Module 1C - IB Environment - Economic

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International Business Environment

Economic
International Business
In this session
Elements of Economic
Environment
Levels of Economic Freedom
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Elements of Economic Environment

1. Gross Domestic Product 8. Income Distribution
2. Purchasing Power Parity 9. Poverty
3. Degree of Human 10. Consumption pattern
Development 11. Population
4. Inflation 12. Unemployment
5. Debt 13. Labour Costs &
6. Balance of Payments Productivity
7. Type of Economic
Systems
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1. Gross Domestic Product

Total value of all goods and services produced within a
nation’s borders over one year, no matter whether domestic
or foreign owned companies make the product.
2018
Source:
https://knoema.com/nwnfkne/world-gdp-ranking-
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Real GDP Growth Rate
Source:
https://commons.wikimedia.org/w/index.php?curid=68753479
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2. Purchasing Power Parity (PPP)

PPP is the no. of units of a country’s currency required to buy
the same amounts of goods and services in the domestic market
that one unit of income would buy in the other country
2018
India (2017)
Per capita GDP - $ 2036
(ranked 140)
Per capita PPP GDP - $ 7873
(ranked 123)
Source:
https://knoema.com/nwnfkne/world-gdp-ranking-
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Income Classification based on per
capita nominal GNI – World Bank
❑ Low income <=$1,025
❑ Lower middle-income: $1,026 - $4,035
❑ Upper middle-income: $4,036 - $12,475
❑ High-income economies: >=$12,476
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3. Degree of Human Development

❑ Human Development Index [HDI] measures
the country in three dimensions
❖ Longevity – measured by life expectancy at birth
❖ Knowledge – adult literacy rate and primary,
secondary and tertiary Gross Enrolment Ratio
❖ Standard of Living – GNI (PPP) per capita
❑ The index was developed in 1990 by
Indian economist Amartya Sen and
Pakistani economist Mahbub ul Haq
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Human Development Index

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Human Development Index

Rank Country HDI
1 Norway 0.953
2 Switzerland 0.944
3 Australia 0.939
4 Ireland 0.938
5 Germany 0.936
6 Iceland 0.935
7 Hong Kong 0.933
7 Sweden 0.933
9 Singapore 0.932
10 Netherlands 0.931
49 Russia 0.816
79 Brazil 0.759 > 0.8 - Very High Human Development
74 Mexico 0.774 0.7-0.8 - High Human Development
86 China 0.752 0.55-0.7- Medium Human Development
113 South Africa 0.699 < 0.55 - Low Human Development
130 India 0.64
157 Nigeria 0.532 10 R Sugant
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4. Inflation
❑ When aggregate demand grows faster than
supply
❑ Too many people chasing too few goods
thereby creating demand that pushes prices
faster than incomes grow
❖ Inflation and cost of living
❖ Implications of chronic inflation
❖ Consumer Price Index & Wholesale Price Index
❖ Problems in measuring inflation
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Inflation – Key Economies

Average
CPI Inflation
2019 (%)
Brazil 3.5
Russia 3.5
India 4.1
China 2.4
S Africa 5.2
USA 2.3
Britain 1.9
Japan 1.3
France 1.3
Germany 1.7
Source:
https://www.imf.org/external/datamapper/PCPIPCH@WEO/WEOWORLD/VEN
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5. Debt
❑ Sum total of a government’s financial
obligations, measures the state’s borrowing
from its population, from foreign
organisations, foreign governments and from
international institutions.
❖ Internal & External debt
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Debt as % of GDP
Source:
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https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORLD/
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Is debt growing faster or slower than the economy?

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6. Balance of Payments
❑ The statement of the balance of a country’s
trade and financial transactions as conducted
by individuals, businesses and government
agencies located in that nation with the rest
of the world over a specific period
❑ Components
❖ Current Account
❖ Capital Account
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Components of a Country's Balance of
Payment
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Current Account
Country
Afghanistan
Balance (%)
-22.50
Current Account
Pakistan
United Kingdom
-5.19
-4.06 Balance as % of GDP
Nepal -3.33
Sri Lanka -2.65
Bangladesh -2.55
Australia -2.47
South Africa -2.46
United States -2.40
India -1.50
France -0.72
Brazil -0.47
China 1.35
Nigeria 2.76
Italy 2.81
Israel 2.96
Malaysia 3.00
Sweden 3.18
Qatar 3.83
Japan 4.02
Korea, Rep. 5.13 Source:
https://data.worldbank.org/indicator/BN.CAB.XOK
Thailand 10.57 A.GD.ZS?type=shaded&view=map
Ireland 12.80
Singapore 18.83 R Sugant
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7. Type of Economic Systems

i. Capitalism
❖ Free market system that allows business competition and
freedom of choice for both consumers and companies.
ii. Communism
❖ All resources should be owned and shared by all people.
i.e.,Government controls all productive assets and
industries and determines jobs, production, price etc.
iii. Socialism
❖ Government owns and operates basic, major industries
and leaves small businesses to private ownership.
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iv. Market economy
❖ Individuals rather than the government make the majority
of economic decisions
❖ Consumers, by virtue of what they do and do not buy,
determine the relationships among price, quantity, supply,
and demand
v. Command/ Centrally planned economy: the
government owns and controls all resources
vi. Mixed economy: virtually all economies have
varying degrees of private and public ownership of
production factors
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8. Income Distribution
❑ Gini Coefficient – the more

nearly equal a country’s
income distribution, the
lower its Gini coefficient.
❑ Urban Vs. Rural income
distribution
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Gini Index
Gini index of 0 represents perfect equality, while an

index of 100 implies perfect inequality.
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Rank Country Gini Index

