International Business Environments Operations 15 e Daniels

Chapter 4 The Economic Environments Facing Businesses Copyright © 2015 Pearson Education, Inc. 4

Learning Objectives Communicate the importance of economic analysis p Discuss the idea of economic freedom p Profile the characteristics of the types of economic systems p Introduce the notion of state capitalism p Profile leading indicators of economic development, performance, and potential p Copyright © 2015 Pearson Education, Inc. 4 -3

Introduction p Managers assess a country’s economic environment knowing n n n 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 Copyright © 2015 Pearson Education, Inc. 4 -4

International Economic Analysis p A universal assessment of economic environments is difficult because of: n System Complexity p n Market Dynamism p n New economic circumstances Market Interdependence p n Identifying proper indicators is difficult Markets influence each other Data Overload p Complicates decision-making Copyright © 2015 Pearson Education, Inc. 4 -5

Economic Freedom p Economic freedom – people have the right to work, produce, consume, save, and invest the way they prefer n measured across business freedom, monetary freedom, fiscal freedom, investment freedom, freedom from corruption, property rights, trade freedom, government size, financial freedom, and labor freedom Copyright © 2015 Pearson Education, Inc. 4 -6

Economic Freedom by Region, with Population Copyright © 2015 Pearson Education, Inc. 4 -7

Global Distribution of Economic Freedom Copyright © 2015 Pearson Education, Inc. 4 -8

Economic Freedom: Value and Trend Economic freedom affects: Growth rates, Productivity, Income levels, Inflation, Employment, Life expectancy, Literacy, Political openness, Environmental sustainability p The trend toward increased economic freedom is no longer certain n The legitimacy of free markets has been questioned n The benefits of more state control p Copyright © 2015 Pearson Education, Inc. 4 -9

Standard of Living Copyright © 2015 Pearson Education, Inc. 4 -10

Types of Economic Systems p p An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services Types n n n 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 Copyright © 2015 Pearson Education, Inc. 4 -11

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

Types of Economic Systems Copyright © 2015 Pearson Education, Inc. 4 -13

Economic Development, Performance, and Potential p Broad classes of countries include n developing countries p largest number of countries p low per capita income n emerging economies p fast growing, relatively prosperous p BRICS – Brazil, Russia, India, China and South Africa n developed countries p high per capita income and standard of living p like the U. S. , Japan, France, Australia Copyright © 2015 Pearson Education, Inc. 4 -14

The Rise of the Emerging Nations are the center of most economic discussions today p Who are these nations? What is their impact in a globalized world? p Impact of Emerging Markets p n p See my presentation under Teaching Aids BRICS and plus nations

Measures of Economic Performance p Gross national income (GNI) n p Gross national product (GNP) n p the broadest measure of economic activity for a country the total value of all final goods and services produced within a nation in a particular year Gross domestic product (GDP) n the total market value of goods and services produced by workers and capital within a nation’s borders Copyright © 2015 Pearson Education, Inc. 4 -16

Improving Analysis p GNI data should be adjusted for n the growth rate of

GNI Data Copyright © 2015 Pearson Education, Inc. 4 -18

A Divided World Copyright © 2015 Pearson Education, Inc. 4 -19

GNI per Capita, 2011 Copyright © 2015 Pearson Education, Inc. 4 -20

GNI Per Capita, 2011, Adjusted for Purchasing Parity Copyright © 2015 Pearson Education, Inc.

National Performance and Potential: Broader Concepts p p GNI data should be adjusted for n the growth rate of the economy n the number of people in a country n the local cost of living Green economics: gauge economic performance in terms of the effect of current choices on longterm 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 Copyright © 2015 Pearson Education, Inc. 4 -22

Purchasing Power Parity p p p 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 p Managers should also consider n n n Inflation Unemployment Debt Income

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 p Records a country’s international transactions amongst companies, governments, and/or individuals p Concept of trade surplus and trade deficit p 25

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Chapter 4: Discussion Questions 1. 2. 3. 4. 5. Define “economic freedom” and explain its implication in an economy. What are three types of economic systems? What criteria can we use to evaluate them? Explain. Discuss the impact of “emerging nations” in a globalized world. Explain how we can evaluate an economy using traditional and nontraditional(broader) measures of economic performance. Explain the Balance of Payments account of a country with its four subheads. Why is it important to in international business manager? 27

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