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Chapter 2
The Global Economic
Environment
Remaining Questions
from Last Week ?
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My Expectations
That you will have read the relevant
chapter in the textbook.
That you will have read the relevant
Article/Case Study (even if you are not
presenting) and that you actively
contribute to the debate
2-3
Group Formation
Internationally, Ethnically, Sexually etc
Mixed. Max 4 per group. No Singletons!
Group Name
Group Strap Line
Happy Birthday !
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Top 10 Reasons
For/Against the WTO
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Introduction
This chapter includes
An overview of the world economy
A survey of economic system types
The stages of market development
The balance of payments
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The World Economy—An Overview
In the early twentieth
century economic
integration was at
10%; today it is 50%
EU and NAFTA are
very integrated
Global competitors
have displaced or
absorbed local ones
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The World Economy—An Overview
The new realities
Capital movements have replaced trade as
the driving force of the world economy
Production has become uncoupled from
employment
The world economy, not individual
countries, is the dominating factor
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The World Economy—An Overview
The new realities, continued
75-year struggle between capitalism and
socialism has almost ended
E-commerce diminishes the importance of
national barriers and forces companies to
reevaluate business models
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Economic Systems
Resource Allocation
Market
Private
Resource
Ownership
State
Command
Market
capitalism
Centrally
planned
capitalism
Market
socialism
Centrally
planned
socialism
2-10
Market Capitalism
Individuals and firms allocate resources
Production resources are privately
owned
Driven by consumers
Government’s role is to promote
competition among firms and ensure
consumer protection
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Centrally Planned Socialism
Opposite of market capitalism
State holds broad powers to serve the public
interest; decides what goods and services are
produced and in what quantities
Consumers can spend on what is available
Government owns entire industries and
controls distribution
Demand typically exceeds supply
Little reliance on product differentiation,
advertising, pricing strategy
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Centrally Planned Capitalism
Economic system in which command
resource allocation is used extensively
in an environment of private resource
ownership
Examples
Sweden
Japan
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Economic Freedom
Rankings of economic freedom among countries
free, mostly free, mostly unfree, repressed
Variables considered include such things as:
Trade policy
Taxation policy
Capital flows and foreign investment
Banking policy
Wage and price controls
Property rights
Black market
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Economic Freedom
Free
1.
2.
3.
4.
5.
7.
8.
9.
Hong Kong
Singapore
Ireland
Luxembourg
Iceland/U.K.
Estonia
Denmark
Australia/New
Zealand/United States
Repressed
150.
151.
152.
153.
154.
155.
156.
Cuba
Belarus
Libya/Venezuela
Zimbabwe
Burma
Iran
North Korea
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Stages of Market Development
The World Bank has defined four categories
of development using Gross National Income
(GNI) as a base
BEMs, identified 10 years ago, were
countries in Central Europe, Latin America,
and Asia that were to have rapid economic
growth
Today, the focus is on BRIC, Brazil, Russia,
India, and China
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Low-Income Countries
GNP per capita of $825 or less
Characteristics
Limited industrialization
High percentage of population involved in farming
High birth rates
Low literacy rates
Heavy reliance on foreign aid
Political instability and unrest
Concentrated in Sub-Saharan Africa
India is the only BRIC country
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Lower-Middle-Income Countries
GNI per capita: $826 to $3,255
Characteristics
Rapidly expanding consumer markets
Cheap labor
Mature, standardized, labor-intensive
industries like textiles and toys
BRIC nations are China and Brazil
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Upper-Middle-Income Countries
GNP per capita: $3,256 to $10,065
Characteristics
Rapidly industrializing, less agricultural employment
Increasing urbanization
Rising wages
High literacy rates and advanced education
Lower wage costs than advanced countries
Also called newly industrializing economies (NIEs)
Examples: Malaysia, Chile, Venezuela, Hungary,
Ecuador
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Marketing Opportunities in LDCs
Characterized by a shortage of goods and
services
Long-term opportunities must be nurtured in
these countries
Look beyond per capita GNP
Consider the LDCs collectively rather than
individually
Consider first mover advantage
Set realistic deadlines
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Mistaken Assumptions About LDCs
1. The poor have no money.
2. The poor will not “waste” money on nonessential goods.
3. Entering developing markets is fruitless
because goods there are too cheap to make
a profit.
4. People in BOP (bottom of the pyramid)
countries cannot use technology.
