macro ppt final

7/27/2019 Macro Ppt Final

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MACRO ENVIRONMENT

As a student dealing with business, it isnecessary to acquire full knowledge about the

behaviour of the economy. The macro systemdetermines the operational conditions underwhich the business operates.

Therefore right decisions can be taken byunderstanding and adapting to the changes inthe business environment.


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Objectives

Knowledge about the national and international

issues/happenings.

Impact of the governments decisions/ policies onbusiness.

How the business operates in the general andinstitutional framework of the whole economy.

To equip the students with analytical tools tounderstand the global economic situation.

To evaluate critically the emerging economicproblems & their implications for trade andcommerce.


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What the students will learn:

The students will learn about the economicgrowth of an economy in terms of output,income & employment.

Understand the macro economic variables likeconsumption, saving, investment, interest rates,balance of payment & their relationships.

They will also try to understand how theserelationships will determine the productionbehaviour of the countries.


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By understanding the macro economic variables,students will be able to understand the macroeconomic issues like Inflation & Employment.

How the uncertainties can constrain theeffectiveness of economic policies in the realworld.


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Factors to be covered under

Economic Environment General economic conditions

Economic conditions of different segments ofthe population; their disposable income,

purchasing power, etc. Rate of growth of the economy; rate of growth

of each sector of the economy.

Income, prices and consumption expenditure

Credit availability and interest rates

Saving rate/capital formation


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Inflation rate

Behaviour of capital markets

Foreign exchange reserves Exchange rate

Tax rates

Infrastructure Labour scene etc.


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CASES

Where Raymond wants to be.

Oil Prices up, Inflation down.

The Anatony of a Currency Crisis : The Collapse of the

Mexican Peso (1994). Central Bank Independence and Inflation in Industrial

Countries.

(US, Germany, Switzerland Vs UK, Spain, Italy, France

& NZ) Mckinseys Agenda for Indias Economic Reform.

Asian Financial Crisis of the late 1990s.


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Suggested Readings :

Text Book

Dornbusch,Rudiger&Fischer,Stanley,Macroeconomics,Tata McGraw Hill,2006.

Reference Books

Aswathappa, K, Essentials of Business Environment,Himalaya Publishing House, 2000.

Cherunilam, Francis, Business Environment : Text &

Cases, Himalaya Publishing House, 2002. Bhalla, V.K. & Ramu, S. Shiva, International Business:

Environment & Management, Anmol Publications,2000.


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Adhikary, M, Economic Environment of Business,ultan Chand & sons, 2001.

Kotabe,Masaaki & Helsen, Kristiaan, Global MarketingManagement, John Wiley & Son ,2004.

Gupta, Suraj B, Monetary Economics, S. Chand & Co.Ltd,2003.

Jalan, Bimal(ed.), The Indian economy: Problems &Prospects, Penguin Books,1992.

Nayar, Baldev Raj, The Geopolitics of Globalization,xford,2005

Economic Survey, Government of India


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Evaluation :

Assignment : 10%

Project : 15%

Mid-Term Test : 15%

End Term Examination : 60%

P j t T i Gl b l E i


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Project Topics-Global Economic

Environment

Economic Reforms in India and their impact

Role of Infrastructure in growth anddevelopment

Monetary and Credit Policy

Economic Implications of population

Information revolution

Tourism: Potentials and problems

Inflation: Causes, effects and remedies


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Emerging International Economic Environment

Balance of Payment

Foreign Direct Investment

Budget Deficits and Public Debt

Economic Planning in IndiaRole of Multinational Corporations (MNCs)

Issue of Disinvestments

Saving and Capital formation

Banking system: Role and functions


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Indian Tax Structure

South-East Asian Crisis

Regional Trading Arrangement: An overview

Capital Market Reforms

Globalization and Development

Chinas Economic Miracle


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Business Environment

The survival & success of a firm depend on two sets of factors

i.e. the internal factors - the internal environment and the

external factors - the external environment.

The external environment has broadly two components i.e.business opportunities and threats to business. Similarly, the

organizational environment has two components: Strengths &

weaknesses of the firm/organization.


