Compendium 18th Edition (Englisch) PDF

Compendium zur Ergänzung der Vorbereitung auf die Prüfung Fremdsprachenkorrespondent/-in (Englisch) Geschäftsbereich Ausbildung...

Compendium zur Ergänzung der Vorbereitung auf die Prüfung Fremdsprachenkorrespondent/-in (Englisch) Geschäftsbereich Ausbildung Kaufmännische Berufe 18th Edition March 2021 Erstellt von Reimer Delpin/aktualisiert von Diane Oliver  Provadis Compendium 18th Edition Contents Contents 1 The Economy....................................................................................4 1.1 Business Cycles......................................................................................... 4 1.1.1 What can be done to steer the economy?.................................................. 5 1.1.2 Indicators used to measure the economy................................................... 5 1.2 Inflation...................................................................................................... 7 1.3 Unemployment........................................................................................... 8 1.4 Trade Unions.............................................................................................. 9 2 The European Union (EU).............................................................. 10 2.1 Overview:................................................................................................. 10 2.2 From economic to political union.............................................................. 10 2.3 European Institutions:............................................................................... 10 2.4 The European Central Bank (ECB).......................................................... 12 2.5 The Euro.................................................................................................. 13 3 Other International Organisations................................................ 14 3.1 World Trade Organisation (WTO)............................................................ 14 3.1.1 The role of the World Trade Organisation................................................. 14 3.1.2 Principles of the WTO.............................................................................. 14 3.2 International Monetary Fund (IMF)........................................................... 14 3.3 United States-Mexico-Canada Agreement (USMCA)............................... 15 3.4 Organisation of Petroleum Exporting Countries (OPEC).......................... 15 3.5 Asia-Pacific Economic Cooperation (APEC)............................................. 16 3.6 North Atlantic Treaty Organisation (NATO).............................................. 16 4 International Trade......................................................................... 16 4.1 Free Trade............................................................................................... 16  Provadis Seite 2 Compendium 18th Edition Contents 4.2 Protectionism........................................................................................... 17 4.3 Balance of Trade...................................................................................... 17 4.4 Trade Wars.............................................................................................. 19 5 Mergers, Takeovers and Joint Ventures...................................... 19 6 The Stock Exchange...................................................................... 21 Links........................................................................................................ 30 Appendix – Some Typical Questions................................................................................................26  Provadis Seite 3 Compendium 18th Edition 1 The Economy 1.1 Business Cycles The main objectives of any national economic policy are to keep the currency and prices stable, to safeguard full employment and to ensure overall growth of the economy. Complete economic equilibrium is very difficult (if not impossible) to maintain.  Provadis Seite 4 Compendium 18th Edition 1.1.1 What can be done to steer the economy? When the economy is in a boom condition: The European Central Bank, ECB, will raise the key interest rates: (see also Inflation). Increasing the interest rate "makes money more expensive". When you - as a consumer - want to buy something and you don't have the money for it, you will have to get a loan from a bank. If the interest rate is 5%, the interest for a loan of € 100,000 will be € 5000 annually. However, if the rate is increased to 10%, the bank will charge you € 10,000 annually for your loan. Consumers will now delay the purchase of goods with borrowed money and wait for a lower interest rate before they take out a loan. The result is lower domestic demand, leading to lower production. Since manufacturers expect less demand, they will reduce or even stop new investments. If employers produce less, they will need fewer employees and decrease their workforce; the unemployment rate will go up. When the economy is in a recession (slump): The European Central Bank (ECB) will cut the interest rates: Now that "money has become cheaper", consumers will again borrow money from the bank to buy the goods and services they had not previously bought because of the high interest rates. Demand will increase, more goods will have to be produced and more services will have to be provided. Employers will therefore invest in additional production facilities and (at least theoretically) increase their workforce; the unemployment rate will go down. However, with an increase in the broad money supply, the inflation rate will go up. The National Governments will:  cut taxes (if the budget deficit allows them to do so)  create jobs (by passing job bills)  help private business to establish new jobs by paying subsidies and other state grants such as tax relief. 1.1.2 Indicators used to measure the economy For the economy as a whole (macro-economics): GROSS DOMESTIC PRODUCT: Bruttoinlandsprodukt (BIP) (measures total economic activity, or could be defined as total output). GROSS NATIONAL PRODUCT: Bruttosozialprodukt (includes production abroad) NATIONAL BUDGET: Der öffentliche Haushalt (revenues: such as taxes, import duties; and expenditures: such as social security, education, defence, payroll costs, infrastructure, subsidies, etc) BALANCE OF TRADE: Die Handelsbilanz (visible exports and imports) CURRENT ACCOUNT: Die Leistungsbilanz (Balance of Trade, including invisibles and certain bank transfers) INFLATION RATE: Inflationsrate (shown also by indicators such as cost of living index, wholesale price index, retail price index, consumer price index)  Provadis Seite 5 Compendium 18th Edition RATE OF UNEMPLOYMENT: Prozentsatz der Arbeitslosen RATE OF EXCHANGE: Wechselkurs (in relation to other currencies) GROWTH RATE: Wachstumsrate RATE OF INTEREST: Zinsrate, Zinsen BROAD MONEY SUPPLY: Geldmengenumlauf DOMESTIC DEMAND: Inlandsnachfrage NEW HOUSING: Wohnungsbau STOCK PRICE INDEX: Börsenindex For industries and individual companies: (micro-economics): SALES: Umsatz (wenn in Geld angegeben) Absatz (wenn in Mengeneinheit angegeben) auch: Verkaufszahlen PROFITS: Gewinne NEW ORDERS: Auftragseingang ORDERS ON HAND: Auftragsbestand UTILISATION RATE: Kapazitätsausnuzung, Auslastungsgrad STOCK or INVENTORY: Vorrat oder Lagerbestand Useful Words: boom Hochkonjunktur budget deficit Haushaltslücke business cycle Konjunkturverlauf demand Nachfrage depression Depression, große Wirtschaftskrise