The Dynamic Environment

of International Trade
Chapter 2

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
BALANCE OF PAYMENTS
1. When countries trade there are financial transactions
among businesses or consumers of different nations
2. Money constantly flows into and out of a country
3. The system of accounts that records a nation’s
international financial transactions is called its
balance of payments (BP)
4. It records all financial transactions between a
country’s firms, and residents, and the rest of the
world usually over a year
5. The BP is maintained on a double-entry bookkeeping
system

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Balance of Payments
The BP is the difference between receipts and payments

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THE WORLD
ECONOMY
 The macro dimensions of the environment
are economic, social and cultural, political,
legal and technological.
• Each is important. But perhaps the single most
important characteristics of the global market is
the economic dimension.
 Without money, many things are impossible
for the marketer.
1. Luxury products, for example, cannot be sold to
low-income consumers.
2. Hypermarkets for food, furniture, or durables
require a large base of consumers with the
ability to make purchase of goods and the
ability to drive away with those purchases.
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 THE WORLD ECONOMY
 The likelihood of business success is much greater
when plans and strategies are based on the new reality
of the changed world economy;
1. Capital movements rather than trade have become the driving
force of the world economy.
2. Production has become “uncoupled” from employment.
– Manufacturing is not in decline but employment in manufacturing is
declining due to gains in productivity.
3. The emergence of the world economy as the dominant
economic unit.
– Germany & Japan “observes” the world and then the world watches
them.
4. The growth of commerce via the Internet diminishes the
importance of national barriers.

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 ECONOMIC
SYSTEMS
Three types of economic systems:
• Capitalist
• Socialist
• Mixed
Classification based on dominant method
of resource allocation
• Market allocation
• Command allocation or central plan
allocation
• Mixed system

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 STAGES OF MARKET
DEVELOPMENT
 Countries/markets are at different stages of
development
 GNP per capita provides a useful way of grouping
countries into 4 categories (categories developed by
The World Bank, Stages based on GNP)
• High income countries
• Upper-middle income countries
• Lower-middle income countries
• Low income countries
 Categories are a useful basis for:
• Market segmentation
• Target marketing
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LOW INCOME
COUNTRIES
 GNP per capita of $785 or less
• Characteristics
• Limited industrialization
• High percentage of population involved
in farming
• High birth rates
• Low literacy rates
• Heavy reliance on foreign aid
• Political instability and unrest
• These countries represent limited
markets for all products and are not
significant locations doe competitive
threats.
 There are exceptions like Bangladesh,
where a growing garments industry
has enjoyed growing exports.
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LOWER MIDDLE INCOME
COUNTRIES
 GNP per capita between $786
and $3,125. Sometimes called
less-developed countries
(LDCs)
• Characteristics
• Early stages of industrialization
• Cheap labor markets
• Factories supply items such as
clothing, tires, building materials,
and packaged foods
• A growing threat - since they
mobilize their relatively cheap but
highly motivated labor to serve
target markets in the world.
– Indonesia
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 UPPER MIDDLE INCOME
COUNTRIES
 GNP per capita between $3,126 to $9,655
• Characteristics
• Rapidly industrializing
• Rising wages
• High rates of literacy and advanced
education
• Lower wage costs than advanced countries
• Countries in this stage of development
frequently become formidable
competitors and experience rapid
economic growth.
 3 BEMs: Argentina, Brazil, Mexico, South
Africa
 Today, the focus is on BRIC, Brazil, Russia,
India, and China.
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 BRIC
 BRIC is a grouping acronym that refers to the
countries of Brazil, Russia, India and China,
which are all deemed to be at a similar stage
of newly advanced economic development.
 It is typically rendered as "the BRICs" or or
alternatively as the "Big Four".
 2010 – BRICS – South Africa
• “These countries encompass over 25% of
the world's land coverage and 40% of the
world's population and hold a
combined GDP (PPP) of 18.486 trillion
dollars. On almost every scale, they would
be the largest entity on the global stage.
These four countries are among the
biggest and fastest growing emerging
markets “- Jim O'Neill, global economist at
Goldman Sachs
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HIGH INCOME COUNTRIES
 GNP per capita above
$9,656
 Sometimes referred to as
post-industrial countries
 Characteristics
• Importance of service sector,
information processing and
exchange, and intellectual
technology
• Knowledge as key strategic
resource
• Orientation toward the future
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 G-8, THE GROUP OF EIGHT
 G-7 began in 1975 and Russia joined in 1998.
• The EU is also represented at all meetings.
 Goal of global economic stability and prosperity
• U.S.
• Japan
• Germany
• France
• Britain
• Canada
• Italy
• Russia (1998)

2009 G-8 Leaders in Italy 2-13

 THE TRIAD
 The ascendancy of the global economy has been noted by many
observers in recent years. One of the most astute is Kenichi
Ohmae, former chairman of McKinsey & Company Japan..
 His 1985 book Triad Power represented one of the first attempts
to develop a coherent conceptualization of the new emerging
order.
 Ohmae argued that successful global companies had to be equally
strong in Japan, Western Europe, and the United States.
 These three regions, which Ohmae collectively called the Triad,
represented the dominant economic centers of the world.
 Today, roughly 75 percent of world income as measured by GNP is
located in the Triad.
 Coca-Cola is a example of a company with a balanced revenue
stream. Revenue: 1/4 from Asia; 25% from Europe, Eurasia and
Middle East; 40% from North America.
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 MISTAKEN ASSUMPTIONS
ABOUT LDCS
1. The poor have no money.
2. The poor will not “waste” money on
non-essential goods.
3. Entering developing markets is
fruitless because goods there are too
cheap to make a profit.
4. People in BOP (bottom of the pyramid)
countries cannot use technology.
5. Global companies doing business in
BOP countries will be seen as
exploiting the poor.
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