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Strategy formulation is properly putting the organizational

factors (the internal environment) against the opportunities &

threats in the external environment. In other words, businessdecisions are conditioned by two broad sets of factors i.e. the

internal environment and the external environment.

Formulation of strategy is sometimes defined as establishing a

proper firm-environment fit. The mission/goal/ objectives

themselves should be based on an assessment of the external

environment & the organizational factors (i.e. the internal

environment).


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Strategy formulation is properly putting the organizational factors

(the internal environment) against the opportunities & threats in

the external environment. In other words, business decisions are

conditioned by two broad sets of factors i.e. the internalenvironment and the external environment.

Formulation of strategy is sometimes defined as establishing a

proper firm-environment fit. The mission/goal/ objectives

themselves should be based on an assessment of the external

environment & the organizational factors (i.e. the internal

environment).

Therefore, SWOT analysis is one of the first steps in the strategic

management process. Business dynamics, to a large extent, is a

dependent factor it depends on, inter alia, the environmental

dynamics. Hence, the importance of ENVIRONMENTAL

ANALYSIS.


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Internal Environment

Promoters/Shareholders

values

Mission/Objectives

Management Structure

Internal power relationship

Co. image/Brand equity

Physical assets/facilities

R & D and technologicalcapabilities

Human Resources

Marketing capabilities

MICRO (Task/Operating)

Environment

Customers

Suppliers

Competitors

Financiers

Marketingintermediates

MACRO ( General

/Remote) Environment

Economic factors

Social/cultural

Demographic

Political/Govt.

Natural

Technological

Global

External Environment

BUSINESS ENVIRONMENT

The internal factors are generally regarded as controllable factors.

External factors which have a direct & intimate impact on the firmare classified as Micro environment.

Many of the times, Business Environment is confined to theExternal Environment.


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VALUE SYSTEM

The value system of JRD Tata and the acceptance of it by otherswho matter were responsible for the voluntary incorporation in the

Articles of Association of TISCO its social and moral

responsibilities to Consumers, employees, shareholders, society

and the people.

Infosys Technologies Ltd.

Core Value: To achieve our objectives in an environment of

fairness, honesty, transparency and courtesy towards ourcustomers, employees, vendors and society at large.


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MISSION & OBJECTIVES

The business domain of the company, priorities, direction of

development, business philosophy, business policy etc. are guided

by the mission and objectives of the co.

Ranabaxys thrust into the foreign markets and development have

been driven by its mission:

To become a research based international pharmaceutical company

Arvind Mills Mission To achieve global dominance in select

businesses built around our core competencies through continuous

product and technical innovation, customer orientation and focus on

cost effectiveness.


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Environmental Analysis And Strategic Management

Where Raymond wants to be?

Raymond has been a well-known fabric brand in India. The

Raymond Ltd. overtime had made significant, investments inprocess oriented business such as Cement, steel & polyester fibre,besides textiles.

Gautam Hari Singhania, who took over from Vijaypat Singhania asChairman & managing director in 1998, sought to put Raymond ona strong footing, restructuring its business portfolio based on aSWOT analysis. So, in early 1999, says singhania, We started

looking at our business portfolio, and decided where we wanted tobe as compared to where we are today. We decided there were threeareas that the company didnt want to be in, in our long-term

strategy. One was filament yarn, the second was cement and thethird steel.


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These business were either not giving adequate returns or were

making losses. The company also didnt have the expertise to run

these units. Raymond, therefore, pulled out of these business anddecided to focus on the core business of dressing (textiles and

readymade apparel).

The divestment of these three businesses brought in about Rs.1100 crore. Out of this, 291 cr. was used to rapay outstanding debt

and this helped to substantially reduce the interest burden. The

company also spent around 158 cr. for buying back shares and this

increased the singhanias share in Raymond from 27 to 31

percent. The company has been left with large amount forinvestment for developing existing core business or entering

new businesses.


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In Singhanias vision, Raymond must turn itself into a lean and

efficient company, before striking out to conquer new territory

overseas. While Raymond claims to be among the top three fabric

brands in the world in integrated worsted (wool-blended) fabrics,it certainly isnt a household name anywhere except South Asia.

