Download The Economic Environments Facing Business

International
Business
Environments & Operations
15e
Daniels
●
Radebaugh
●
Copyright © 2015 Pearson Education, Inc.
Sullivan
4-1
Chapter 4
The Economic
Environments Facing
Businesses
Copyright © 2015 Pearson Education, Inc.
4-2
Learning Objectives
Communicate the importance of economic
analysis
 Discuss the idea of economic freedom
 Profile the characteristics of the types of
economic systems
 Introduce the notion of state capitalism
 Profile leading indicators of economic
development, performance, and potential

Copyright © 2015 Pearson Education, Inc.
4-3
Introduction

Managers assess a country’s economic
environment knowing





Countries differ in different ways
Economic and political changes alter market
circumstances
It is important to understand connections,
change, and consequences
The challenges of the comeback
Choices of citizens, policymakers, and
institutions
Copyright © 2015 Pearson Education, Inc.
4-4
International
Economic Analysis

A universal assessment of economic
environments is difficult because of:

System Complexity


Market Dynamism


New economic circumstances
Market Interdependence


Identifying proper indicators is difficult
Markets influence each other
Data Overload

Complicates decision-making
Copyright © 2015 Pearson Education, Inc.
4-5
Economic Freedom

Economic freedom – people have the
right to work, produce, consume, save,
and invest the way they prefer

measured across business freedom, monetary
freedom, fiscal freedom, investment freedom,
freedom from corruption, property rights,
trade freedom, government size, financial
freedom, and labor freedom
Copyright © 2015 Pearson Education, Inc.
4-6
Economic Freedom
Economic Freedom by Region, with Population
Copyright © 2015 Pearson Education, Inc.
4-7
Global Distribution of Economic
Freedom
Copyright © 2015 Pearson Education, Inc.
4-8
Economic Freedom: Value and
Trend
Economic freedom affects: Growth rates,
Productivity, Income levels, Inflation,
Employment, Life expectancy, Literacy,
Political openness, Environmental
sustainability
 The trend toward increased economic
freedom is no longer certain
 The legitimacy of free markets has been
questioned
 The benefits of more state control

Copyright © 2015 Pearson Education, Inc.
4-9
Standard of Living
Copyright © 2015 Pearson Education, Inc.
4-10
Types of Economic Systems


An economic system refers to the mechanism
that deals with the production, distribution, and
consumption of goods and services
Types



Market Economy: a free-market (capitalistic) economy
built upon the private ownership and control of the
factors of production
Command Economy: a centrally-planned economy built
upon government ownership and control of the factors of
production
Mixed Economy: an economy in which economic
decisions are largely market-driven and ownership is
largely private, but significant government intervention
is still evident
Copyright © 2015 Pearson Education, Inc.
4-11
Evaluating Market, Mixed and
Command Economy
Criteria
Market
Mixed
Command
Degree of economic
freedom
Ownership of means of
production
Role of price in the
system
Role of government
Trade and investment
policy
Fiscal and monetary
policy
12
Types of Economic Systems
Types of Economic Systems
Copyright © 2015 Pearson Education, Inc.
4-13
Economic Development,
Performance, and Potential

Broad classes of countries include
 developing countries
 largest number of countries
 low per capita income
 emerging economies
 fast growing, relatively prosperous
 BRICS – Brazil, Russia, India, China and
South Africa
 developed countries
 high per capita income and standard of
living
 like the U.S., Japan, France, Australia
Copyright © 2015 Pearson Education, Inc.
4-14
The Rise of the Emerging Nations
Emerging Nations are the center of most
economic discussions today
 Who are these nations? What is their
impact in a globalized world?
 Impact of Emerging Markets



See my presentation under Teaching Aids
BRICS and plus nations
Measures of Economic
Performance

Gross national income (GNI)


Gross national product (GNP)


the broadest measure of economic activity for
a country
the total value of all final goods and services
produced within a nation in a particular year
Gross domestic product (GDP)

the total market value of goods and services
produced by workers and capital within a
nation’s borders
Copyright © 2015 Pearson Education, Inc.
4-16
Improving Analysis

GNI data should be adjusted for
 the growth rate of the economy
 the number of people in a country
 the local cost of living
Copyright © 2015 Pearson Education, Inc.
4-17
GNI Data
Copyright © 2015 Pearson Education, Inc.
4-18
A Divided World
Copyright © 2015 Pearson Education, Inc.
4-19
GNI per Capita, 2011
Copyright © 2015 Pearson Education, Inc.
4-20
GNI Per Capita, 2011, Adjusted for
Purchasing Parity
Copyright © 2015 Pearson Education, Inc.
4-21
National Performance and
Potential: Broader Concepts




GNI data should be adjusted for
 the growth rate of the economy
 the number of people in a country
 the local cost of living
Green economics: gauge economic performance
in terms of the effect of current choices on longterm sustainability
Sustainable development: meet the needs of
the present without compromising the ability of
future generations to meet their own needs
Happynomics: importance of emotional
prosperity in addition to financial prosperity
Copyright © 2015 Pearson Education, Inc.
4-22
Purchasing Power Parity



PPP is the number of units of a country’s currency
required to buy the same amounts of goods and
services in the domestic market that $1 would
buy in the United States.
The relative price index makes the difference.
Example: The price of tomato in USA and India is
$2.00 and $0.20 respectively. If an Indian earns
$3000 per year, how much an American will have
to earn to buy the same amount of tomato?
As we evaluate an economy, the purchasing
power parity should also be taken into
consideration
Economic Analysis

Managers should also consider






Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
Copyright © 2015 Pearson Education, Inc.
4-24
The Balance of Payments
Reports the total of all money flowing into
a country less all money flowing out of
that country to any other country during a
given period of time
 Records a country’s international
transactions amongst companies,
governments, and/or individuals
 Concept of trade surplus and trade deficit

25
Balance of Payments (BOP) Account
A. Current Account
Merchandise Trade
Services
Unilateral Transfer
B. Capital Account
Portfolio Investment
Direct Investment
Short term loans
C. International Reserve
Gold, Silver, and Precious Metals
Foreign Currency
Special Drawing Rights (SDR)
D. Net Statistical
Discrepancy
Equation: A+B = C+D
BOP Account must balance
26
Chapter 4: Discussion Questions
1.
2.
3.
4.
5.
Define “economic freedom” and explain its implication in
an economy.
What are the three types of economic systems? What
criteria can we use to evaluate them? Explain.
Discuss the impact of “emerging nations” in a globalized
world.
Explain how we can evaluate an economy using traditional
and nontraditional(broader) measures of economic
performance.
Explain the Balance of Payments account of a country with
its four subheads. Why is it important to in international
business manager?
27
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
Copyright © 2015 Pearson Education, Inc.
4-28