5. Global companies doing business in BOP
countries will be seen as exploiting the
poor.
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High-Income Countries
GNI per capita: $10,066 or more
Also know as advanced, developed,
industrialized, or postindustrial countries
Characteristics
Sustained economic growth through
disciplined innovation
Service sector is more than 50% of GNI
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High-Income Countries
Characteristics, continued
Importance of information processing and
exchange
Ascendancy of knowledge over capital,
intellectual over machine technology,
scientists and professionals over engineers
and semiskilled workers
Future oriented
Importance of interpersonal relationships
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G-8, the Group of Eight
Goal of global economic stability and
prosperity
United States
Japan
Germany
France
Britain
Canada
Italy
Russia (1998)
2007 G-8 leaders in Germany
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OECD, the Organization for Economic
Cooperation and Development
30 nations
Post–World War II European origin
Canada, United States (1961), Japan
(1964)
Promotes economic growth and social
well-being
Focuses on world trade, global issues,
labor market deregulation
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The Triad
United States, Western Europe, and
Japan
Represents 75% of world income
Expanded triad includes all of North
America and the Pacific Rim and most
of Eastern Europe
Global companies should be equally
strong in each part
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Product Saturation Levels
The percentage of potential buyers or
households who own a product
India: 1% of people have telephones
Autos: 1 per 20,000 Chinese; 21 per
100 Poles; 49 per 100 EU citizens
Computers: 1 PC per 6,000 Chinese;
11 PCs per Poles; 34 PCs per EU citizen
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Balance of Payments
Record of all economic transactions between
the residents of a country and the rest of the
world
Current account—record of all recurring trade in
merchandise and services, and humanitarian aid
• Trade deficit—negative current account
• Trade surplus—positive current account
Capital account—record of all long-term direct
investment, portfolio investment, and capital flows
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Balance of Payments
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Top Exporters in 2004
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
In U.S. $ billions
Germany
912
U.S.
819
China
593
Japan
566
France
449
Netherlands
358
Italy
349
Great Britain
347
Canada
317
Belgium
307
% of total
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
EU
United States
China
Japan
Canada
South Korea
Mexico
Russia
Taiwan
Malaysia
18.1
12.3
8.9
8.5
4.8
3.8
2.8
2.8
2.7
1.9
2-30
Top Importers in 2004
In U.S. $ billions
1. United States
1,526
2. Germany
717
3. China
561
4. France
466
5. Great Britain
464
6. Japan
455
7. Italy
351
8. Netherlands
319
9. Belgium
286
10. Canada
280
% of total
1. United States
2. EU
3. China
4. Japan
5. Canada
6. South Korea
7. Mexico
8. Taiwan
9. Switzerland
10. Australia
21.8
18.3
8.0
6.9
4.0
3.2
3.0
2.4
1.6
1.6
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Overview of International Finance
Foreign exchange makes it possible to
do business across the boundary of a
national currency
Currency of various countries are traded
for both immediate (spot) and future
(forward) delivery
Currency risk adds turbulence to global
commerce
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Foreign Exchange Market Dynamics
Supply and demand interaction
Country sells more goods/services than it buys
There is a greater demand for the currency
The currency will appreciate in value
Exchange risks and gains in foreign transactions
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The Big Mac Index is based on the theory of
purchasing-power parity (PPP), which says
that exchange rates should move to make the
price of a basket of goods the same in each
country. The basket contains just a single
item, a Big Mac hamburger, but one that is
sold around the world. The exchange rate
that leaves a Big Mac costing the same in
dollars everywhere is our fair-value yardstick.
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Purchasing Power Parity (PPP)
The Big Mac Index
Is a certain currency over-/under-valued compared to another?
Assumption is that the Big Mac in any country should equal the
price of the Big Mac in the United States after being converted
to a dollar price
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Managing Economic Exposure
Economic exposure refers to the impact of
currency fluctuations on the present value of the
company’s future cash flows
Two categories of economic exposure
Transaction exposure is from sales/purchases
Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs
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Managing Economic Exposure
Numerous techniques and strategies
have been developed to reduce
exchange rate risk
Hedging involves balancing the risk of
loss in one currency with a corresponding
gain in another currency
Forward contracts set the price of the
exchange rate at some point in the future
to eliminate some risk
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Looking Ahead to Chapter 3
The global trade environment
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