THE ENDEAVOUR IS TO MAKE IT A TRULY GLOBAL

BRAND, says the chairman.

A look at the strategic management process would make theimportance of the external-internal factors nexus more clear.

Strategy has been defined as unified, comprehensive, and

integrated plan relating the strategic advantages of the firm to thechallenges of the environment. It is designed to ensure that the

basic objectives of the enterprise are achieved.


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Determination

of Mission

Evaluation and Control

Establishment of

objectives

Implementation

SWOT Analysis Choice of Strategy

Consideration of Strategic

Alternatives

Strategic Management Process

GLOBAL ENVIRONMENT


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GLOBAL ENVIRONMENT

Globalisation and the increasing global business interdependence make the

fortunes of companies, sometimes even of national economies, dependent on

the economic conditions in other countries.

The slowdown in the US economy during 2000-01 has sent its shock waves to

India too. The IT sector in US was very badly hit by the economic slowdown

as it forced US firms to sharply reduce their IT spends and defer projects that

werent critical.

The IT cos. seriously affected by the recession resorted to massive lay offs

(during Feb.-March, 2001, CISCO laid off 8000, lucent 10,000 & Intel 5000people). Besides, massive numbers have been benched - people currently

without work in the co. (but not retrenched) waiting for projects. The revenue

warnings by the tech firms sent their stock prices deep down.


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As the US IT firms were major clients of Indian IT majors, companies like

Infosys, WIPRO, HCL and many others were hit hard. The American tech flue

thus affected the business of the Indian firms, their share prices, the nations

export earnings and the lucrative employment market. It featured-one out of

every five engineers in the countrys finest IT cos. could soon have nothing to

do; salaries which grew by between 20 and 30 percent last year will grow by

just 0-5 percent this year and entry level intake will decline by 20 percent.


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ECONOMIC SYSTEMS

1. CAPITALISM

Private ownership of means of production

Predominance of private sector

Decisive role of market

Profit induced business

Exploitation of labour

Restricted role of the government

2. SOCIALISM

State ownership of means of production

Predominance of public sector

Decisive role of planning

Production guided by social benefit

Abolition of exploitation of labour

Dominant role of the state


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3. MIXED ECONOMY

Private and the state ownership of means of production

Co-existence of private and public sectors.

Decisive role of market and supportive role of planning.

Profit induced private business

Production in the state sector guided by social benefit

The interventionist role of the state

MODERN ECONOMIC GROWTH

Prof. Simon Kuznet has defined a countrys economic growth as along-term rise in capacity to supply increasingly diverse economic

goods to its population, this growing capacity being based on

advancing technology and the institutional and ideological adjustments

that it demands.


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The six characteristics of modern economic growth according to

Simon Kuznet:

i.) High rates of growth of per capita output /income.

ii.) High rates of increase in total factor productivity, especially labour productivity

iii.) High rates of structural transformation of the economy : some of the major

components include the gradual shift from agricultural to non-agricultural

activities; a significant change in the scale or average size of productive units

and a corresponding shift in the occupational status of the labor force.


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iv.) High rates of social & ideological transformation i.e. change in

attitudes, institutions & ideologies.

v.) The propensity of economically developed countries to reach out

to the world for markets and raw materials.

vi.) Limited international spread of economic growth: unequal

international power relationships between developed and underdeveloped

countries have a tendency to exacerbate the gap between the rich and the

poor. Economic growth of the former is often achieved at the expense of

the growth of the later.


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Characteristics of Underdeveloped Economies:

i) Dominance of Agriculturei) Exports dominated by primary products: adverse trade

terms and strain on balance of payments situation.ii) Low capital accumulation: low levels of capital

accumulation lead to low productivity as well as poverty,but they are also caused by poverty as capital

accumulation requires investment and saving which isdifficult for poor societies.iii) Rapid population growth and high dependency ratio.

