GLOBAL FINANCE

``every individual . . . endeavors as much as he can . . . to direct
. . . industry so that its produce may be of the greatest value . . .
He intends only his own gain, and he is in this, as in many other
cases, led by an invisible hand to promote an end that was no part
of his intention . . . . By pursuing his own interest he frequently
promotes that of society more effectually than when he really
intends to promote it .''

Adam Smith

In this chapter we will look at some commonly used ideas in macro-
economics and international business.

MACROECONOMICS

Macroeconomics is the study of whole economies, as opposed to
``microeconomics,'' which looks at how individual industries, house-
holds, and businesses function. While macroeconomics is a vital
concern of governments, it is also essential to businesses, espe-
cially those with operations overseas. Macroeconomic concerns, such
as currency exchange, inflation, unemployment levels, economic
development, and international trade, are a major element in success-
fully managing operations in a complex and ever-changing environ-
ment.

THE THEORY OF COMPARATIVE ADVANTAGE

One of the most important ideas in economics is comparative advan-
tage, originally propounded by David Ricardo, a British economist and
politician of the early 1800s. The proposition is simply that nations,
societies, and members of those societies collectively benefit most by
specializing in what they do best, even if some parties are ``absolutely''
more efficient producers than others.

To follow the argument, imagine two people, A and B, on a desert

island, who have only two jobs to do: collecting coconuts and fishing.
Assume that they agree that both items are of equal value 1 coconut
is worth 1 fish. Person A is better than Person B at both tasks (see
Table 2.1).

The problem is to decide how A and B should spend their time.