International Business

Chapter Four

The Economic Environment Facing Business

Elements of the Economic Environment

Gross Domestic Product and Gross National Income GDP/GNI growth Per capita income Purchasing Power Parity Human Development (HDI of UNDP) Green measures of development

Features of an Economy
Implication of the following factors for managers: Inflation/deflation: price index and cost of living, Unemployment: civilian labor force, labor regulations Debt: internal and external debt Income distribution/inequality: globally, within the country, GINI index, urban vs. rural Poverty: definition, do poor have any potential? Labor costs Productivity Balance of Payments

Purchasing Power Parity

PPP is the number of units of a countrys 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?

Human Development Index and Inequality

The human development index (HDI) provides a more comprehensive measure that incorporates both economic and social variables. It is designed to capture long-term progress rather than shortterm changes. HDI is a composite given by income, education and life expectancy at birth. Inequality in the world: GINI index, ratio between top 20% and bottom 20%.

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 Records a countrys international transactions amongst companies, governments, and/or individuals Concept of trade surplus and trade deficit
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Balance of Payments (BOP) Account A. Current Account

Merchandise Trade Services Unilateral Transfer

C. International Reserve
Gold, Silver, and Precious Metals Foreign Currency Special Drawing Rights (SDR)

B. Capital Account
Portfolio Investment Direct Investment Short term loans

D. Net Statistical Discrepancy

Equation: A+B = C+D BOP Account must balance

Types of Economic Systems

Economic system: the set of structures and processes that guides the allocation of scarce resources and shapes the conduct of business activities in a nation

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
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Evaluating Market, Mixed and Command Economy

Criteria
Economic Freedom Ownership of means of Production Role of Price in the System Role of Government Trade and Investment Policy Monetary and Fiscal Policy

Market Mixed

Command

Economic Freedom

Refers to the extent of government control exercised on the economic activities of the people. Heritage Foundation Measures it on the basis of the following 10 criteria.
Business Freedom Monetary Freedom Fiscal Freedom Investment Freedom Freedom from Corruption Trade Freedom Freedom from government Property Rights Financial Freedom Labor Freedom

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World Economy in Transition

Role of state in managing the economy Economies are shifting from a command or mixed economy to a freer market economy Rise of Emerging Markets are noticeable (G20 over G8) Will BRIC nations control the future?

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Chapter 4: Discussion Questions

1.

2.

3.

4.

Discuss the Features of an Economy and their implication for an international business manager. Explain the Balance of Payments account with its four subheads. Why is it important to in international business manager? What are the three types of economic systems? How can we evaluate them? Explain. What changes are evident in the world economy today? Explain this in view of the rise of the emerging nations, BRIC, and G20.
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