Three phases of demographic transition:

a) High birth rate & high death rateb) High birth rate & low death ratec) Low birth rate & low death rate


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A larger population, mostly unskilled, is a burden on theeconomic resources, reduces savings and puts a strain on

government expenditure.Problem of Disguised Unemployment.

v) High and rising levels of unemployment and

underemploymentvi) Low level of labour productivityvii) Low levels of livingviii) Backward technologyix) Low income & unequal distribution of income:

Prof. Amartya Sen has observed- It is not the lack of foodthat leads to starvation and malnutrition but the lack ofpurchasing power.

Th f E i G h


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The stages of Economic Growth:

i) Traditional: ceiling on productivity due to the limitations ofscience. In such societies a very high proportion of theworkforce is in agriculture, there is little mobility or socialchange, there is great division of wealth and

decentralized political power.

ii) Transitional stage: it requires the level of investment to beraised atleast 10 percent of national income to ensure

self- sustaining growth. The direction of investment mustbe mainly in transport and other social overhead capitalto build up societys infrastructure.

iii) Take-off stage: growth becomes self-sustaining, investmentmust rise to over 10 percent of national income so as to

ensure a high per capita income and consequent guaranteeof adequate levels of saving and investment for the future.Also important is the establishment of leading growthsectors.


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The stage of Maturity: the period when society haseffectively applied the range of modern technology to

most of its resources. There are changes in thedistribution of the workforce, growth of urbanpopulation, an Increase in the proportion of whitecollar workers and politically nations grow confidentand assert themselves.

v) Stage of High Mass Consumption: This stage is inevitableas more and more wealth is created.

The above thesis has been mainly criticized for the factthat the differences between different stages are too thinto be identified. However, it gives a good insight into thedevelopment process.

NATIONAL INCOME AND ITS COMPONENTS


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NATIONAL INCOME AND ITS COMPONENTS

The end result of economic activity is the production ofgoods and services and the distribution of those goods andservices to the members of the society. All branches ofeconomics are concerned in one way or another with outputand income.

Definition: The measure of the money value of the total flow ofgoods and services produced in an economy over a specifiedperiod of time is known as NATIONAL INCOME.

The basic problem in Macroeconomics is the determinationof total employment, output and the price level and the basictheory is that of determination of national income throughaggregate demand and aggregate supply.

If the economic goods comprising the


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If the economic goods comprising the

national income are analysed during theprocess of their creation in various branches

of the economy, relative to the services ofdifferent factors of production employed, thenational income measures the

PRODUCTIVITY of the system.

If the national income is analysed in itsdistribution phase, as a flow of money

incomes from producing units to variousfactors of production, it appears as ameasure of EQUITABLENESS of the existing

social and economic order.


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If the economic goods are analysed in the

process of their consumption by the people ofthe economy or their addition to theeconomys capital, the national income

appears as a measure of ECONOMICWELFARE.An examination of these three phases ofnational income is essential for any balancedappraisal of the economys operations.


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Measurement of National Income:

Output, income and expenditure are threeimportant macroeconomic concepts. Firmsproduce goods & services, which in total arethe nations output (P). Production requiresfactors of production whose owners are paidfor services provided and it thus generates

income I. The expenditure E is incurred bythe people to buy the nations product.


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Thus, national income can be measured in

three different ways: (a) the Outputmethod, (b) the Income method and the

Expenditure method. Each method gives the

same measure of NI.

Thats why we have:

GNP = GNI = GNE


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Estimation of National Income in India.

Indian economy has been divided into 13broad industrial divisions classified underprimary, secondary and tertiary sectors.

PRIMARY SECTOR

1. Agriculture, livestock & allied activities (P)2. Forestry and logging (P)

3. Fishing (P)4. Mining and Quarrying (P)

SECONDARY SECTOR


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SECONDARY SECTOR

5. Manufacturing (P)

6. Construction (P+E)7. Electricity, gas and water supply (I)

TERTIARY SECTOR

8. Transport, storage and communications (I)9. Trade, hotels & restaurants (I)10. Banking and Insurance (I)

11. Real estate, ownership of dwellings andbusiness services (I)

12. Public administration and defence (I)

13. Other services.

Ei ht i t f N ti l P d t A t


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Eight variants of National Product AggregatesGross Domestic Product (GDP) at Market Prices(MP)

at Factor cost (FC)

Gross National Product (GNP) at Market Prices

at Factor cost

Net Domestic Product (NDP) at Market Prices

at Factor cost

Net National Product (NNP) at Market Prices

at Factor cost

We can s m p the diffe ence bet een G oss &


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We can sum up the difference between Gross &Net, Market Prices & factor cost and National &Domestic concepts in the following way:Gross = Net + DepreciationMarket Prices = Factor Cost + Indirect taxessubsidies

National = Domestic + Net Factor Income fromAbroad. GDP at m.p. + NFIA

EQUALSGNP at m.p. Net Indirect TaxesEQUALSNNP at f.c. (popularly known as National Income)

A From the following figure compute:


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A. From the following figure compute:a) GDP at Factor Costb) National Income

c) Personal Disposable IncomeRs. (Crore)

GNP at Market Prices 5000

Personal Income Tax 1000Corporate Taxes 800Subsidies 400Factor Income Paid Abroad 800Factor Income received from Abroad 900Undistributed Profit 200Indirect Taxes 450

Depreciation 350

a) GDP at f c = GNP at m p IT +subsidies-


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a) GDP at f. c. GNP at m. p. IT +subsidiesNFIA

= 5000-450+400 (900-800)

= 4850 cr.b)NI = NNP at factor cost

= GNP at f.c. Depreciation

= (GNP at at m.p. IT + subsidies)-Dep.= 4950350 = 4600 cr.

c) Personal Disposable Income = PersonalIncome Personal TaxesPersonal Income = NI Undistributed ProfitCorporate Taxes = 4600-200-800 =3600 cr.

PDI = 3600 1000 = 2600 cr.


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Q. In an economy which has a capital-output

ratio of 4:1, population is expected to grow

at 2.1% p.a. If the planners fix a target

growth rate of 5% p.a. in per capita real

GDP, compute the rate of Investment (i.e.)

Investment as %age of GDP) required to

achieve the target.


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Growth required in GDP to achieve target percapita GDP growth = 5% + 2.1% = 7.1% p.a.

Capital Output ratio = 4 : 1

The required rate of interest as a %age of GDP =(Required GDP growth rate) x (Capital Output

ratio)

4 x 7.1 = 28.4 %


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Q. The following data pertains to an economy

Rs. (cr.)

GDP at m.p. 6000

Corporate Income Tax 1200

Personal Income Tax 900

Subsidies 475

Factor Income Recd. from abroad 1500

Factor Income paid abroad 1200

Undistributed profits 225

Indirect Taxes 900

Depreciation 600

Required to compute:


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Required to compute:a) Personal Disposable Income b) National

Income c) GNP at m.p.

a) GNP at m.p. = GDP at m.p. + NFIA= 6000 + 1500 1200 = 6300 cr.

b) NI = NNP at factor cost = GNP at m.p. Indirect Taxes + subsidies- Depreciation

= 6300900 + 475600 = 5275 cr.

c) PDI = NI Retained earning (UP)corporate taxes Personal Taxes

= 5275 2251200900 = 2950 cr.

Q F th 2001 02 th N ti l A t


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Q. For the year 2001-02, the National AccountsStatistics at current prices for an economy

were as follows: Rs.(Cr.)NNP at f.c. 4,73, 246Depreciation 61, 809

Subsidies 19, 431Net factor income from abroad (-) 6, 833Indirect Taxes 87, 043

Personal Income Taxes 9, 759Corporate Taxes 7, 300Retained profits 6, 758


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Calculate the following:

GNP at market prices

NNP at m.p

NDP at m.p.

NDP at f.c.

GNP at f.c.Personal Disposable Income


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a) GNP at m.p.= NNP at f.c. + Dep.subsidies +IT

= 4,73,246 + 61,809 19,431 + 87,043

= 6,02,667 cr.

b) NNP at m.p.= GNP at m.p Dep.= 6,02, 667 61,809 =5,40, 858 cr.

c) NDP at m.p.= NNP at m.p. NFIA= 5,40,858 (-6833) = 5,47, 691 cr.


