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International Business Environments and Operations, 13/e Global Edition

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International Business Environments and Operations, 13/e Global Edition

Chapter Four The Economic Environments Facing Businesses

Copyright 2011 Pearson Education

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To understand the importance of economic analysis To identify the major dimensions of international economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of economic systems To discuss the idea of economic freedom To profile the drivers of economic transition

Copyright 2011 Pearson Education

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Managers study economic environments to estimate how market trends and government policy influence the performance of their companies. A countrys economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms. Economic development directly impacts citizens, managers, companies, policymakers, and institutions.

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Three conditions hamper the development of a universal scheme:Difficulty in stipulating a definitive set of indicators to estimate the performance and potential of a countrys economy. Todays set of perfect measures may prove imperfect tomorrow. Interdependencies complicate interpreting the relationship among elements of the economic environment.Copyright 2011 Pearson Education

Copyright 2011 Pearson Education

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Gross National Income (GNI): the income generated both by total domestic production as well as the international production activities of national companies Gross National Product (GNP): the value of all final goods and services produced within a nation in a given year, plus the income earned by its citizens abroad, minus the income earned by foreigners from domestic production.

Copyright 2011 Pearson Education

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Gross domestic product (GDP): the total value of all final goods and services produced in a country in a given year equal to total consumer, investment, and government spending, plus the value of exports, minus the value of imports.

Copyright 2011 Pearson Education

Per Capita Conversion ` Rate of Change ` Purchasing Power Parity (PPP): The No. of unit of a countrys currency required to buy the same amounts of goods & services in the domestic market that one unit of income would buy in the other county ` Degree of Human Development Base for Human Index: Real Purchasing Power, Education & Health, longevity, knowledge, standard of living, gender related development, gender empowerment, Human Poverty`Copyright 2011 Pearson Education

Green Measures Meet the needs of Present without compromising the ability of future generations to meet their own needs Adjusting GDP for green concerns: 1. Green Net National Product: Natural Resources, Environmental Resources 2. Genuine Progress Indicator: Population Health, Security, Equity, Free Time, Educational Attainment 3. Gross National happiness: Promotion of Cultural values, Spiritual Development 4. Happy planet index: living long & Fulfilling lives`

Copyright 2011 Pearson Education

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Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments

Copyright 2011 Pearson Education

Inflation is the measure of the increase in the cost of living Data: Jan 2010 Dec 2010Country India`

Interest Growth Inflation Jobless Current Exchange Rate Rate Rate Rate Account Rate 5.50% 8.90% 9.47% 8.00% -14 45.69

Expected Growth rate for 2011-2012: 9% ` Cost of Living ` Implications of Chronic/Hyper Inflation ` Price Indexes & Measurement Problems Consumer Price Index is the official measure of the Inflation ` Deflation

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Unemployment: The unemployment rate is the number of unemployed workers who are seeking employment for pay dividend by the total civilian labor force Problems in Measuring Variation in Public Support The Pension Problem

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Internal Debt: Portion of the government debt that is denominated in the countrys own currency and held by domestic residents External Debt: Debt owed to foreign creditors and denominated in foreign currency.

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Copyright 2011 Pearson Education

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Gini Coefficient : Degree of Inequality in Income Distribution in a country Urban vs. Rural Income Inequality

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Copyright 2011 Pearson Education

It is a condition in which a person or community is deprived of, or lacks the essentials for, a minimum standard of well being & life ` World Bank Definition 78% population is poor (Avg. PPP income is < $3470), 11% is middle income & 11% rich (Avg. PPP income is > $8000 annually) ` Poverty and the Economic Environment People struggle for food, shelter, clothing, clean water, health services, education & security The failure result in suffering, malnutrition, mental illness, death, epidemics & war ` The Potential of the Poor`

Bottom of the Pyramid PhenomenonCopyright 2011 Pearson Education

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Labor and Total Costs For many goods and services, the cost of labor is a key element of total costs. Consequently, companies scan the world, looking for markets that offer lower-cost labor.

Copyright 2011 Pearson Education

Productivity measures the efficiency with which products are produced. Impact of Technology on the Productivity

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Officially known as statement of international transactions It is a statement of the balance of countrys trade & financial transaction as conducted by individuals, businesses & government agencies located in that country with the rest of the world over a specified period Current and Capital AccountsCurrent Account: tracks all trade activity in merchandise Capital Account: tracks both loans given to foreigners and loans received by citizens

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BOP and Economic Stability

Copyright 2011 Pearson Education

Copyright 2011 Pearson Education

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A mechanism that deals with the production, distribution, and consumption of goods and services In another term economic system means the set of structure & processes that guide the allocation of resources & shapes the conduct of business activities in country Types: Market economy : Individuals rather than Government make Economic Decision, laissez-faire Command economy: Government owns & controls all resources Mixed economy: Both government & Individuals owns the resources

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The Allure of Market Economies Belief in Free Markets Economic Freedom Index: Absence of government coercion or constraints on the production, distribution or consumption of goods & services beyond the extent necessary for citizens to protect & maintain liberty itself

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Copyright 2011 Pearson Education

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Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom Financial freedom Freedom from corruption Labor freedom

Copyright 2011 Pearson Education

Copyright 2011 Pearson Education

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Return of the Mixed Economy Free-Market Strike Back

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Liberalizing economic activity Reforming business activity Establishing legal and institutional frameworks Success is linked to how well the government deals with:Privatization Regulation Property right protection Fiscal and monetary reform Antitrust legislation

Copyright 2011 Pearson Education