International Business 1 Sweden 23
2 Slovenia 23.7
Gini 3 Montenegro 24.3
Index 4
5
Hungary
Denmark
24.7
24.8
6 Czech Republic 24.9
7 Norway 25
8 Luxembourg 26
9 Slovakia 26
10 Austria 26.3
36 Bangladesh 32.1
62 India 36.8
Source: CIA
66 Japan 37.6 Fact Book;
Figures are
92 Russia 42 indicative and
101 United States 45 are taken from
different years
110 Singapore 46.3
115 China 23 47.3 R Sugant
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9. Poverty
❑ Condition in which a person or a community
lacks the essentials for minimum standards of
living and well being
❑ 21 percent [1.2 Billion] of people in the
developing world live at or below $1.25 a day
[defined by World Bank as extreme poverty]
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10. Consumption Pattern

❑ Engel’s laws state that as a family’s income
increases:
❖ Percentage spent on food will decrease
❖ Percentage spent on housing and household
operations will be roughly constant
❖ Amount saved or spent on other purchases will
increase
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11. Population
❑ Population ❑ A few facts on India..
❖ Population figures can ❖ Population – 1.3 billion
be classified to show ❖ more than 50% below 25

yrs; more than 65% below
specific characteristics
35 yrs.
of their respective
❖ As of 2020, the average age
markets of an Indian is 29 years,
❖ Age distribution and compared to 37 for China
life expectancy and 48 for Japan
❖ Degree of urbanization ❖ Rural Vs. Urban : 69% Vs
31%
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Source:
US Census
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Demographic Dividend
❑ Ratio of the working age population is high
❑ Dependency ratio in terms of proportion of
children and elderly people low
❑ Create opportunities for increasing
investments in enhancing human capabilities,
resulting in a positive influence on growth and
development.
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Source:
https://www.livemint.com/Opinion/zgCdZ3GrDwtDpQWD95HenO/Opinion--Indias-demographic-dividend-will-play-out-over-a.html
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12. Unemployment
❑ Working age population
❑ Labour regulation
❑ Problems in measuring unemployment
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13. Labour Costs & Productivity

❑ Availability of labour
❑ Labour and total cost
❑ Impact of technology
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Level of Economic Freedom –
Economic Freedom An index developed by
The Heritage Foundation and
The Wall Street Journal
❑ Fundamental right of every human to control his or

her own labor and property.
❑ Measured based on 12 quantitative and qualitative
factors, grouped into four broad categories:
1. Rule of Law (property rights, judicial effectiveness,
government integrity)
2. Government Size (tax burden, government spending,
fiscal health)
3. Regulatory Efficiency (business freedom, labor freedom,
monetary freedom)
4. Market Openness (trade freedom, investment freedom,
financial freedom) 37 R Sugant
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Level of Economic Freedom
Free Mostly Moder Mostly Repressed Not

An index developed by Free ately Unfree Ranked
The Heritage Foundation and Free
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To recap
❑ Elements of Economic ❑ Factors of Economic Freedom
Environment 1. Rule of Law (property rights,
1. Gross Domestic Product judicial effectiveness, government
integrity)
2. Purchasing Power Parity
2. Government Size (tax burden,
3. Degree of Human Development government spending, fiscal
4. Inflation health)
5. Debt 3. Regulatory Efficiency (business
6. Balance of Payments freedom, labor freedom,
monetary freedom)
4. Market Openness (trade freedom,
8. Income Distribution
investment freedom, financial
9. Poverty freedom)
10. Consumption pattern
11. Population
12. Unemployment
13. Labour Costs & Productivity
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Module 1C - IB Environment - Economic

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Module 1C - IB Environment - Economic

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13-02-2020

International Business Environment

Levels of Economic Freedom

Elements of Economic Environment

1. Gross Domestic Product

Real GDP Growth Rate

2. Purchasing Power Parity (PPP)

3. Degree of Human Development

Human Development Index

Human Development Index

Inflation – Key Economies

Is debt growing faster or slower than the economy?

7. Type of Economic Systems

7. Type of Economic Systems

❑ Gini Coefficient – the more

Gini index of 0 represents perfect equality, while an

Rank Country Gini Index

10. Consumption Pattern

be classified to show ❖ more than 50% below 25

13. Labour Costs & Productivity

❑ Fundamental right of every human to control his or

Level of Economic Freedom

Free Mostly Moder Mostly Repressed Not

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