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d) NDP at f.c.= NNP at f.c. NFIA= 4,73,246 (6833) = 4,80, 079 cr.

e) GNP at f.c.= NNP at f.c. + Dep.= 4, 73, 246 + 61, 809 = 5, 35, 055 cr.

f) PDI = NNP at f.c. Corporate taxesRetained profits Personal

Income Tax

= 4,73,246-7300 6758 97 59

= 4,49, 429 cr.


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Balance of Payments

BOP is a statistical statement of a countrystrade & financial transactions with rest of theworld over a period of time, usually one year.

BOP a/c is divided up into two main parts:

i. Current Accountii. Capital Account


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CURRENT ACCOUNT is made up of 3 components:

a) The VISIBLE TRADE balance indicates thedifference between the value of exports andthe value of imports of goods. Exports are

normally calculated free on board (f.o.b), i.e.the costs of transportation, insurance etc. areexcluded, whereas imports are normallycalculated at cost, insurance, freight (c.i.f.),

i.e. the costs of transportation, insurance etc.are included.

b) The INVISIBLE TRADE includes


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b) The INVISIBLE TRADE includesearnings from and payments for suchservices as banking, shipping,

insurance, tourism etc. It also includesprofits, interests and dividends onloans & investment.

c) UNILATERAL TRANSFERS are receiptsfor which residents of a country donthave to make any payments in return.

These are usually in the forms of giftsor grants. The current account mayshow a surplus or deficit for any given

year.


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CAPITAL ACCOUNT

The Capital A/c (i.e. investment & other

capital flows) is made up of items involving

inward and outward flow of currency forinvestments, and grants & loans (such as

from governments of other countries and

international institutions like the WorldBank, IMF etc).


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The BOP on capital A/c shows theimplications of current transactions for the

countrys international financial position.

e.g. The surplus or deficit of the current

account would be reflected in the capitalaccount thru changes in the foreignexchange reserves of the country which

itself signifies the strength or weakness ofa countrys international paymentsposition.


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The main components of capital A/C are :

a) External Commercial Borrowings(ECBs).

b) Foreign Investmenti. Foreign Direct Investment (FDI)ii. Portfolio Investmentiii. Euro equities & others like GDRs.

c) External Assistance

d) IMF loanse) NRI depositsf) Debt service (interest) payments.

BOP ACCOUNT


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BOP ACCOUNT

CREDIT DEBIT

1. Export of goods 500 2. Import 700

3. Xt of services 200 4. Mt of services 200

5. Unrequited receipts 50 6. Unrequited payments 100

7. Capital Receipts 350 8. Capital payments 100

1100 1100


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Balance of Trade = 500-700 = - 200(we have a deficit)

Balance on Current Account:(500 +200+50) (700+200+100) = - 250

Balance on Capital A/C = 350100 =+250

Thus the deficit on current A/C is offset bythe surplus on the Capital A/C.

A t & A d ti C it l


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Autonomous & Accommodating CapitalMovements.

Let out of 350, 100 be autonomous.

Total Autonomous Receipts = 750+100 = 850

Total Autonomous payments = 1100

There we will have to undergo inflow of capital

of 250.Autonomous Capital Movements are ex ante.Accommodating Capital Movements are ex

post.


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INTERNATIONAL INVESTMENTS

The international private capital flows havebeen increasingly rapidly mainly because ofthe favourable business environment

fostered by the global liberalization. Cross-border Mergers and Acquisitions (M&As)have been the major driver of the recentsurge in the FDI.

Broadly, there are the following two types offoreign investment:

a) FDI where the investor has control over


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)

/participation in the management of thefirm.

b) Portfolio investment where the investorhas only a sort of property interest ininvesting the capital in buying equities,bonds or other securities abroad. Theinvestor uses his capital in order to get areturn on it, but has no much control over

the use of the capital. The major portfolioinvestment in the Indian capital market isby the Foreign Institutional Investors

(FIIs).

roa y, ere are ree econom cti f FDI


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motives of FDI:

a) Resources seeking: Historically, the most

important motivation of FDI has been theexploitation of natural resources. However,because of the decline in the importance ofthe primary sector in world output and

development of the indigenous enterprisesin this sector, there has been a decline inthe share of natural resources in FDI.

