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.