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International Business

Environments & Operations

Chapter 4The Economic Environments

Facing Businesses

Daniels ● Radebaugh ● Sullivan

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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

Difficult to specify definitive set of economic indices that estimate performance and potential of an economy

New challenges when interpreting relationships between estimators in other economic environments

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International Economic Analysis

Economic Factors Affecting International Business Operations

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Elements of the Economic Environment

Different measures used to assess performance and potential Begin with monetary values of total flow of goods and services Refine by considering growth rate, income distribution,

inflation, unemployment, wages, debt, balance of payments

Gross national income (GNI) Income generated both by total domestic production as

well as the international production activities of national companies

value of all production in the domestic plus the net flows of factor income (rents, profits, and labor income) from abroad during a one-year period

The market value of final goods and services prodcued by domestically owned factors of production

the broadest measure of economic activity for a country

Elements of the Economic Environment

Gross domestic product (GDP) the total value of all final goods and services produced

within a nation in a particular year (both domestic and foreign owned companies produce)

Technically, GDP plus the income generated from exports, imports, and the international operations of a nation’s companies equals GNI

GDP is an essential part of GNI

GNI data should be adjusted for the growth rate of the economy the number of people in a country the local cost of living 4-6

Improving the power of GNI Per Capita Conversion

Transform GNI and other economic indicators by the number of people who live in a country

Per capita GNI is converting the GNI into a standard currency (at prevailing market rates) and divide by its population

Rate of change When GNI grows at higher rate than the population,

standards of living are said to be rising Purchasing Power Parity (PPP)

Simple conversion of per capita is misleading Adjust GNI per capita for a country in terms of its local

PPP: The number of units of a country’s currency required to buy the same amounts of goods and services that one unit of income would buy in the other country 4-7

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Performance and Potential of a Country

Degree of Human Development Greater access to knowledge, better nutrition and health services,

secure livelihood, security against crime and violence, political and cultural freedom, recreations

UN Human Development Index measures achievements on three dimensions: longevity, knowledge, and standard of living

Other indexes: Gender development, gender empowerment, human poverty

Green economics Economic performance in terms of the effect of current

choices on long-term sustainability meet the needs of the present without compromising the ability of

future generations to meet their own needs Green net national product, Genuine progress indicator,

Gross national happiness, Happy planet Happynomics

importance of emotional prosperity in addition to financial prosperity

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Inflation Inflation

A general, sustained rise in prices measured against a standard level of purchasing power

A measure of the increase in the cost of living

Measured by comparing two sets of goods at two points in time and computing the increase in cost that is not reflected by an increase if the quality of good

Results when aggregate demand grows faster than aggregate supply

Chronic inflation decreases confidence in a country’s currency

Deflation when prices for products go down not up

Reflation increase the money supply and reduce taxes to

accelerate economic activity

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Unemployment Unemployment rate

Number of unemployed workers seeking employment for pay relative to the total civilian labor force

Misery index the sum of a country’s inflation and unemployment

rates

Inflation depresses economic growth, create social pressures, and increases political uncertainty

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Debt Debt

the total of a government’s financial obligations; measures the stats borrowing from its population, from foreign organizations, foreign governments, and international institutions

internal debt: results when a govt spends more than it collects in the revenues

Reasons: imperfect tax system, costs of security or social programs exceed available tax revenues, state-owned enterprises run deficits

external debt: results when a govt borrows money from foreign lenders

DEBT Growing public debt signals

tax increases reduced growth rising inflation increasing austerity (governess)

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Income Distribution Income distribution

estimates the proportion of the population that earns various levels of income

GNI or PPP per capita report how much income the average person earns but everyone is NOT an average

Gini Coefficient measures the extent to which the distribution of

resources deviates from a perfectly equal distribution

Assess the degree of inequality in the distribution of income in a country

Uneven income distributions exists in almost every country Urban versus Rural income Distribution

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Poverty Poverty the state of having little or no money and few

or no material possessions ~ condition in which a person or community is deprived

of, or lacks the essentials for, a minimum standard of well being in life The essentials can be food, safe drinking water, shelter; social

resources such as education and access to information, healthcare, and social status; opportunity to develop meaningful connections with other people in the society

extreme poverty less than $1.25 per day

moderate poverty less than $2.00 per day (over 3 billion people)

Today the world population is 80% poor, 10% middle income, and 10% rich

Labor Costs and Productivity

Labor Costs: The cost of labor is a key element of total costs Consider labor cost for a factory worker across countries

Productivity: Amount of output created per unit input used Quantity produced per person per labor hour

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Balance of Payments Balance of payments Officially known as Statement of International

Transactions Reports a country’s trade and financial transactions

with the rest of the world (usually over one year) Current account: Tracks all trade activities in

merchandise Capital account: Tracks both loans given to foreigners

and loans received by citizens

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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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Types of Economic Systems

An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services Set of structures and processes that guides the allocation

of resources and shares the conduct of business activities in a country

Spectrum analysis gives a range of economic systems in the world with capitalism and communism on two ends

Major difference between economic systems is in terms of their implications for economic matters such as ownership and control and freedom of prices to balance supply and demand

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Types of Economic Systems

Types of Economic Systems

Capitalism vs Communism

Capitalism: free market system built on private ownership and control Owners of capital have property rights

Communism: centrally planned system built on state ownership of all economic factors of production and control of all economic activity

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Market Economy: Capitalism

In a market economy individuals rather than governments make most economic decisions Capitalism

private ownership of capital Laissez-faire

governmental noninterference in economic affairs

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Command Economy: Communism In a command economy the visible hand

of the state supersedes the invisible hand of individuals Government

owns and controls resources determines prices

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Mixed Economy There are rarely pure capitalist or

communist countries now

Most economies are mixed economies fall between market and command economies

Socialism regulate economic activity with a focus on

social equality and a fair distribution of wealth

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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, and China

developed countries high per capita income and standard of

living like the U.S., Japan, France, Australia