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Copyright © 2015 Pearson Education, Inc. 4-1
International Business
Environments & Operations
15e
Daniels ● Radebaugh ● Sullivan
Copyright © 2015 Pearson Education, Inc. 4-3
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. 4-4
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
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International Economic Analysis
A universal assessment of economic environments is difficult because of: System Complexity
Identifying proper indicators is difficult Market Dynamism
New economic circumstances Market Interdependence
Markets influence each other Data Overload
Complicates decision-making
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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
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Economic FreedomEconomic Freedom by Region, with Population
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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
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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
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
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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
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
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Measures of Economic Performance
Gross national income (GNI) the broadest measure of economic activity for
a country Gross national product (GNP)
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
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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
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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 long-term 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
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
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Economic Analysis Managers should also consider
Inflation Unemployment Debt Income distribution Poverty Balance of payments
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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
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Balance of Payments (BOP) Account
D. Net Statistical Discrepancy
B. Capital AccountPortfolio InvestmentDirect InvestmentShort term loans
C. International ReserveGold, Silver, and Precious MetalsForeign CurrencySpecial Drawing Rights (SDR)
A. Current AccountMerchandise Trade
ServicesUnilateral Transfer
Equation: A+B = C+DBOP Account must balance
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Chapter 4: Discussion Questions1. Define “economic freedom” and explain its implication in
an economy. 2. What are the three types of economic systems? What
criteria can we use to evaluate them? Explain.3. Discuss the impact of “emerging nations” in a globalized
world.4. Explain how we can evaluate an economy using traditional
and nontraditional(broader) measures of economic performance.
5. Explain the Balance of Payments account of a country with its four subheads. Why is it important to in international business manager?
Copyright © 2015 Pearson Education, Inc. 4-28
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.
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