In many countries, natural resources still

explain much of the inward FDI:developing (e.g. countries in sub-Sahara,Africa, India ), developed (e.g. Australia)and countries in transition (e.g.) Azerbaijan,

Kazakhistan etc.)

b) Market seeking : The lions share of FDI flow


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b) Market seeking : The lion s share of FDI flowto the developing countries goes to thelarger markets with comparatively goodinfrastructure and political stability ingeneral. The growing importance of theservice sector has been resulting in

increasing FDI because of the fact that mostservices arent tradable and, therefore, theonly way to deliver them to foreign markets

is through establishment abroad. However,the highly regulated nature of the servicessector has been a deterrent to the FDI flowin its full potential.

C) Efficiency seeking: Low cost of production


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C) Efficiency seeking: Low cost of production,deriving mostly from cheap labour, is the

driving force of FDIs in many developingcountries. Export Processing Zones &Special Economic Zones have beendeveloped by developing countries mostly

to take advantage of the efficiency seekingFDI inflows.

Besides, several other factors like thepolitical environment, government policies,bureaucratic culture, social climate etc. arealso important determinants of FDI.

Commandments of Foreign Direct


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Commandments of Foreign DirectInvestment

1. Stable, predictable macro economic policy:Cos. must have the confidence that theeconomy will be managed in a competent &predictable way. Investors must believe thatthe rules of the game will not change in themiddle of a contest.

2. An effective and honest government mainlyin terms of maintaining law & order.

3. A large & growing market: Cos. dont seek


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3. A large & growing market: Cos. don t seekto invest in a market where there is littlepotential to make a profit.

4. Freedom of activity in the market: thefreer the market, the more attractive itbecomes as an investment site forinternational investors.

5. Property rights & protection: Private

property must be protected. The likelihoodthat a companys real or intangible (patents,copyrights etc.) property will be stolenmust be avoided.

6. Reliable Infrastructure


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7. Availability of high-quality factor ofproduction: the quality of the indigenous

work force and the availability of localraw materials are also key ingredients inthe recipe for success.

8. A strong local currency.

9. The ability to remit profits, dividends &interest.

10. Freedom to operate between markets : A

co. must be able to source goods & servicesfrom its operating unit in one market inorder to serve other markets or to maximizeits global efficiency by trading among its

operating entities in different countries.

Regional Economic Arrangements


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Regional Economic Arrangements

FREE TRADE AREA

A free trade area is a formal agreementamong two or more countries to reduce or

eliminate customs duties and nontariff tradebarriers among partner countries.

However, member countries are free to

maintain individual tariff schedules forcountries that dont belong to the free tradegroup.


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One fundamental problem with this

arrangement is that a free trade area can

be circumvented by nonmember countries

that can export to the nation having the

lowest external tariff in a FTA, and thentransport the goods to the destination

country in the FTA without paying the

highest tariff applicable if it had gonedirectly to the destination country.

In order to stem foreign companies from


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In order to stem foreign companies from

benefiting from this tariff-avoiding method

of exporting, local content laws are usuallyintroduced. These laws require that in

order for a product to be considered

domestic, a certain percentage or moreof the value of the product should be

sourced locally within the FTA. Thus, these

laws are designed to encourage foreign

exporters to set up their manufacturing

locations in the FTA.

The North American Free Trade Agreement


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The North American Free Trade Agreement(NAFTA) is the free trade agreementamong Canada, the US & Mexico.

European Free Trade Association (EFTA)comprising Iceland, Liechtenstein, Norway

& Switzerland. MERCOSUR is a FTA consisting of Brazil,

Argentina, Uruguay and Paraguay, with an

automatic schedule for the lowering ofinternal trade barriers and the ultimate goalof creating a customs union.

Probably one of the most ambitious FTA is


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Probably, one of the most ambitious FTA isin making. The Free Trade Area of the

Americas (FTAA) was proposed in Dec.1994 by 34 countries in the region as aneffort to unite the economies of theWestern Hemisphere into a single FTA.

Japan has never been keen on regional freetrade area agreements because it prefers a

broader multilateral free trade regime asespoused by WTO.

