copyright © 2015 pearson education, inc.4-1 international business environments & operations...

Copyright © 2015 Pearson Education, Inc. 4-1

International Business

Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan


Chapter 4

The Economic Environments Facing

Businesses


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


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


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


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


Economic FreedomEconomic Freedom by Region, with Population

Global Distribution of Economic Freedom



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

Standard of Living



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


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


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


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

GNI Data


A Divided World


GNI per Capita, 2011


GNI Per Capita, 2011, Adjusted for Purchasing Parity



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


Economic Analysis Managers should also consider

Inflation Unemployment Debt Income distribution Poverty Balance of payments

25

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

26

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?


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