economic equilibrium wirtschaftliches Gleichgewicht economy Volkswirtschaft, auch Konjunktur Federal Government Bundesregierung full employment Vollbeschäftigung goods and services Waren und Dienstleistungen incentives Anreiz, Fördermittel interest rate Zinsen; Zinssatz job-creation measures; job bills Arbeitsbeschaffungsmaßnahmen key interest rates Leitzinsen loan Kredit; Anleihe recession Rezession retail (trade) Einzelhandel slump Abschwung; Krise state grants staatliche Zuschüsse subsidies Subventionen  Provadis Seite 6 Compendium 18th Edition tax exemption Steuererbefreiung, Freibetrag tax relief Steuererleichterungen to take out a loan Kredit aufnehmen wholesale (trade) Großhandel workforce die Beschäftigten 1.2 Inflation Inflation is characterised by rising prices and, in line with this, by a decline in the purchasing power of money. Inflation may be caused by:  rising costs: Rising costs lead to higher prices. This is called a cost-push inflation. Rising prices force employees to ask for wage increases. Since higher wages are higher costs for employers who want to retain or increase their profit margins, they will, once more, increase their prices.  demand exceeding supply: If demand exceeds supply or, in other terms, the circulation of money and the gross domestic product (GDP) are out of balance, price increases cannot be avoided. This is called a demand-pull inflation. According to the law of supply and demand, prices will go up if there are more buyers than sellers. This is illustrated by continuously rising prices for homes in Germany. There are just too many people looking for houses and condominiums.  too much foreign exchange flowing into the country: Since exports are paid for in foreign exchange and this foreign money must be changed into local currency, the money supply will be increased. Too much money in circulation (an excessive money supply) decreases its intrinsic value and therefore leads to inflation. After World War I and World War II, people had lots of money, but there were no goods available to be bought. Prices skyrocketed and black markets came into existence. What can be done to fight inflation and who can do it? In all countries the central banks are responsible for keeping the currency stable and the economy in balance. In Europe, all countries which have joined the EMU (European Monetary Union) have delegated this responsibility to the ECB (European Central Bank). In the US, the central bank is called "Federal Reserve System" or "Fed". If the economy is jeopardised by inflation, the ECB (or the central bank in other countries) applies the instruments of credit policy:  the discount policy (it raises the interest rate)  the minimum reserves policy (it raises the minimum reserve ratios)  the open market policy (it sells securities on the open market) The Government, on the other hand, can curb inflation by:  freezing budget funds  freezing or abolishing subsidies  increasing taxes  Provadis Seite 7 Compendium 18th Edition Useful Words: budget funds öffentliche Haushaltsmittel circulation of money Geldumlauf cost-push inflation Kosteninflation curb eindämmen, kürzen, reduzieren decline Rückgang demand-pull inflation Nachfrageinflation discount rate Diskontsatz Federal Reserve (Fed) Amerikanische Notenbank float the exchange rate den Wechselkurs freigeben freeze Einfrieren gross domestic product Bruttoinlandsprodukt gross national product Bruttosozialprodukt intrinsic value der innere Wert law of supply and demand Gesetz von Angebot und Nachfrage minimum reserves Mindestreserven open market policy Offenmarktpolitik profit margin Gewinnspanne purchasing power Kaufkraft surge, rocket, soar in die Höhe schießen 1.3 Unemployment The rate of unemployment is an important indicator for the economy. It is expressed as a percentage of the total labour force. However, monthly statistical publications also show the total number of unemployed people (unemployment figures). Unemployment is one of the most crucial problems of the economy. Traditional countermeasures, such as cutting the interest rates, have proved ineffective. This failure can be explained by the ever increasing replacement of human labour by computers not only in offices but also in the production process, and the globalisation process. Useful Words: casual work Gelegenheitsarbeit cyclical unemployment konjunkturelle Arbeitslosigkeit discharge/fire/sack/lay off/make Entlassen redundant dismiss Entlassen executives Führungskräfte full employment Vollsbeschäftigung full-time employment Vollzeitbeschäftigung jobseeker Arbeitssuchender labour force Arbeitskräfte (potential) manpower Beschäftigte, Arbeitskräfte part-time employment Teilzeitbeschäftigung retraining Umschulung shed (cut) jobs Arbeitsplätze abbauen skilled labour Facharbeiter structural unemployment strukturerlle Arbeitslosigkeit  Provadis Seite 8 Compendium 18th Edition to be out of work, unemployed, on arbeitslos sein the dole, jobless to give notice/I was given notice kündigen/mir wurde gekündigt unemployment benefit Arbeitslosengeld unemployment rate Arbeitslosenquote unskilled labour ungelernte Arbeitskräfte 1.4 Trade Unions What is a trade union? A trade union is an association of working people, organised primarily for the protection and improvement of the economic status of its members. (Eine Gewerkschaft ist eine Vereinigung von Arbeitnehmern zum Schutz und zur Verbesserung der wirtschaftlichen Lage ihrer Mitglieder.) How does it work? Demand for higher wages and better working conditions are put to the employers by conducting collective bargaining with employers' associations. In normal times, this system of free collective bargaining is not disturbed by any government interference. Disputes which cannot be settled through negotiations are often referred to arbitration. If either party does not accept the arbitrator's recommendations, the trade union will be under pressure from among its members for industrial action. Unofficial wild-cat strikes may occur, and the union leadership will call for a strike ballot. The employers, on the other hand, might threaten and resort to lock-outs. If union members vote in favour of industrial action, a strike will be called. Industrial disputes are always economically damaging. Useful Words: arbitration (mediation) Schlichtung collective bargaining Tarifverhandlungen employers' association/employers' Arbeitgeberverband confederation go-slow (movement) Bummelstreik industrial action Arbeitskampf industrial law Arbeitsrecht industrial peace Arbeitsfrieden labour dispute Arbeitskonflikt lock out Aussperrung overtime Überstunden pickets (picket line) Streikposten shop steward Betriebsobmann/Vertrauensmann strike ballot Urabstimmung terms of notice Kündigungsfristen to call a strike einen Streik ausrufen to down tools die Arbeit niederlegen to go on strike Streiken token strike Warnstreik trade union (AM = labor union) Gewerkschaft Trade Union Congress (TUC) Dachverband der Britischen Gewerkschaften union contract (AM) Lohnabkommen union dues Gewerkschaftsbeiträge wage agreements (UK) Tarifabkommen wage increases Lohnerhöhungen wild-cat strike wilder Streik (illegal) work stoppage/walk-out Ausstand  Provadis Seite 9 Compendium 18th Edition work to rule Arbeit nach Vorschrift workers codetermination Mitbestimmung working hours Arbeitszeit works council Betriebsrat 2 The European Union (EU) 2.1 Overview: The goals of the European Union are:  promote peace, its values and the well-being of its citizens  