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8/3/2019 Ch04 the Economic Enviroment
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International Business
Chapter Four
The Economic Environment
Facing Business
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Elements of the EconomicEnvironment
Gross Domestic Product and GrossNational Income
GDP/GNI growth
Per capita income
Purchasing Power Parity
Human Development (HDI of UNDP)
Green measures of development
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Features of an Economy
Implication of the following factors for managers:
Inflation/deflation: price index and cost of living,
Unemployment: civilian labor force, laborregulations
Debt: internal and external debt
Income distribution/inequality: globally, withinthe country, GINI index, urban vs. rural
Poverty: definition, do poor have any potential?
Labor costs
Productivity
Balance of Payments
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Purchasing Power Parity
PPP is the number of units of a countrys currencyrequired to buy the same amounts of goods andservices in the domestic market that $1 wouldbuy 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 haveto earn to buy the same amount of tomato?
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Human Development Index and
Inequality
The human development index (HDI) provides amore comprehensive measure that incorporatesboth economic and social variables. It is designedto 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, ratiobetween top 20% and bottom 20%.
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The Balance of Payments
Reports the total of all money flowing intoa country less all money flowing out of
that country to any other country during agiven period of time
Records a countrys internationaltransactions amongst companies,
governments, and/or individuals Concept of trade surplus and trade deficit
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Balance of Payments (BOP) Account
D. Net StatisticalDiscrepancy
B. Capital AccountPortfolio Investment
Direct Investment
Short term loans
C. International ReserveGold, Silver, and Precious Metals
Foreign Currency
Special Drawing Rights (SDR)
A. Current Account
Merchandise Trade
Services
Unilateral Transfer
Equation: A+B = C+DBOP Account must balance
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Types of Economic Systems
Economic system: the set of structures and processes thatguides the allocation of scarce resources and shapes theconduct of business activities in a nation
Market Economy: a free-market (capitalistic)
economybuilt upon the private ownership andcontrol of the factors of production Command Economy: a centrally-planned
economybuilt upon government ownership andcontrol of the factors of production
Mixed Economy: an economy in which economicdecisions are largely market-driven andownership is largely private, but significantgovernment intervention is still evident
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Evaluating Market, Mixed andCommand Economy
Monetary and Fiscal Policy
Trade and InvestmentPolicy
Role of Government
Role of Price in the System
Ownership of means ofProduction
Economic Freedom
CommandMixedMarketCriteria
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Economic Freedom
Refers to the extent of government controlexercised on the economic activities of the people.Heritage Foundation Measures it on the basis ofthe following 10 criteria.
Business Freedom Trade Freedom
Monetary Freedom Freedom from government
Fiscal Freedom Property Rights
Investment Freedom Financial Freedom
Freedom from Corruption Labor Freedom
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World Economy in Transition
Role of state in managing the economy
Economies are shifting from a commandor 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. Discuss the Features of an Economy and theirimplication for an international businessmanager.
2. Explain the Balance of Payments account with
its four subheads. Why is it important to ininternational business manager?
3. What are the three types of economic systems?How can we evaluate them? Explain.
4. What changes are evident in the world economytoday? Explain this in view of the rise of theemerging nations, BRIC, and G20.