Chapter 2: The Global Economic Environment

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Changes in the World Economy

1. 2. 3.

4. 5.

Emergence of global markets. Integration of world economy. Increased volume of capital movements. End of the Cold War. Diminishing importance of national boundaries due to technological advancements.

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Changes in the World Economy

The new realities: Capital movements have replaced trade as the driving force of the world economy. Production has become uncoupled from employment. The world economy, not individual countries, is the dominating factor. 75-year struggle between capitalism and socialism has almost ended. E-Commerce diminishes the importance of national barriers and forces companies to reevaluate business models
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Economic Systems

1. 2. 3. 4.

Market capitalism. Centrally planned socialism. Centrally planned capitalism. Market socialism.

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Economic Systems
Resource Allocation Market Command Private Resource Ownership State Market Capitali sm Central ly Planne d Capitali sm Centra lly Planne d Sociali sm 5/3/12 55

Marke t Sociali sm

(1) Market Capitalism

Economic system in which individuals and firms allocate resources: Production resources are privately owned. Consumers decide what goods are desired and firms determine what and how much to produce. Role of state is to promote competition and protect consumers.
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(2) Centrally Planned Socialism

Opposite of market capitalism. State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities. Consumers can spend on what is available. Government owns entire industries. Demand typically exceeds supply. Little reliance on product differentiation, advertising, pricing strategy.

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(3) Centrally Planned Capitalism

Economic system in which command resource allocation is used extensively in an environment of private resource ownership. Examples: Sweden Japan

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(4) Market Socialism

Economic system in which market allocation policies are permitted within an overall environment of state ownership. Examples: China India

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Degrees of Economic Freedom

Free

Repressed

Hong Kong Singapore Ireland New Zealand United States United Kingdom Netherlands Australia Switzerland

Bosnia Vietnam Laos Iran Cuba Iraq Libya North Korea Congo

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Stages of Market Development

World Bank has defined four categories of development: Low-income countries. Lower-middle income countries. Upper-middle income countries. High-income countries. Based upon Gross National Product (GNP).

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(1) Low Income Countries

GNP per capita of $785 or less. Characteristics: Limited industrialization. High percentage of population involved in farming. High birth rates. Low literacy rates. Heavy reliance on foreign aid. Political instability and unrest.

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(2) Lower Middle Income Countries

GNP per capita between $786 and $3,125. Sometimes called less-developed countries (LDCs). Characteristics: Early stages of industrialization. Cheap labor markets. Factories supply items such as clothing, tires, building materials, and packaged foods. Examples: Poland, Turkey, Indonesia

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(3) Upper Middle Income Countries

GNP per capita between $3,126 to $9,655. Characteristics: Rapidly industrializing. Rising wages. High rates of literacy and advanced education. Lower wage costs than advanced countries. Sometimes called newly industrializing economies (NIEs). Examples: Argentina, Brazil, Mexico, South Africa.
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(4) High Income Countries

GNP per capita above $9,656. Sometimes referred to as postindustrial countries. Characteristics: Importance of service sector, information processing and exchange, and intellectual technology. Knowledge as key strategic resource. Orientation toward the future.
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Marketing Implications of the Stages of Development

Product Saturation Levels:

The percentage of potential buyers or households that own a particular product. Graph shows that in India a private phone is owned by 1% of the population.
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Influencing the World Economy

1. 2.

3.

Group of Seven (G-7). Organization for Economic Cooperation and Development. The Triad.

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(1) G-7 Countries

Leaders from these high income countries work to establish prosperity and ensure monetary stability: United States Japan Germany France Britain Canada Italy

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(2) Organization for Economic Cooperation and Development (oecd)

30 nations each with market-allocation economic systems. Mission: to enable its members to achieve the highest sustainable economic growth and improve the economic and social well-being of their populations. www.oecd.org

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(3) The Triad

Dominant economic centers of the world: Japan Western Europe United States Expanded Triad: Pacific Region North America European Union

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Leading Exporters and Importers

Exporters United States Germany Japan China France United Kingdom Canada Italy

Importers United States Germany United Kingdom France Japan Netherlands Canada Italy

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Balance of Payments

Record of all economic transactions between the residents of a country and the rest of the world. Current account record of all recurring trade in merchandise and services, private gifts, and public aid between countries. trade deficit trade surplus Capital account record of all longterm direct investment, portfolio investment, and capital flows.
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Example of Balance of Payments*

*Note: U.S. balance of payments statistics for the period 1999 to 2003

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International Finance

Foreign exchange makes it possible to do business across the boundary of a national currency. Currency of various countries are traded for both immediate (spot) and future (forward) delivery. Increases the risk to organizations that are involved in global marketing.
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Foreign Exchange Market Dynamics

Supply and Demand interaction: Country sells more goods/services than it buys. There is a greater demand for the currency. The currency will appreciate in value.

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Purchasing Power Parity (PPP) The Big Mac Index*

*Assumption is that the Big Mac in any country should equal the price of the Big Mac in the US after being converted to a dollar price.

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Managing Economic Exposure

Economic exposure refers to the impact of currency fluctuations on the present value of the companys future cash flows. Transaction exposure is from sales/purchases. Real operating exposure arises when currency fluctuations, together with price changes, alter a companys future revenues and costs.
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Managing Economic Exposure

Numerous techniques and strategies have been developed to reduce exchange rate risk Hedging involves balancing the risk of loss in one currency with a corresponding gain in another currency. Forward Contracts set the price of the exchange rate at some point in the future to eliminate some risk.
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