The next topic we’ll discuss is globalization, which refers to companies from different countries interacting with one another – it’s the global economy. Interacting with companies in different countries presents both advantages and disadvantages.

An advantage includes increased social interaction between countries, helping to reduce tensions. Engaging in international trade results in increased interaction with other countries, leading to more innovation. As more discussions occur, more ideas are shared.

Another advantage is cost reduction. International trade gives companies access to cheaper raw materials overseas and less expensive labor. Additionally, it results in an expanded customer base. If a company decides to sell to other countries, its potential customer pool suddenly grows.

Globalization carries risks as well. Doing business with other countries means dependency on the decisions made by those countries’ governments. What if the country suddenly imposes a significant tariff on all foreign goods? This could negatively impact us.

Another disadvantage is foreign currency risks, which occur when you have a receivable or payable in a different currency and the currency value changes. When discussing this foreign currency risk, our risk varies depending on whether we are importing or exporting goods.

Imagine you’re exporting goods, meaning that customers in other countries are buying from you in the US dollar; you want them to be able to afford more US dollars, thereby buying more from you. Therefore, as an exporter, when the US dollar decreases in value, you will benefit by garnering more business. Therefore, when we are exporting, currency depreciation is good, and currency appreciation is bad.

If you’re importing goods from other countries, then you’re using the US dollar to convert into the other currency to purchase goods in the other country. When importing, you want the US dollar to remain as strong as possible to be able to purchase more goods. Therefore, when we are importing, currency depreciation is bad, and currency appreciation is good.

Study Tip: Currency depreciation is good for exporting goods and bad for importing goods