Download The International Business Environment

The International
Business Environment
Chapter 2: The Global Economy
LEARNING OUTCOMES
This lecture on the global economy will
enable you to:
• identify the global pattern of income
• analyse the pattern of international trade
• explain why countries trade with each
other
• explain the pattern and reasons for FDI
Measuring the Global Economy
Gross Domestic Product
market value of total output of goods and
services produced within a nation, usually
over a year.
Problems of comparison
Which Currency? – local or $US
Purchasing Power Parity
Gross National Income
(IMF, World Economic Outlook Database, 2008)
% WORLD
POP
% OF WORLD GDP
Current
$US
PPP
GDP PER CAPITA
Current
$US
PPP $US
G7
11
58.4
44.5
USA
4.6
27
21.9
44,118
44,118
CHINA
20.2
5.5
10
2,012
4,650
INDIA
17
1.8
4.4
791
2,405
GDP and the standard of living
•
•
•
•
•
•
Population – per capita income
Shadow economy
Environmental degradation
Resource depletion
Distribution of income
Composition of spending
Human Development Index
(UNDP)
Measure combining:
– life expectancy
– Education (adult literacy + average years
schooling)
– Standard of living (PPP per capita income)
Income Inequality
Source: UNDP, Human Development Report 2006
HDI
rank
Country
Poorest
10% (1)
Poorest
20%
Richest
10% (3)
Richest
20%
Ratio of
(3) to (1)
8
USA
1.9
5.4
29.9
45.8
15.9
18
UK
2.1
6.1
28.5
44.0
13.8
81
CHINA
1.8
4.7
33.1
50.0
18.4
115
BOLIVIA
0.3
1.5
47.2
63.0
168.1
126
INDIA
3.9
8.9
28.5
43.3
7.3
Economic Growth
Key to raising living
standards
Measured by annual %
change in GDP
2000-2006
(annual average %)
World
G7
3.65
2.23
Developing
Economies
China
6.14
India
Brazil
Source: IMF
Russia
9.63
6.79
3.16
6.87
Implications for Business
Attraction of high growth emerging economies
• Demand for infrastructure investment
– Capital equipment
– Construction materials
– Power transmission equipment
– Transport
Implications for Business
• Demand for consumer goods from growing
middle class
– Cars
– Electronic goods
– Household appliances
– Entertainment
– International travel
World Merchandise Trade 2005
WTO
Exports
Imports
Share (%)
Share (%)
Germany
9.3
USA
16.1
USA
8.7
Germany
7.2
China
7.3
China
6.1
Japan
5.7
Japan
4.8
France
4.4
UK
4.7
Netherlands
3.9
France
4.6
UK
3.7
Italy
3.5
Italy
3.5
Netherlands
3.3
WHY DO COUNTRIES TRADE
Mercantilism
Absolute advantage
Comparative advantage
Hecksher Ohlin
Leontief paradox
Vernon
Linder
Mercantilism
• The country has to export more and import
less so that to keep and increase “the precious
metals”, i.e. money which pays for the imports
• M. protects mainly the interests of the state
and of the traders
• The poverty of the working class and farmers
was seen as desirable and the increase of their
spending power – as weakening the economy
Absolute advantage
• Adam Smith (1776). An Inquiry into the
Nature and Causes of the Wealth of Nations
• Against the restrictions on trade, as well as all
sorts of intervention of the government in
business. Except for the national security.
• free export and import of commodities, i.e.
import of cheap grain, export of manufactured
products
Comparative advantage
• Absolute advantage is a rare case. Also the countries
can be interested in the trade with each other even if
one has an absolute advantage in the production of
many goods
• David Ricardo (1817) England and Portugal, cloth and
wine, Portugal is more efficient in the production of
both. Ricardo states that they still can trade with
benefit to both if say each of them specializes in one
commodity based on the opportunity cost of
producing both products in both countries
Comparative advantage
• If Portugal is 2 time more productive in
producing cloth and 3 times more
productive in wine, then Portugal has
comparative advantage in producing wine.
Hecksher-Ohlin Theory
• Theory of factor endowments
• Comparative advantage of one country over
another in the production of something comes
from the fact that the first country has
advantage in a factor which plays substantial
role in that production process. The original
theory: labour and capital, two commodities and
two countries (2x2x2)
• Examples: better soil, more sun, specific row
materials, qualification of labor, etc.
Hecksher-Ohlin Theory
• Limitations:
–This theory assumes perfect competition
in factor and production markets.
–Important factors as transportation are
not considered.
–Capital and labor are mobile in the
country of analysis but not
internationally
Leontief paradox
• In 1954, Leontief found that the US
exported labour-intensive commodities
and imported capital-intensive
commodities, in contradiction with
Heckscher-Ohlin theory
• The country with the world's highest
capital-per-worker has a lower
capital/labour ratio in exports than in
imports.
Raymond Vernon
• Vernon’s model : all countries (might)
benefit from any innovation, no
matter if it was invented there or not.
• Critics say that it fails to address “the
complexity of socio-economic
implications of technology and
production transfer over time”.
Linder hypothesis
• Linder hypothesis states that demand plays a more
important role than comparative advantage as a
determinant of trade--with the hypothesis that
countries which share similar demands will be more
likely to trade. For instance, both the U.S. and Germany
are developed countries with a significant demand for
cars, so both have large automotive industries. Rather
than one country dominating the industry with a
comparative advantage, both countries trade different
brands of cars between them.
COMPETITIVE ADVANTAGE OF
NATIONS
•
•
•
•
•
•
Factor conditions
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry
Chance
Government
PORTER’S DIAMOND
TRADE INTERVENTION
• Import restrictions
•tariffs
•non-tariff barriers
–
–
–
–
–
quotas
licences
rules or origin
product requirements
procedures
• Export promotion
•subsidies
•Exchange rate manipulation
WHY INTERVENE?
•
•
•
•
•
•
•
•
•
•
National defence
Infant industries
Declining industry protection
To spread risk
Political reasons
Strategic trade policy- first in the market
Protection from dumping
Retaliation
To protect against undesirable products
To resist cultural imperialism
CONTROL OF TRADE
GATT/WTO
• non-discrimination
• reciprocity
• transparency
• predictability and stability
• freeing of trade
• special assistance and trade concessions for
developing countries
GATT/WTO ROUNDS
Period
Round
Countries
Subjects
1947
Geneva
23
Tariffs
1949
Annecy
13
Tariffs
1950-51
Torquay
38
Tariffs
1955-56
Geneva
26
Tariffs
1960-61
Dillon
26
Tariffs
1964-67
Kennedy
62
Tariffs, anti-dumping measures
1973-79
Tokyo
102
Tariffs, non-tariff measures and framework
agreements
1986-94
Uruquay
123
Tariffs, agriculture, textiles and clothing
brought
into GATT
Agreement on services (GATS)
Intellectual property (TRIPS)
Trade related Investment (TRIMS)
Creation of WTO and dispute settlement
2001 -
Doha
141
Not yet resolved
FOREIGN DIRECT INVESTMENT
REASONS FOR FDI
• A quest for natural resources
– Minerals and energy
– Increased competition from developing
economies
• Lower production costs
– Offshoring
• Market access