offer freedom, security and justice without internal borders  sustainable development based on balanced economic growth and price stability, a highly competitive market economy with full employment and social progress, and environmental protection  combat social exclusion and discrimination  promote scientific and technological progress  enhance economic, social and territorial cohesion and solidarity among EU countries  respect its rich cultural and linguistic diversity  establish an economic and monetary union whose currency is the euro. 2.2 From economic to political union The European Union is a unique economic and political union between 27 EU countries that together cover much of the continent. The predecessor of the EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict. The result was the European Economic Community (EEC), created in 1958, and initially increasing economic cooperation between six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Since then, 22 other members joined and a huge single market (also known as the 'internal' market) has been created and continues to develop towards its full potential. On 31 January 2020 the United Kingdom left the European Union. What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration. A name change from the European Economic Community (EEC) to the European Union (EU) in 1993 reflected this. 2.3 European Institutions: The European Council of Ministers (der Europäische Ministerrat) consists of the national ministers of the member countries, such as foreign ministers, finance ministers, defence ministers, etc. They meet at least once a month, or whenever necessary, to discuss and decide  Provadis Seite 10 Compendium 18th Edition important issues. If agriculture is on the agenda, ministers of agriculture will attend, etc. The Council is based in Brussels, but meetings are also held in Luxembourg. The European Commission (die Europäische Komission) is the "government" of the EU. It is located in Brussels and it is made up of the president and 27 commissioners appointed by the various member countries. Each commissioner is assigned a specific field (agriculture, trade, environment, economic affairs etc.) just like a minister (secretary) in a national government. However, their responsibilities are limited to:  planning all actions required for development of common policies and actions  implementing decisions made by the European Council or the Council of Ministers by issuing implementing instructions  negotiating international agreements on behalf of the EU  controlling compliance with all laws, regulations and agreements, issued and agreed upon by the members of the EU  preparing a draft budget which must be approved by the Council of Ministers and the European Parliament The European Parliament (das Europäische Parlament) meets regularly in Strasbourg or Brussels Its rights and responsibilities are still very restricted and mostly of an advisory nature. It may:  veto the nomination of the President of the EU  veto legislation by a majority vote of its members  give advice on legislation  control a portion of the EU budget  require answers to questions directed to the Commission or the Council of Ministers Part of the criticism directed against the European Union and its institutions stems from the fact that this parliament does not control the European Commission as all national parliaments in democratic countries control their governments. The European Central Bank (die Europäische Zentralbank) has taken over all responsibilities and objectives of the central banks of all countries which are part of the “euro- zone”. Its main responsibility is to maintain price stability in all member countries by adjusting the interest rate to current economic conditions. It is located in Frankfurt. The European Court of Justice (der Europäische Gerichtshof) watches over compliance with European Law and decides on disputes between member countries. Every citizen of a member country can go to this court if he/she feels that European Law has been violated by decisions of national courts of justice. There is no appeal against its decisions. Other European Institutions are: the Economic and Social Committee (purely advisory); the Court of Auditors (examines all accounts of revenues and expenditures of European Institutions); the European Investment Bank. (EIB). Useful words: advisory beratend appeal Berufung commissioner Komissar currency basket Währungskorb  Provadis Seite 11 Compendium 18th Edition currency realignment Wechselkursanpassung devalue/depreciate abwerten fixed range; band Bandbreite fluctuate schwanken foreign exchange Devisen implement durchführen/einführen implementing instructions Durchführungsbestimmungen monetary union Währungsunion peg stützen; festsetzen rate of exchange Wechselkurs revalue/appreciate Aufwerten single currency gemeinsame Währung single market Binnenmarkt 2.4 The European Central Bank (ECB) Overview: The Maastricht agreement, which set a time schedule for the introduction of a single European currency, states that the primary objective is to maintain price stability. For this purpose a European Central Bank with its headquarters in Frankfurt was created in 1998. Specific economic criteria, known as the stability pact, were stipulated in the Maastricht agreement which have to be met before a country can join the European Monetary Union (EMU). These criteria include:  the budget deficit should not exceed 3% and public debts not exceed 60 % of the GDP  the inflation rate should not have exceeded the average rate of the three best performing member states by more than 1½ %  the long-term interest rate should not have exceeded the average rate of the three best performing member states by more than 2% Opposition against EMU from member states and their citizens: To be eligible for membership in the EMU, the above mentioned criteria have to be met. However, efforts to meet these conditions require tough austerity measures to consolidate and reduce public debts. The public debt can be reduced by increasing taxes and/or reducing expenditures (payroll, social security). Needless to say, taking such actions is highly unpopular. If member countries have met all conditions before they joined the EMU, but fail to maintain price stability and other important convergence criteria they can (theoretically) be fined although this has never happened in practice. All governors of the national European central banks are represented at the European Central Bank (ECB). Nearly all responsibilities of the national European central banks were transferred to the (ECB). These include:  establishing and changing interest rates  establishing and changing exchange rates.  printing money (done by contractors)  setting the minimum reserve rates The main goal of the ECB is to maintain price stability. The main risk (and perhaps disadvantage) may be that the monetary tools available to central banks to steer the economy (cut the interest rate to fight a recession, increase the interest rate to curb inflation) can no longer be used for individual nations separately. All actions taken by the ECB are effective throughout “Euroland“.  Provadis Seite 12 Compendium 18th Edition The president of the European Central Bank is Christine Lagarde. 2.5 The Euro Although money transations could be made in euros from 1 January 1999, bank notes and coins have only been available since 1 January 2002. Therefore, this is the date which is considered to be the implementation date of the euro. The main purposes for establishing a single currency in Europe were to  eliminate the risk of exchange rate fluctuations (which hamper trade).  