culture is superior to other cultures. It can affect global trade because all nations are proud of their cultures and do not aspire to be like other countries. Thus it’s easy to offend potential customers by being ethnocentric.
3) A low value of the dollar would make U.S. exports cheaper in foreign markets and may lead to higher demand for U.S. products.
4) The Foreign Corrupt Practices Act prohibits “questionable” or “dubious” payments to foreign officials to secure business contracts. Other nations do not have to follow this law causing some disadvantages for U.S. businesses.
*

*
*
Trade Protectionism
TRADE PROTECTIONISM
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
The Great Depression was exacerbated by the passage of the Glass-Steagall Act. The Glass-Steagall Act of 1933 raised the tariff rates on thousand of products imported into the United States. This led to other nations enacting similar protectionist measures effectively shutting down world trade. Many fear that the economic contraction the world is currently experiencing will lead to similar laws.
*

*
*
Trade Protectionism
TARIFFS
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
While a tariff may end up raising revenue for the government it ultimately costs consumers more money in the long run. Due to tariff rates on the importation of sugar consumers in the United States end up paying close to 50 percent more for sugar than the rest of the world.
*

*
*
Trade Protectionism
IMPORT QUOTAS and EMBARGOS
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
The United States also maintains an embargo against Iran and North Korea.
*

*
*
The World Trade Organization
WORLD TRADE ORGANIZATION
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
*

*
*
Common Markets
COMMON MARKETS
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
*

*
*
The North American and Central American Free Trade Agreements
NAFTA
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
*

*
*
The North American and Central American Free Trade Agreements
CAFTA
LG5
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
*

*
*
The U.S. trade deficit with Mexico has increased.
There are positives though:
Trade with Canada and Mexico has nearly tripled since 1994.
Though manufacturing jobs are down, output has increased 54% in the U.S.
Though NAFTA has not delivered on all promises, it isn’t the major cause of our nation’s current economic state.
NAFTA or SHAFTA?
(Legal Briefcase)
3-*

See Learning Goal 5: Debate the advantages and disadvantages of trade protectionism.
*

*
*
Progress Assessment
What are the advantages and disadvantages of trade protectionism and of tariffs?
What’s the primary purpose of the World Trade Organization (WTO)?
What’s the key objective of a common market like the EU?
Which three nations comprise NAFTA? Which nations comprise CAFTA?
PROGRESS ASSESSMENT
3-*

1) Trade protectionism is the use of government regulations to limit the import of goods and services. It can be a barrier to global trade. Trade protectionism often involves the use of tariffs or taxes on imported goods that makes them more expensive to buy. Protective tariffs can be an advantage to workers in certain industries since it makes the products they produce more cost competitive with imported products. American labor unions have sought certain protective tariffs. Revenue tariffs are designed as a source of revenue for the government. Most economists do not favor the use of tariffs instead are in favor of free trade.
2) The World Trade Organization (WTO) was established to mediate trade disputes among nations.
3) The purpose of a common market like the EU is to have common external tariffs, no internal tariff, and coordinate laws to facilitate exchange between member nations. This enables smaller nations to compete as a group against large economies like the United States, China, and Japan.
4) NAFTA is comprised of the United States, Canada, and Mexico. CAFTA is a free trade zone with the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.
*

*
*
The Future of Global Trade
FUTURE of GLOBAL TRADE
LG6
3-*

See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
*

*
*
The Challenge
of Offshore Outsourcing
OUTSOURCING
LG6
3-*

See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
*

*
*
Source: Investor’s Business Daily, www.ibd.com, December 1, 2008.
The Challenge
of Offshore Outsourcing
ELECTRONICS MANUFACTURING AROUND the WORLD
LG6
3-*

See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
Electronics Manufacturing Around the World
Electronics manufacturing has spread around the world.
Students will be familiar with different types of electronics and the companies that manufacture these electronics.
Ask students why a large percentage of electronics are made in Asia? (Comparative advantage is the obvious answer) This question can be followed up with the question of why does Asia have this comparative advantage? (Labor cost, favorable trade policies and lack of regulation)
*

Chart1

S. America

India & Central Asia

N. America

Europe

S.E. Asia

N. Asia

Rest of World

2008
0.128
0.038
0.04
0.291
0.076
0.416
0.011

Sheet1

2008

S. America 12.80%

India & Central Asia 3.80%

N. America 4%

Europe 29.10%

S.E. Asia 7.60%

N. Asia 41.60%

Rest of World 1.10%

*
*
Some insurance companies encourage patients to seek medical care in foreign countries.
Procedures are cheaper and involve top-flight doctors at state-of-the-art facilities.
Would it be ethical to force patients to travel to other countries to save money?
TAKE TWO ASPIRIN and GO to THAILAND
(Making Ethical Decisions)
3-*

See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
*

*
*
Globalization and Your Future
LG6
3-*

See Learning Goal 6: Discuss the changing landscape of the global market and the issue of offshore outsourcing.
*

*
*
Progress Assessment
How has the Internet impacted doing business in global markets?
What are the economic risks of doing business in countries like China?
What might be some important factors that will have an impact on global trading?
What are the two primary concerns of offshore outsourcing?
PROGRESS ASSESSMENT
3-*

1) The Internet has made it possible to make global trade available to small as well as large companies. It has simplified and expanded trade opportunities across the globe.
2) China’s one-party political system, human rights abuses, underground economy with counterfeit goods, and other issues still make it a risky place to do business.
3) Terrorism, nuclear proliferation, rogue states with dangerous dictators, and other issues cast a dark shadow on global markets and could inhibit global trade.
4) The key concern surrounding offshore outsourcing is the loss of jobs. Today such loss includes professional services as well as production jobs. Questions also linger about outsourcing sensitive products like airline maintenance and medical devices. Consumer’s fears about quality and product safety keep the issue center stage.
*

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