The Economic Environment: Developed by Cool Pictures & Multimedia Presentations

Chapter 4
The Economic
Environment
Developed by Cool Pictures & MultiMedia Presentations Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved.
The World Economic Pyramid
Annual per Capita Income* Tiers Population in Millions
More Than $20,000 75-100
$1,500-$20,000 1,500-1,750
Less Than $1,500 4,000
*Bases on Purchasing power parity in U.S. $.

SOURCE: U.N. World Development Reports
Major Industrialized Countries
of the World
Market Characteristics
• Population demographics
– Age distribution, life expectancies,
household size, urbanization.
• Income
– Distribution of low, medium, and high incomes.
– Gross domestic product per capita.
– Purchasing power parity.
• Consumption patterns
– Income spent on necessities and luxuries.
– Product saturation or diffusion.
– Product form differences.
Market Characteristics (continued)
• Availability and quality of infrastructure

– Rail traffic networks for distribution capabilities.
– Communication systems for marketing.
– Energy (electrical and fuel) consumption.
• Foreign involvement in the economy
– Degree of foreign direct investment in country or in a
specific industry.
– Rules governing foreign investment.
• Impact of the economic environment on social development
– Urbanization, life expectancy, literacy rates, etc.
– Physical Quality of Life Index (PQLI).
Regional Economic Integration
• Levels of economic integration

– Free Trade Area
• Least restrictive.
• Goods and services are freely trades among all members. Each
country maintains its own trade barriers for nonmembers.
– Customs Union
• Members establish a common trade policy with respect to
nonmembers.
– Common Market
• Factors of production mobility is emphasized. A common external
tariff is adopted.
– Economic Union
• Integration and harmonization of economic and monetary policies is
achieved leading to political union.
Free Trade Area
• Eliminates tariff and quota barriers

among member countries.
• Each country is free to set its own
tariff and quota barriers against
nonmember countries.
• Can be formed for certain classes
of goods or services only.
Customs Union Area
• Tariff and quota barriers among member countries

are eliminated.
• Member countries establish common tariff and trade
barriers against nonmember countries.
• Tariff revenues are shared among members
according to a prescribed formula.
Common Market Area
• No trade barriers among member nations.

• No restriction on the movement of labor, capital, or
technology across borders.
• Member countries establish common tariff and trade
barriers against nonmember countries.
Economic Union
• Has all the characteristics of a common market.

• Harmonizes taxation.
• Harmonizes government spending.
• Harmonizes monetary policies.
• Establishes a common currency.
European Integration
• Expected economic growth from:

– Eliminating transaction costs.
– Economies of scale will be attained as production
becomes concentrated.
– More intense competition from EU companies.
• Operations from one country can be freely expanded
to other countries.
• Products can be freely sold across borders to millions
of new consumers.
• There is a “Fortress Europe” fear.
North America Integration
• Is for purely economic reasons.

• There are no constituencies for political integration.
• NAFTA.
• “Maquiladoras”.
NAFTA
• The North American Free Trade Agreement (NAFTA)

created the world’s largest free market.
– 390 million U.S., Canadian, and Mexican
consumers and a total output of $10 trillion.
Free Trade Area of the Americas

• An agreement to form a regional trading
zone stretching from Point Barrow,
Alaska to Patagonia, Argentina.
Developed by Cool Pictures & MultiMedia Presentations

 Copyright © 2004 by South-Western, a division of Thomson Learning. All rights reserved.
Integration in Asia
• Association of Southeast Asian Nations (ASEAN)

• East Asia Economic Group
• Asia-Pacific Economic Cooperation (APEC)
• South Asian Association for Regional Cooperation
(SAARC)
Integration in Africa and the
Middle East
• Economic Community of West African States

(ECOWAS)
• Afro-Malagasy Economic Union
• East Africa Customs Union
• West African Economic Community
• Maghreb Economic Community
• Gulf Cooperation Council (GCC)

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Chapter 4

Annual per Capita Income* Tiers Population in Millions

More Than $20,000 75-100

Less Than $1,500 4,000

*Bases on Purchasing power parity in U.S. $.

• Availability and quality of infrastructure

• Levels of economic integration

• Eliminates tariff and quota barriers

• Tariff and quota barriers among member countries

• No trade barriers among member nations.

• Has all the characteristics of a common market.

• Expected economic growth from:

• Is for purely economic reasons.

• The North American Free Trade Agreement (NAFTA)

Developed by Cool Pictures & MultiMedia Presentations

• Association of Southeast Asian Nations (ASEAN)

• Economic Community of West African States

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