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Page 1Powerpoint Templates

The EconomicEnvironments Facing

BusinessesSe s s i o n 0 7

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Todays agenda

Chapter 4

Homework

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Chapter 4Learning objectives

1. Communicate the importance of economic

analysis

2. Discuss the idea of economic freedom

3. Profile the characteristics of the types of

economic systems

4. Introduce the notion of state capitalism

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Chapter 4Learning objectives

5. Profile leading indicators of economic

development, performance, and potential

6. Profile the benefits and drawbacks of

economic growth

7. Profile leading global indices of economic

performance

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Chapter 4

1. Economic analysis

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Chapter 4The importance of economic analysis

Managers assess a country

s economicenvironment knowing:

Countries differ in different ways

Economic and political changes alter market

circumstances

It is important to understand connections,

change, and consequences

The challenges of the comeback

Choices of citizens, policymakers, and

institutions

What should managers know?

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Universal assessment of economicenvironments is difficult because of:

System Complexity

Identifying proper indicators is difficult

Market Dynamism

New economic circumstances

Market Interdependence

Markets influence each other (butterfly effect)

Data Overload

Complicates decision-making

Why is it difficult?

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Do you remember graphic from page 6?

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Chapter 4

2. Economic Freedom

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Chapter 4Economic freedom

Definition: people have the right to work,produce, consume, save, and invest the waythey prefer

10 dimensions of EF:

Business freedom,

Monetary freedom,

Fiscal freedom,

Investment freedom,

Freedom from corruption,

What is Economic Freedom?

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Definition: people have the right to work,

produce, consume, save, and invest the waythey prefer

10 dimensions of EF:

Property rights,

Trade freedom,

Government size,

Financial freedom,

And labor freedom

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Chapter 4Global distribution of economic freedom

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Chapter 4Value of economic freedom

Economic freedom affects

Growth rates

Productivity

Income levels

Inflation

Employment

Life expectancy

Literacy

Political openness

Environmental sustainability

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Chapter 4Trends in economic freedom

The trend toward increased economic freedom is

no longer certain

Questions about the legitimacy of free

markets (2009 financial crisis)

The benefits of more state control

Do you believe in economic freedom?

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Chapter 4Economic freedom: Standard of living

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Chapter 4

3. Types ofeconomic systems

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Chapter 4Types of economic systems

Definition: an economic system refers to the

mechanism that deals with the production,

distribution, and consumption of goods and

services

3 types of economic systems:

1. Market economy

2. Command economy

3. Mixed economy

What is an economic system?

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Chapter 4Types of economic systems

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Chapter 4Market economy

In a market economy individuals rather than

governments make most economic decisions

Capitalism

private ownership of capital

Laissez-faire

governmental noninterference in

economic affairs

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Chapter 4Property rights example

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Chapter 4Command economy

In a command economy the visible hand of

the state supersedes the invisible hand of

individuals

Government

owns and controls resources

determines prices

Communism

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Chapter 4Mixed economy

Most economies are mixed economies

Fall between market and command economies

Socialism

regulate economic activity with a focus

on social equality and a fair distribution

of wealth

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Chapter 4

4. State capitalism

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Chapter 4State capitalism

State capitalism refers to a system in which the

government explicitly manipulates market

outcomes for political purposes

promote certain industries to encourage

economic development

develop national companies into global

leaders

foreign companies restricted from strategic

industries

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Chapter 4State capitalism example

The government of Norway has ownership

stakes in many companies:

37% of the Oslo stock exchange

67% of Statoil, world's 11th largest oil andgas company (by Forbes / 36 countries)

100% of Statkraft, the 3rd largest energy

producer in the Nordic region, and the

largest energy producer based on

renewable energy sources in Europe

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Chapter 4

5. Economic Development,Performance, and Potential

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Chapter 4Economic Development,

Performance, and Potential

Broad classes of countries include:

developing countries largest number of countries

low per capita income

emerging economies fast growing, relatively prosperous

BRICs Brazil, Russia, India, and China

developed countries

high per capita income and standardof living

like the U.S., Japan, France, Australia

In which class of countries is Mexico?