to establish a powerful currency which can compete with the dollar.  to provide a tool for further consolidation of Europe as a commercial and political entity. Naturally the rates of exchange in relation to non-European currencies, in particular the US dollar, can change and have changed. Although the euro is a stable currency within Europe, it initially lost about 35% in relation to the dollar. Starting with the weakness of the US economy, especially after the destruction of the World Trade Center in September 2001, the euro has recovered in relation to the dollar. After reaching parity (1 euro = 1 dollar), the Euro rose again against the dollar and currently (March 2021) stands at $1.19, although the exchange rate is very volatile currently due to the US budget issues and the instability of the euro caused by the debt crisis in certain EU countries eg Greece, Spain, Portugal and Ireland. Some new member states that have joined the EU since May 2004 have not yet adopted the Euro as their currency, although they are required to work towards doing so. Useful words: analysts Wirtschaftsforscher austerity measures Sparmaßnahmen budget deficit Haushaltsdefizit convergence Konvergenz; Annäherung economists Wirtschaftsexperten; Volkswirte European Central Bank (ECB) die Europäische Zentralbank European Monetary Union (EMU) die Europäische Währungsunion fixed range; band Bandbreite fluctuate schwanken forerunner Vorläufer payroll (cost) Personalkosten primary objective Hauptzweck rate of exchange Wechselkurs single currency gemeinsame Währung social security Sozialsystem time schedule Zeitplan  Provadis Seite 13 Compendium 18th Edition 3 Other International Organisations 3.1 World Trade Organisation (WTO) WTO is the successor organisation to The General Agreement on Tariffs and Trade (GATT), founded as a temporary trade agreement in 1947,and was founded in 1995. Its objective is to liberalise trade, i.e. to reduce or eliminate tariffs and other trade barriers on a world-wide basis. It also acts as arbiter to decide if international trading rules and/or agreements have been violated. Recently its meetings have been accompanied by violent demonstrations of people opposed to the idea of globalisation. The Director-General is Dr. Ngozi Okonjo-Iweala. 3.1.1 The role of the World Trade Organisation The World Trade Organisation (WTO) is the policeman of global trade. Its decisions are absolute and every member must abide by its rulings. When, for example, the US and the European Union are in dispute over steel, bananas or beef, it is the WTO which acts as judge and jury. The organisation’s principal goal is to help trade flow as freely as possible. The aim is to help producers of goods and services, exporters and importers conduct their business, while allowing governments to meet social and environmental objectives. The WTO agreements are negotiated and signed by most of the world’s trading nations. These documents provide the legal basis for international trade. Extra powers given to the WTO are supposed to ensure that disputes are settled in harmony with international trade principles, and to prevent unfair trade practices. 3.1.2 Principles of the WTO The WTO has 164 members (February 2021) and makes decisions on a basis of unanimity. No country can wield a power of veto. The principles which members sign up to are:  extending trade concessions equally to all WTO members  aiming for a freer global trade with lower tariffs everywhere  making trade fairer through the use of rules  bringing about more competition by cutting subsidies  to encourage member countries to protect the environment and public health 3.2 International Monetary Fund (IMF) The International Monetary Fund, or IMF, promotes international financial stability and monetary cooperation. It is governed by and accountable to its 190 member countries and has its headquarters in Washington D.C.  Provadis Seite 14 Compendium 18th Edition The IMF's primary mission is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to transact with each other. Its objectives are to:  foster global monetary cooperation  promote exchange stability  facilitate the expansion and balanced growth of international trade  promote high employment and sustainable economic growth by extending short-term credits to member countries to help them out of temporary balance of payments problems  reduce poverty The IMF is a very powerful but also controversial organisation. Through attaching conditions to its loans, it tries to influence the economic policy of countries needing financial assistance. These conditions usually include stringent austerity measures to reduce budget deficits and lower the inflation rate through increasing the interest rate. The IMF is accountable to the governments of its member countries through the Board of Governors which meets once a year. However the work is carried out by an Executive Board of 24 Directors which usually meet three times a week. The IMF’s five largest shareholders are the USA, Japan, Germany, France and the United Kingdom. Its resources come mainly from quota subscriptions which countries pay when they join the IMF, or following periodic reviews in which quotas are increased. The Managing Director is Kristalina Georgieva. 3.3 United States-Mexico-Canada Agreement (USMCA) Current members are the United States, Canada and Mexico. This free trade area is larger than the European Union. However, due to the ailing Mexican economy and the weakness of its currency there have been many problems. 3.4 Organisation of Petroleum Exporting Countries (OPEC) OPEC was founded in 1960 in Bagdad and is now a cartel of 13 oil-producing countries. It establishes fixed prices and tries to maintain them through allocation of production quotas to each member country. Its headquarters was set up in Vienna, and its objective is to establish common policies on prices and production quotas, to secure a strong market position. Members meet from time to time to discuss and decide on changes in policy, prices, or quotas. OPEC’s main goal is to coordinate and unify the petroleum policies of the different member countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. The OPEC founding members are Saudi-Arabia, Venezuela, Iran, Iraq and Kuwait.  Provadis Seite 15 Compendium 18th Edition 3.5 Asia-Pacific Economic Cooperation (APEC) APEC was established in 1989 to further enhance economic growth and prosperity for the region and to strengthen the Asia-Pacific community. It has 21 members which account for just under 50% of the world’s population and is one of the most important trade regions. Since its inception, APEC has worked to reduce taiffs and other trade barriers across the Asia- Pacific region, creating domestic economies and dramatically increasing exports. The ‘Bogor Goals’ of free and open trade and investment in the Asia-Pacific by 2010 for industrialized economies and 2020 for developing economies were adopted in 1994. APEC has no treaty obligations required of its participants. Decisions are reached by consensus and commitments are undertaken on a voluntary basis. It is working to create an environment for the safe and efficient movement of goods, services and people across borders in the region through policy alignment and economic and technical cooperation. 