CUSTOMS UNION


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CUSTOMS UNION

When members of a FREE TRADE AREAadd common external tariffs to theprovisions of a FTA, then the FTA becomesa Customs Union.

Members of a customs union not only havereduced or eliminated tariffs amongst

themselves, but they also have a commonexternal tariff of countries that are notmembers of the customs union.

This prevents nonmember countries from


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This prevents nonmember countries fromexporting to member countries that havelow external tariffs, with the goal of sendingthe exports to a country that has a higherexternal tariff through the first country thathas a low external tariff.

ASEAN comprising of Brunei, Cambodia,Indonesia, Laos, Malaysia, Myanmar, the

Philippines, Singapore, Thailand andVietnam is a good example of a currentlyfunctional Customs Union with the goal of aCommon Market.


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The Treaty of Rome of 1958, which formed

the European Economic Community,

created a Customs Union between West

Germany, France, Italy, Belgium,Netherlands & Luxembourg.

COMMON MARKET


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As cooperation increases among the countriesof a customs union, they can form a common

market.

A Common Market eliminates all tariffs andother barriers to trade among members of the

common market, adopts a common set ofexternal tariffs on nonmembers and removesall restrictions on the flow of capital andlabour among member nations.

The 1958 Treaty of Rome that created theEEC had the ultimate goal of creating acommon market a goal that was achieved

by the formation of European Union.

EU M b


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EU Members

1. Austria 6. Germany 11. Netherlands

2. Belgium 7. Greece 12. Portugal

3. Denmark 8. Ireland 13. Spain

4. Finland 9. Italy 14. Sweden

5. France 10. Luxembourg 15. UK of Great Britain &

Northern Ireland

Ten countries have joined theEU on 01-05-04:


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1. Cyprus 21. Lithuania

2. Czech Republic 22. Malta

3. Estonia 23. Poland

4. Hungary 24. Slovakia

5. Latvia 25. Slovenia

England

Wales

Scotland

Northern Ireland

Great

Britain

MONETARY UNION


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The Maastricht Treaty also laid down rules

for, and accomplished, the creation of amonetary union with the introduction of theeuro-a new European currency in January1999, which began its circulation in Jan.2002. Britain, Greece, Denmark andSweden havent opted for it.

A Monetary Union represents the fourthlevel of integration, with a single commoncurrency among politically independent

countries.


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In strictly technical terms, a monetary

union doesnt require the existence of acommon market or a customs union, a free

trade area or a regional cooperation for

development. However, it is the logical next

step to a common market becoz it requires

the next higher level of cooperation amongmember nations.

POLITICAL UNION


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POLITICAL UNION

The culmination of the process ofintegration is the creation of a politicalunion, which can be another name for a

nation when such a union truly achieveslevels of integration on a voluntary basis.

The ultimate stated goal of the MaastrichtTreaty is a political union with the adoptionof a constitution for an enlarged EuropeanUnion.

Currently Britain & France remain the


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Currently, Britain & France remain theprincipal opponents of ceding any part of

the sovereignty of the nation-state to anyenvisaged political union.

Although Germany, one of the leadingproponents of further European integration,wants to see a framework of the Europeansecurity and defense policy developed,other member countries have reservationsabout such a policy.

As the stark display of pubic disunity over


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As the stark display of pubic disunity over

the Iraq issue, tinged with personal rivalry

among the European political leadership,

has amply shown, EUs efforts to draft an

ambitious constitution face a majorroadblock, compounded by differences

rooted in national tradition, geography and

public opinion.

SE Asian CrisisTh Th i M lt D


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The Thai Melt Down

Appreciation of Yen Cheap Thai Labour High Return in Thailand

Japanese FDI Portfolio Short-term

Investment funds

Overheating of Thailand Economy

Over-building Rise in labour Indiscriminate

Of industries cost lending

These resulted in:


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1.INFLATION 2.REAL ESTATE BUBBLE

+ Cheap Chinese

exports

Exports suffer & Real estate crash

Imports rise Bank failures

Large current A/c

Deficit PANIC

Run on Baht Depreciation of Baht.

macro ppt final

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