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chapter eight
Economic and Socioeconomic
Forces
McGraw-Hill/Irwin
International Business, 11/e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
 Understand the purpose of economic analysis
 Identify the categories used to describe levels of
economic development
 Recognize the economic and socioeconomic
dimensions of the economy
 Understand the importance of a nation’s
consumption patterns and the significance of
purchasing power parity
8-3
Learning Objectives
 Understand the degree to which labor costs can
vary from country to country
 Understand the significance for businesspeople of
the large foreign debts of some nations
 Discuss the new definition of economic
development
8-4
International Economic Analyses
(Table 8.1)
 Economic Analysis
 When a firm enters overseas markets,
economic analyses become more complex
8-5
International Economic
Analysis
 Sources for Economic Information
 The Commercial officers in embassies
 The World Bank
 The United Nations
 The International Monetary Fund
 The Organization for Economic
Cooperation and Development
8-6
Levels of Economic Development
• Developed
– A classification for all industrialized nations,
which are the most technically developed
• Developing
– A classification for lower income nations,
which are less technically developed
8-7
Levels of Economic Development
• Newly industrialized economies (NIEs)
– The fast-growing upper-middle-income and
high income economies of South Korea,
Taiwan, Hong Kong, and Singapore
• Newly industrializing countries (NICs)
– The four Asian Tigers and the middleincome economies such as Brazil, Mexico,
Malaysia, Chile, and Thailand
8-8
Dimensions of the Economy
 Important Economic Indicators
 Gross National Income (GNI)
 GNI/capita
 Income Distribution
 Private consumption
 Unit labor costs
 Exchange rates
 Inflation rates
 Interest rates
8-9
Dimensions of the Economy
• Gross National Income (GNI)
– The measure of the income generated by
a nation’s residents from international
and domestic activity
– Preferred over GDP
• GNI/Capita
– Used to compare countries with respect
to the well-being of their citizens and to
assess market or investment potential
8-10
Underground economy
• Underground economy
– That part of a nation’s income not measured
by official statistics
• unreporting
• underreporting
8-11
Purchasing Power Parity
• Purchasing Power Parity
– The number of units of a currency required
to buy the same amount of goods and
services in a domestic market that $1.00
would buy in the U.S.
– Helps to make comparisons possible across
economies
8-12
Dimensions of the Economy
 Income Distribution
 A measure of how a nation’s income is
apportioned among its people
 Reported as the percentage of income
received by population quintiles
 Data gathered by World Bank
 Income more evenly distributed in richer
nations
 Income redistribution proceeds slowly
 Income inequality increases in early stages
of development but reverses in later stages
8-13
Dimensions of the Economy
 Private Consumption
Disposable income
after-tax personal income
Discretionary income
income left after paying taxes and
making essential purchases
8-14
Private Consumption Based on
Purchasing Power Parity
8-15
Dimensions of the Economy
 Unit labor costs
 Total direct labor costs divided by units
produced
 Countries with slower-rising unit labor
costs attract management’s attention
8-16
Dimensions of the Economy
• Reasons for relative changes in
labor costs
– Compensation
– Productivity
– Exchange rates
• International firms must keep close
watch on labor rates around the
world
8-17
Dimensions of the Economy
• Large international debts of middle- and
low-income nations affect multinational
firms
– When foreign exchange must be used for loan
repayment, import of components used in
local production is reduced
– Local industries must manufacture these
components or production must stop
8-18
Major International Debtors
8-19
Socioeconomic Dimensions
• Total Population
– Most general indicator of potential market
size
– Population size, used alone, is not good
indicator of economic strength and market
potential
8-20
Socioeconomic Dimensions
• Age Distribution
– Developing countries have more
youthful populations than do industrial
countries
– Birthrates decreasing worldwide
– Population of developing countries
accounts for over three-quarters of
world’s population
8-21
Population Growth
8-22
Forces Reducing Birthrates
• Government supported family planning
programs
• Improved levels of health, education along
with enhanced status for women
• More even distribution of income
• Greater degree of urbanization
8-23
Concern: Birthrate Decline
• Concern in Developed Nations: Europe
• An increasing number of young
Europeans not marrying
• Marriages are later, with fewer children
• By 2025, the present 9 percent
unemployment rate in the EU will be
replaced by a shortage of workers
8-24
Concern: Birthrate Decline
• Concern in Developed Nations: Japan
– By 2025, Japan’s population aged 65 and
older will make up 26.8 percent of total
population
– By 2025, Japan will have twice as many
old people as children
8-25
Socioeconomic Dimensions
• Population Density
– A measure of the number of inhabitants
per area unit
– product distribution and
communications simpler and cheaper in
densely populated countries
8-26
Socioeconomic Dimensions
• Population Distribution
– A measure of how the inhabitants are
distributed over a nation’s area
– Changing population distribution: ruralto-urban shift
8-27
Rural-to-Urban Shift
(Table 8.8)
8-28
Socioeconomic Dimensions
• Increase in the number of
working women
– May require marketers to alter
promotional mix
– Results in larger family incomes
– Results in a greater market for
convenience goods
8-29
Population Distribution
8-30