3.6 North Atlantic Treaty Organisation (NATO) NATO is an international organization for defense collaboration established in 1949 in support of the North Atlantic Treaty signed in Washington DC on 4 April 1949. It aims to safeguard freedom and the security of its member countries by political and military means. It also tries to assist in solving some international conflicts. 4 International Trade International (or foreign) trade is the exchange of goods and services between two or more countries. It is shown as exports and imports in the Balance of Trade, and in the Current Account (see Balance of Trade). Export and import of goods is called visible trade (visibles), export and import of services is called invisible trade (invisibles). Services include the tourist industry, transport, insurance, banking, health, communication, etc. Foreign trade is considered essential for developing the global economy. Prosperity in an industrialised economy depends to a large degree on its exports. Every country therefore tries to increase its exports, especially if the domestic market is too small or saturated. Unrestricted imports of foreign goods could hurt domestic industries if they are not competitive. Rather than concentrating production on products where the country has a competitive edge over its competitors, national governments want to protect their industries against cheaper imports and take appropriate measures. This economic policy is called "protectionism". 4.1 Free Trade The concept of free trade centres around the idea that everybody will benefit from competition because:  consumers have a free choice to buy goods wherever they get them at the cheapest price.  it keeps prices down and forces competitors to produce attractive goods at the best possible quality at the lowest possible price. A free-trade area (or zone) is a group of countries which have agreed to eliminate trade barriers, on most goods, between member countries. Global trade can only expand if trade barriers are  Provadis Seite 16 Compendium 18th Edition abolished as far as possible. To achieve this objective, free trade areas such as the European Union (EU), the Asia-Pacific Economic Cooperation (APEC) and others in North and South America have been set up. In addition, there is a world-wide organisation, the World Trade Organization, which negotiates measures to lower or abolish trade barriers and increase economic cooperation. 4.2 Protectionism Protectionism aims to protect domestic industries against foreign competition. This concept is, to a certain degree, justified since domestic trade cannot be viewed simply in terms of efficiency and competitiveness. Other factors to be considered are tradition, cultural aspects and the impact on employment and the environment. Free trade areas are inclined to set up free markets within their frontiers, but establish trade barriers in their relations with the rest of the world. Non-European countries are afraid of the "Fortress Europe". Therefore, countries often show split attitudes: They are for free trade in order to help their export industries and, at the same time, for protectionism in order to protect their domestic industries. Useful words foreign trade Außenhandel current account Leistungsbilanz services Dienstleistungen visible trade sichtbare Ausfuhr, Warenverkehr visible exports Warenausfuhr invisible trade Dienstleistungsverkehr visible imports Wareneinfuhr invisible exports active Dienstleistungen prosperity Wohlstand invisible imports passive Dienstleistungen saturated gesättigt competitive edge Wettbewerbsvorteil protectionism Protektionismus domestic industries Inlandsindustriezweige 4.3 Balance of Trade Definition: The trade balance is an indicator showing the total value of visible exports vs. visible imports over a certain time period. It could be compared with an account showing revenues and expenditures. Exports are like revenues because you earn money (in foreign exchange) with them. Imports are like expenditures because you have to pay for them by buying foreign exchange. Other indicators: The Trade Balance includes only visible trade, (i.e. goods). The indicator which, in addition to goods also includes invisible trade (services such as the tourist industry, transport, insurance and banking), plus payments resulting from interest, profits and dividends, international aid and workers’ remittances, is called the "Current Account". If all payments in settlement of visible and invisible imports plus exchange transactions and capital movements are included (such as investments by private firms abroad, lendings by banks to foreigners, investments by foreigners in domestic firms, other money transfers, etc.), the indicator is called "Balance of Payments".  Provadis Seite 17 Compendium 18th Edition Explanations: If a country exports more than it imports, the result is a trade surplus. Basically, exports are desired to exceed imports, because this means that a country earns more money than it spends. It is just like saving money. These "savings" are held in foreign exchange at the central bank and support the strength of the domestic currency. A country with a continuing trade surplus will "become rich". Unfortunately, there is also another side to the coin: foreign currencies (exchange) flowing into the country are exchanged for local currency and "inflate" the money supply, causing inflation. If a country imports more than it exports, the Balance of Trade will show a trade deficit or trade gap which must be balanced in foreign exchange (hard currency). If a country does not earn sufficient amounts of foreign exchange, it will be forced to borrow more and more money from other countries or the IMF (International Monetary Fund), and will eventually be unable to service its debts. Thus, the country could, at least theoretically, go bankrupt. However, before this can happen, creditor nations will try to agree on a debt moratorium, waive the debts partially or completely, agree to temporary suspension of debt service, or provide other means of relief. This explains why countries have to try so hard to boost their exports (and cut imports if they cannot pay for them). What can governments do to achieve this purpose? Boost exports by:  joining other free trade areas (EU, USMCA, APEC)  devaluing their currency  subsidising industries  providing tax relief and other export incentives Cut imports: Set up trade restrictions (barriers) by:  establishing or increasing tariffs (import duties)  imposing import quotas  devaluing the currency  setting up currency controls However, import restrictions are in contradiction to the principles of free trade and might prompt reactions from trade partners, leading to Trade Wars. Useful words balance of payments Zahlungsbilanz credit balance Guthaben/Habensaldo currency controls Devisenkontrolle current account Leistungsbilanz debit balance Schulden/Sollsaldo debt service/to service debts Schuldendienst/Schulden bedienen devalue/depreciate Abwerten expenditures Ausgaben foreign exchange Devisen free trade area Freihandelszone IMF (International Monetary Fund) Internationaler Währungsfonds import quota(s) Einfuhrkontingente incentives Förderung/Anreiz revalue/appreciate Aufwerten revenues Einnahmen suspension of payments Zahlungseinstellung  Provadis Seite 18 Compendium 18th Edition tax exemption Steuerbefreiung tax relief Steuererleichterungen trade balance Handelsbilanz trade deficit/trade gap Handelsdefizit trade surplus Exportüberschuß 4.4 