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International Business Part Two Comparative Environmental Frameworks Chapter Four The Economic Environments Facing Businesses Chapter Objectives • To understand the importance of economic analysis of foreign markets • To identify the major dimensions of international economic analysis • To compare and contrast macroeconomic indicators • To profile the characteristics of the types of economic systems • To discuss the idea of economic freedom • To profile the idea, drivers, and constraints of economic transition 4-2 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Importance of Economic Environments • Company managers study economic environments to estimate how trends affect their performance • A country’s economic policies are a leading indicator of government’s goals and its planned use of economic tools and market reforms. • Economic development directly impacts citizens, managers, policymakers, and institutions. 4-3 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Elements of the Economic Environment • Gross national income (GNI): the income generated both by total domestic production as well as the international production activities of national companies • Gross domestic product (GDP): the total value of all goods and services produced within a nation’s borders over one year, no matter whether domestic or foreign-owned companies make the product. 4-4 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Adjustments to GNI • • • • Number of people in a country Growth rate Local cost of living Economic sustainability 4-5 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Other features of an economy • • • • • • • • Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments 4-6 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Definition of Economic System • A mechanism that deals with the production, distribution, and consumption of goods and services • Types: Market economy Command economy Mixed economy 4-7 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall The Economic Freedom Index • Approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency • Countries with the freest economies have had the highest annual growth and a greater degree of wealth creation. 4-8 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Dimensions of The Economic Freedom Index • • • • • • • • • • Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from corruption Labor freedom 4-9 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Transition to a Market Economy • • • • Liberalizing economic activity Reforming business activity Establishing legal and institutional frameworks Success is linked to how well the government deals with: Privatization Deregulation Property right protection Fiscal and monetary reform Antitrust legislation 4-10 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall