daniels_ib13_04

International BusinessEnvironments and Operations,

13/eGlobal Edition

Copyright © 2011 Pearson Education

Chapter Four

The Economic Environments Facing Businesses


To understand the importance of economic analysis

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 drivers of economic

transition


Managers study economic environments to estimate how market trends and government policy influence the performance of their companies.

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, companies, policymakers, and institutions.


Three conditions hamper the development of a universal scheme:

◦ Difficulty in stipulating a definitive set of indicators to estimate the performance and potential of a country’s economy.

◦ Today’s set of perfect measures may prove imperfect tomorrow.

◦ Interdependencies complicate interpreting the relationship among 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 National Product (GNP): the value of all final goods and services produced within a nation in a given year, plus the income earned by its citizens abroad, minus the income earned by foreigners from domestic production.


Gross domestic product (GDP): the total value of all final goods and services produced in a country in a given year equal to total consumer, investment, and government spending, plus the value of exports, minus the value of imports.


Per Capita Conversion Rate of Change Purchasing Power Parity (PPP): “The No. of unit of a country’s currency required to

buy the same amounts of goods & services in the domestic market that one unit of income would buy in the other county”

Degree of Human Development Base for Human Index: Real Purchasing Power,

Education & Health, longevity, knowledge, standard of living, gender related development, gender empowerment, Human Poverty


Green Measures Meet the needs of Present without compromising the

ability of future generations to meet their own needsAdjusting GDP for green concerns:1. Green Net National Product: Natural Resources,

Environmental Resources2. Genuine Progress Indicator: Population Health,

Security, Equity, Free Time, Educational Attainment3. Gross National happiness: Promotion of Cultural

values, Spiritual Development 4. Happy planet index: living long & Fulfilling lives


Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments


“Inflation is the measure of the increase in the cost of living” – Data: Jan 2010 – Dec 2010

Expected Growth rate for 2011-2012: 9% Cost of Living Implications of Chronic/Hyper Inflation Price Indexes & Measurement ProblemsConsumer Price Index is the official measure of the Inflation Deflation

Country Interest Rate

Growth Rate

Inflation Rate

Jobless Rate

Current Account

Exchange Rate

India 5.50% 8.90% 9.47% 8.00% -14 45.69


Unemployment: The unemployment rate is the number of unemployed workers who are seeking employment for pay dividend by the total civilian labor force

Problems in Measuring Variation in Public Support The Pension Problem


Internal Debt: Portion of the government debt that is denominated in the country’s own currency and held by domestic residents

External Debt: Debt owed to foreign creditors and denominated in foreign currency.


Gini Coefficient : Degree of Inequality in Income Distribution in a country

Urban vs. Rural

Income Inequality


It is a condition in which a person or community is deprived of, or lacks the essentials for, a minimum standard of well being & life

World Bank Definition 78% population is poor (Avg. PPP income is < $3470), 11% is

middle income & 11% rich (Avg. PPP income is > $8000 annually)

Poverty and the Economic EnvironmentPeople struggle for food, shelter, clothing, clean water, health

services, education & security The failure result in suffering, malnutrition, mental illness,

death, epidemics & war The Potential of the Poor

◦ Bottom of the Pyramid Phenomenon


Labor and Total CostsFor many goods and services, the cost of labor is a key element of total costs. Consequently, companies scan the world, looking for markets that offer lower-cost labor.


Productivity measures theefficiency with which products are produced.

Impact of Technology on the Productivity


Officially known as statement of international transactions

It is a statement of the balance of country’s trade & financial transaction as conducted by individuals, businesses & government agencies located in that country with the rest of the world over a specified period

Current and Capital Accounts◦ Current Account: tracks all trade activity in merchandise◦ Capital Account: tracks both loans given to foreigners and

loans received by citizens

BOP and Economic Stability


A mechanism that deals with the production, distribution, and consumption of goods and services

In another term economic system means the set of structure & processes that guide the allocation of resources & shapes the conduct of business activities in country

Types:◦ Market economy : Individuals rather than Government

make Economic Decision, laissez-faire ◦ Command economy: Government owns & controls all

resources ◦ Mixed economy: Both government & Individuals owns the

resources


The Allure of Market Economies

Belief in Free Markets

Economic Freedom Index: “ Absence of government coercion or constraints on the production, distribution or consumption of goods & services beyond the extent necessary for citizens to protect & maintain liberty itself


Business freedom Trade freedom Monetary freedom Freedom from

government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from

corruption Labor freedom


Return of the Mixed Economy

Free-Market Strike Back


Liberalizing economic activity Reforming business activity Establishing legal and institutional

frameworks Success is linked to how well the

government deals with:◦ Privatization◦ Regulation◦ Property right protection◦ Fiscal and monetary reform◦ Antitrust legislation

daniels_ib13_04

Documents

education

income earned

total costs

ppp income

goods amp

final goods

services produced

production