Trade Wars A trade war breaks out when a country retaliates for what it considers a violation of existing trade agreements or generally accepted rules of free trade. Rules of Free Trade include free exchange of goods unimpeded by trade barriers - such as sanctions, trade bans, tariffs, import duties, import quotas, foreign exchange controls, payment of subsidies, and other administrative procedures. Retaliatory Measures: Setting up trade barriers to make import of listed goods more expensive or difficult. If considered appropriate, the list of such goods can be expanded to put more pressure on the other country. Useful words dump zu Schleuderpreisen verkaufen file unfair trade complaints sich wegen unlauteren Wettbewerbs beschweren foreign exchange controls Devisenkontrollen import quota Einfuhrkontingente penal/punitive duties Strafzölle reciprocate mit gleicher Munze heimzahlen (auch einen Gefallen erwidern) retaliate vergelten retaliatory measures Vergeltungsmaßnahmen tit-for-tat war Vergeltungskrieg trade bans Handelsverbote trade barriers Handelsschranken unimpeded unbehindert violation Verletzung, Vergehen 5 Mergers, Takeovers and Joint Ventures 5.1 Mergers and Takeovers A merger is a consolidation of two legally independent companies to a new legal and financial entity. A horizontal merger takes place when the two merging companies produce similar products in the same industry whereas a vertical merger is between two companies working at different stages of production of the same product. A takeover refers to one company (the acquirer) purchasing another company (the target). Why do companies wish to acquire (take over) another company? Reasons may be:  to increase their market share by cutting out a competitor and taking over their customers  Provadis Seite 19 Compendium 18th Edition  to use their know-how and brand names  to cut costs. By increasing production and making personnel redundant you decrease the cost per production unit (economy of scale)  to dominate the market. To prevent this from happening, most nations and the European Union have developed antitrust legislation and unfair trading acts. Before a major merger can be effected, it must be approved by national and European antitrust authorities.  to "make a fast dollar" Some companies are only interested in acquiring another company at a low cost and want to sell it - or parts of it - later at a profit. Why do companies agree to be taken over?  They may not have sufficient funds to finance research, plant extensions and advertising and are afraid of becoming less and less competitive.  A sole proprietor may be without heirs and is prepared to step down if he can leave his business in capable hands. How can a company be taken over? Normally, by acquiring the shares (equity) of the other company. The money for doing this is sometimes raised through "junk bonds". How and where can the shares be bought?  Friendly takeover: You negotiate the takeover with the board of directors (management) of the company you wish to acquire and, if they agree, they will ask the shareholders to accept your offer to buy their shares. You offer them a higher price than that currently quoted at the stock exchange to make your bid attractive. Of course, you can always go to the stock exchange to buy shares. However, you cannot hope to gain a majority stake if many shareholders and/or big investors refuse to sell their shares.  Hostile takeover: Although the management of the targeted company refuses to accept your offer and does not want you to take over their company, you still go ahead with your efforts to acquire a majority of shares. Sometimes, more than one company is interested in acquiring the other company. This can lead to a takeover battle. Why do mergers fail? Mergers can fail if people cannot work together. Although the target company may seem like a good fit in technical and business terms, the differing company cultures may make consolidation difficult. Many companies lose their revenue momentum while concentrating on cost synergies. 5.2 Joint Ventures A joint venture is a business relationship undertaken by two, or more, companies for a specific project. The companies remain independent and agree to share profits and losses from the venture. Useful words merger Fusion, Zusammenschluß demerger Entflechtungen capital link Kapitalverflechtung equity Eigenkapital, Aktien take-over battle Kampf um die Übernahme take-over bid Übernahmeangebot acquisition Kauf  Provadis Seite 20 Compendium 18th Edition management buyout Übernahme durch das Management leveraged buyout Übernahme mit Fremdkapital, of auch Übernahme durch das Management hostile take-over feindliche Übernahme economy of scale Kostendegression, Vorteile der Massenproduktion antitrust authorities Kartellamt Unfair Trading Act Gesetz gegen den unlauteren Wettbewerb junk bonds Schundobligation 6 The Stock Exchange The stock exchange is a market for buying and selling stocks (shares). It is therefore also called the "stock market". Without stock exchanges a modern free economy cannot function. Its purpose is:  to finance enterprises  to enable everyone to invest savings directly in promising enterprises, thus participating in their profits and growth There are, basically, two kinds of securities traded at a stock exchange: Shares: Owners of shares are co-owners of the company. They will only get dividends (interest paid on shares) if and when the company makes a profit. As shareholders they can exercise their voting right at the annual shareholders' meeting. They participate in the growth of the company through the increasing value of its shares. When a company performs well, and other investors also buy its shares, the share price will go up. A shareholder can make higher profits in one day than a bond-holder does in one year. However, if a company shows poor performance and loses money, shareholders, as co-owners, will also lose money because share prices will drop. In addition, the price of shares depends on a large variety of unpredictable risks (political events and general economic developments, psychological factors, and money transfers of investors who keep changing their investment strategies and who are only looking at short-term investments for making a "fast dollar"). Bonds: The owner of a bond is a creditor and only entitled to receive annual interest payments which remain stable during the entire term of the bond. Bonds are issued by the government and major corporations. After bonds have expired, they will be redeemed at face value. The investor does not bear any risk other than losing his money when the company goes bankrupt. Prices of bonds traded at the stock exchanges will only change if the rate of interest goes up or down. Useful words: bears Pessimisten bonds Anleihen/festverzinsliche/Rentenwerte bulls Optimisten common stock/class A Stammaktien (mit Stimmrecht) shares/ordinary shares co-owner Mitbesitzer creditor Gläubiger debtor Schuldner  Provadis Seite 21 Compendium 18th Edition dividends Dividenden /Gewinnausschüttung für Aktien) face value Nennwert futures Termingeschäfte hedging Kurssicherungstermingeschäfte maturity Fälligkeit preferred stock/class B Vorzugsaktion (ohne Stimmrecht) shares/preferential stock securities/stocks Wertpapiere shareholder Aktionär shareholder' meeting Aktionärsversammlung shares edged up die Aktien erholten sich leicht shares rallied die Aktien erholten sich shares/stocks Aktien stock exchange, stock market Börse, Aktienmarkt term Laufzeit to redeem Einlösen voting right Stimmrecht APPENDIX – Some Typical Questions 1. What is a holding company? A subsidiary? A franchise? Holding company:  also called parent company  created primarily as a shell company for the purpose of owning shares of one or more companies  controls other independently incorporated companies by ownership of most or all their stock, but does not directly control the daily operations of those companies Subsidiary:  A subsidiary is a company that is completely or partly owned by another company.  