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International Business

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.

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International Business

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  1. International Business Chapter Four The Economic Environment Facing Business

  2. 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

  3. 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

  4. Purchasing Power Parity • 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?

  5. 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 short-term 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%.

  6. 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 country’s international transactions amongst companies, governments, and/or individuals • Concept of trade surplus and trade deficit

  7. 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

  8. Criteria Market Mixed Command Economic Freedom Ownership of means of Production Role of Price in the System Role of Government Trade and Investment Policy Monetary and Fiscal Policy Evaluating Market, Mixed and Command Economy

  9. 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.

  10. 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?

  11. Chapter 4: Discussion Questions 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. 12

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