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Chapter 4Emerging Market Index

Is it better to be a developed or an emerging economy?

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Chapter 4Developed Vs Emerging economies

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Chapter 4Developed Vs Emerging economies

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Chapter 4A global vision of long term growth

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Chapter 4Gross national income (GNI)

Gross national income (GNI)

measures the income generated bothby total domestic production plus theinternational production activities ofnational firms,

It is the market value of all finalgoods and services newly producedby a countrys domestically-owned

firms plus the net flows of factorincome (i.e., rents, profits, andlabor income) in a given year.

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Chapter 4Gross national product (GNP)

Gross national product (GNP)

It is the value of all final goods andservices produced within a nation ina given year, plus the incomeearned by its citizens abroad, minusincome earned by foreigners.Although GNI and GNP areconceptually equal, they are often

calculated differently

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Chapter 4Gross domestic product (GDP)

Gross domestic product (GDP)

It measures the value of goods andservices generated by bothdomestic and foreign-owned firmswithin a nations borders in a givenperiod, usually a year.

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Chapter 4Improving analysis

GNI data should be adjusted for

the growth rate of the economy

the number of people in a country

the local cost of living (PPP)

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Chapter 4Only GNI

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Chapter 4A divided world

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Chapter 4GNI per capita

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Chapter 4GNI per capita adjusted for purchasing parity

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Chapter 4Improving analysis

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Chapter 4Improving Broader Conceptionsof Performance and Potential

Green economics

gauge economic performance interms of the effect of currentchoices on long-term sustainability

Sustainable development

meet the needs of the presentwithout compromising the ability offuture generations to meet theirown needs

Happynomicsimportance of emotional prosperity

in addition to financial prosperity

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Chapter 4Economic analysis

Managers should also consider

Inflation

Unemployment

Debt

Income distribution

Poverty

Balance of payments

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Chapter 4Inflation

Inflation

a measure of the increase in thecost of living

Deflation

when prices for products go downnot up

Reflationincrease the money supply and

reduce taxes to accelerateeconomic activity

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Chapter 4Unemployment

Unemployment rate

share of unemployed workers

seeking employment for pay relative

to the total civilian labor force

Misery index

the sum of a country

s inflation and

unemployment rates

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Chapter 4Debt Debt

the total of a governmentsfinancial obligations

internal debt

external debt

Growing public debt signals

tax increases

reduced growth

rising inflation

increasing austerity

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Chapter 4Income distribution

Income distribution

estimates the proportion of thepopulation that earns various levels

of income

Gini coefficient

measures the extent to which the

distribution of resources deviates

from a perfectly equal distribution

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Chapter 4Poverty

Poverty the state of having little or nomoney and few or no material

possessionsextreme poverty

less than $1.25 per day

moderate poverty

less than $2.00 per day

Today the world population is 80% poor,

10% middle income, and 10% rich Base of the Pyramid

Frugal engineering

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Chapter 4Example of frugal engineering

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Chapter 4

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Chapter 4Balance of Payments (BOP)

Balance of payments

reports a countrys trade andfinancial transactions with the restof the world

Current account

tracks merchandise trade

Capital account

tracks loans given to foreigners andloans received by citizens

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Chapter 4Components of a Country

s BOP

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Chapter 4Current Account Balances:The Top and Bottom Five

Ch

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Chapter 4Why do managers use BOP?

BOP and Economic Stability

Managers use the BOP to assess acountrys economic stability.

By measuring a countrystransactions with the rest of theworld, the BOP estimates acountrys financial stability.

BOP and Company Strategy

Monitoring trends in BOP givesmanagers more data in order tochart strategic choices.

Ch t 4

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Chapter 4Why do managers use BOP?

BOP and Economic Stability

Managers use the BOP to assess acountrys economic stability.

By measuring a countrystransactions with the rest of theworld, the BOP estimates acountrys financial stability.

BOP and Company Strategy

Monitoring trends in BOP givesmanagers more data in order tochart strategic choices.

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Questions

Do you haveany questions?

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Homework

Upload BOP exercise on BB

And prepare the

Quiz 2 on Chapter 4!

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Thank you for

your attention

Documents

Session 07