also sometimes a company for which a majority of the voting stock is owned by a holding company  holding company can influence subsidiary → stocks Franchise:  form of business organisation in which the owner of an already successful product or service ( the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee 2. How can a company improve its competitiveness?  mass production at a cheaper price → economies of scale  improve quality of products  make innovations  product variety → diversification  advertising  Provadis Seite 22 Compendium 18th Edition 3. How can companies cut costs?  outsource to countries where labour, taxes, property, etc. are cheaper  by producing more cheaply  by laying off staff  reduce advertising costs  invest in machines → replace human labour  make sure customers pay their invoices 4. What is the difference between revenue and profit? Revenue:  all money that comes into the company during a given period  sales, interest income, proceeds from the sale of a subsidiary, etc. Profit:  difference between revenue and expenditures  what is gained after costs are accounted for 5. How can a company increase its market share?  acquire another company → cutting out a competitor and taking over its customers  advertising  product improvements  increase range of products 6. What is diversification?  product market strategy – extending product range  investing strategy that seeks to minimize risk by diversifying among types of investments  diversification and risk are directly related to each other → the more you diversify your portfolio the less risk you have 7. When and how can a company be listed at the stock exchange?  needs to go public → sell shares through an initial public offering (IPO) 8. Why do companies issue shares/go public?  to increase their competitiveness  to raise money  to reduce owner’s risk 9. What causes share prices to go up or down?  political events  general economic events  psychological factors  supply and demand  war  natural catastrophes  Provadis Seite 23 Compendium 18th Edition  terrorist attacks 10. What are the most important stock exchange indices?  Dow Jones; America  Nasdaq; America – over the counter market  S&P 500 (Standard and Poor’s 500); America  DAX; Germany  FTSE; England (pronounced Footsie)  CAC-40; France  Nikkei; Japan 11. Which economic sectors are most subsidized by the EU? Why?  regional aid: to reduce the wealth gap between member states and regions  agriculture: to keep food prices low, farmers can survive, to protect new EU members against competition  aid for new members, to build civil services and institutions, improve transport and infrastructure  research 12. Why was the EURO introduced? Which countries use it?  result of a significant monetary reform  key part of the European project of political integration  established: 1992 Maastricht Treaty  to facilitate money transactions and to eliminate losses and uncertainties associated with exchange rate fluctuations  to establish a powerful currency which can compete with the dollar  to maintain price stability  introduced in non-physical form on 1 January 1999 → physical form on 1 January 2002 Criteria to join the EURO – Stability pact (see p12) Countries  Austria  Belgium  Cyprus  Estonia  Finland  France  Germany  Greece  Ireland  Italy  Latvia  Lithuania  Luxembourg  Malta  Netherlands  Provadis Seite 24 Compendium 18th Edition  Portugal  Slovakia  Slovenia  Spain  Montenegro, Andorra, Monaco, San Marino,Vatican City and Kosovo also use the euro by virtue of agreements concluded with the EU member states, although they are not officially euro members 13. What impact did the introduction of the Euro have?  prices increased  easier to travel to countries which have adopted to the euro  exports and imports within the eurozone have become much easier  no exchange rate fluctuations 14. What are the disadvantages and advantages of the euro? Disadvantages  cost of transitioning 19 countries’ currencies over to a single currency  billions were spent not only producing the new currency, but in changing over accounting systems, software, printed materials, signs, vending machines. parking meters, phone booths and every other type of machine that accepts currency  training necessary for employees, managers and even consumers  chance of economic fluctuations were controllable by each country in the past  makes interest adjustments by individual countries impossible  difficulty of dealing with countries that have widely differing economies Advantages  tool to enhance political solidarity  elimination of exchange rate fluctuations  price transparency between countries, both for consumers and businesses  reduced transaction costs  increased trade across borders  increased cross-border employment  simplified travel  expanding markets for business  financial market stability  macroeconomic stability: introduction of the euro also helps to lower (and control) inflation  lower interest rates  structural reform for Europe 15. What makes a currency weak or strong?  exports  demand → large investment  Provadis Seite 25 Compendium 18th Edition 16. What is the FED? Who heads it?  Federal Reserve Bank  central bank of the US  created in 1913  private corporation  composed of a central Board of Governors and 12 regional Federal Reserve Banks located in major cities throughout the nation  counterpart to ECB, current president: Jerome Powell Tasks  supervise and regulate banks  implement monetary policy  issue US Treasury Bonds 17. How can a government influence the amount of money in circulation?  cut/increase taxes → if budget deficit allows them to do so  create or cut jobs in the public sector  help private businesses to establish new jobs by paying subsidies and other state grants such as tax relief  freeze budget funds  freeze or abolishing subsidies 18. What does the price of oil indicate? How does it affect the economy?  worldwide oil sales are denominated in US dollars  spot price on the Rotterdam exchange is the price for 1 barrel of oil (159 litres)  oil is necessary for production and transport → costs of production increase if oil is expensive → inflation  changes in value of the dollar against other world currencies affect OPEC’s decisions on how much oil to produce  when the dollar falls relative to the other currencies, OPEC states receive smaller revenues in other currencies for their oil, in turn causing substantial cuts to their purchasing power, because they continue to sell oil in US dollars  OPEC’s decisions have a large influence on world price of oil  OPEC has been successful at increasing the price of oil for extended periods  ability to raise price has some limits  increase in oil prices decreases consumption and could cause a net decrease in revenue  extended rise in price can encourage systematic behaviour changes such as the use of alternative energy solutions or increased conservation 19. What is the present price of a barrel of oil?  $ 60.00 in March 2021 (after a high of nearly $150.00 in June 2008) 20. What are the advantages of competition?  producers are forced to produce goods at the lowest price but for the best quality  no one can dominate the market  Provadis Seite 26 Compendium 18th Edition 21. What would happen if trade unions achieved excessive wage increases?  leads to inflation since as labour costs increase, prices for products will increase 22. What is the unemployment rate in Germany?  4.6 % in January 2021 23. What are the reasons for unemployment?  Corona pandemic  high non-wage labour costs e.g. pension, health care  high corporation tax  outsourcing  economic slump  globalisation  seasonal unemployment  cyclical unemployment  structural unemployment 24. Why is the job situation better in summer than in winter?  in summer → weather better  therefore more jobs available e.g. construction, agriculture 25. Why do companies make employees redundant?  high labour costs  economic situation  automation of industrial processes  lack of demand for products  employees lack the required skills 26. How do you measure the growth of economy?  economic growth is measured by comparing the gross domestic product in one time period (one year or one quarter) to the gross domestic product in a comparable time period (the year before or the previous quarter)  inflation rate  unemployment rate  balance of trade  current account 27. What is the GDP?  the gross domestic product is the total market value of a nation’s goods and services earned during a specific time period, e.g. one year or one quarter  Provadis Seite 27 Compendium 18th Edition 28. What is the difference between the GDP and the GNP?  the gross national product is the value of all goods and services owned by a country's residents over a period of time. It extends from the GDP to include the overseas economic activities performed by its nationals. 29. What is the magic quadrangle?  four main areas which government may aim to influence with its policies control of inflation/price stability, employment, economic growth, balance of payment 30. What are the characteristics of a social market economy?  economy in which most allocations of resources occur as a result of interaction between buyers and sellers of goods and services  contrast with a planned economy  no direct intervention of government  aims: high growth rate, low inflation, low unemployment rate, good working conditions and welfare  protection of competition  social security 31. What are the rules of a free market?  an idealized form of a market economy in which buyers and sellers are permitted to carry out transactions based on mutual agreement on price without government intervention in the form of taxes, subsidies, regulation or government ownership of goods and services 32. Name some trade barriers.  tariffs  quotas  subsidies 33. Name some economic indicators.  inflation rate  unemployment rate  GDP  balance of trade  consumer spending  stock market prices 34. What state is the German economy in at the moment?  due to the Corona pandemic, some sectors are suffering, e.g. service sector and retail trade  IT sector is booming  export trade is increasing again to reach pre-pandemic levels  consumer spending has decreased  Provadis Seite 28 Compendium 18th Edition 35. What are the indicators of a boom?  consumer spending and investment high  firms expect increase in demand for their product  people have more money to spend  profits and wages should increase 36. What is a recession?  fall of a country’s Gross National Product in successive quarters  caused by economic shocks  incomes and output begins to fall  firms face a fall in demand for their products 37. Explain the relationship between supply and demand and its influence on prices.  theory of supply and demand explains how the price and quantity of goods sold in markets are determined  where goods are traded in a market, prices of goods tend to rise when the quantity demanded exceeds the quantity supplied at that price, leading to a shortage and conversely prices tend to fall when quantity supplied exceeds the quantity demanded 38. What happens if a country has more imports than exports?  trade deficit or trade gap 39. What is a trade war? Mention some examples.  most barriers to free trade work on the same principle: the imposition of some sort of cost on trade that increases the price of the traded good  if two or more nations repeatedly use trade barriers against each other then a trade war results  example: steel trade → Mexico and USA 40. What is globalisation?  social change, an increase in connections between societies due to, amongst other things, the explosive evolution of transport and communication activities  applied to many social, cultural, commercial and economic activities  depending on the context it can mean: o closer contact between different parts of the world (globalisation of the world, global village) with increasing opportunities for personal exchange and mutual understanding between “world citizens” o or economic globalisation. more freedom of trade and increasing relations among members of an industry in different parts of the world (globalisation of an industry) o or some negative exploitation aspects of economic globalisation such as evasion of legal, environmental and moral standards by shifting production overseas 41. Should world debt in the Third World be waived?  yes → if they stay indebted they will never have the possibility to build up an economy  yes → the debts will increase, will never be independent of aid  Provadis Seite 29 Compendium 18th Edition  no → will never learn to manage with the money they have  no → should find their own way out of the debts → so they can be independent of other countries  no→ diminishes their creditworthiness, will make it difficult to borrow money in future 42. What measures help developing countries?  education → school  subsidies agriculture → to build up economy  increased rights for women to participate in society and business on equal grounds 44. What is G7/G20?  Group of Seven or G7 is a coalition of the major industrial democracies: The United Kingdom, France, Germany, Italy, Japan and the United States (the original G6 which met the first time in 1975) and Canada which joined in1976. The Russian Federation is sometimes invited, making G8.  primary purpose of G7 now is as an annual meeting of the financial ministers of those countries as well as officials from the European Community, held preceding the IMF/ World Bank annual fall meetings  meeting is known also as G7 Finance Ministers Meeting  G7 also meet annually as a summit of the heads of state. These summits rotate through the member countries with that nation’s leader serving as an informal chairman of the group  often targets for demonstrations from anti-globalisation movement groups  G20 includes the major advanced and emerging economies as well as the ECB, the IMF and the World Bank. Links http://www.ecb.int/ecb/orga/tasks/html/index.en.html http://www.ecb.int/ecb/educational/hicp/html/index.en.html http://europa.eu/about-eu/eu-history/index_en.htm http://europa.eu/about-eu/institutions-bodies/index_en.htm http://www.ecb.int/euro/intro/html/index.en.html http://www.wto.org/english/thewto_e/thewto_e.htm http://www.imf.org/external/about.htm http://www.opec.org/opec_web/en/about_us/24.htm http://www.apec.org/About-Us/About-APEC/History.aspx http://www.nato.int/history/index.html  Provadis Seite 30