International

Business & Trade

Environments & Operations
Chapter 4
The Economic Environments
Facing Businesses

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 Introduction
 Managers assess a country’s economic
environment 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

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 International
Economic Analysis
 A universal assessment of economic
environments is difficult because of:
 System Complexity
 Identifying proper indicators is difficult

 Market Dynamism
 New economic circumstances

 Market Interdependence
 Markets influence each other

 Data Overload
 Complicates decision-making

 Difficult to specify definitive set of economic indices that estimate

performance and potential of an economy
 New challenges when interpreting relationships between 4-3

estimators in other economic environments

Elements of the Economic Environment
 Gross national income (GNI)
 Income generated both by total domestic production as
well as the international production activities of national
companies
 value of all production in the domestic plus the net
flows of factor income (rents, profits, and labor income)
from abroad during a one-year period
 The market value of final goods and services prodcued
by domestically owned factors of production
 the broadest measure of economic activity for a country

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Elements of the Economic Environment
 Gross domestic product (GDP)
 the total value of all final goods and services produced
within a nation in a particular year (both domestic and
foreign owned companies produce)
 Technically, GDP plus the income generated from
exports, imports, and the international operations of a
nation’s companies equals GNI
 GDP is an essential part of GNI

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 Improving the power of GNI
 Per Capita Conversion
 Transform GNI and other economic indicators by the
number of people who live in a country
 Per capita GNI is converting the GNI into a standard
currency (at prevailing market rates) and divide by its
population
 Rate of change
 When GNI grows at higher rate than the population,
standards of living are said to be rising
 Purchasing Power Parity (PPP)
 Simple conversion of per capita is misleading
 Adjust GNI per capita for a country in terms of its local
PPP: The number of units of a country’s currency required
to buy the same amounts of goods and services that one
unit of income would buy in the other country 4-6
Performance and Potential of a Country
 Degree of Human Development
 Greater access to knowledge, better nutrition and health
services, secure livelihood, security against crime and
violence, political and cultural freedom, recreations
 Green economics
 Economic performance in terms of the effect of
current choices on long-term sustainability
 meet the needs of the present without compromising the
ability of future generations to meet their own needs
 Happynomics
 importance of emotional prosperity in addition to
financial prosperity

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 Inflation
 Inflation
 A general, sustained rise in prices measured against
a standard level of purchasing power
 A measure of the increase in the cost of living
 Measured by comparing two sets of goods at two points in
time and computing the increase in cost that is not
reflected by an increase if the quality of good
 Results when aggregate demand grows faster than aggregate supply
 Chronic inflation decreases confidence in a country’s
currency
 Deflation
 when prices for products go down not up

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 Unemployment
 Unemployment rate
 Number of unemployed workers seeking
employment for pay relative to the total civilian
labor force
 High unemployment is a warning sign for managers
because it symbolizes a government’s ineptitude in
managing domestic affairs.

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 Debt
 Debt
 the total of a government’s financial obligations;
measures the stats borrowing from its population,
from foreign organizations, foreign governments,
and international institutions
 internal debt: results when a govt spends more

than it collects in the revenues

 Reasons: imperfect tax system, costs of security or
social programs exceed available tax revenues, state-
owned enterprises run deficits
 external debt: results when a govt borrows
money from foreign lenders

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 DEBT
 Growing public debt signals
 tax increases
 reduced growth
 rising inflation
 increasing austerity (governess)

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 Income Distribution
 Income distribution
 estimates the proportion of the population that
earns various levels of income
 Gini Coefficient
 measures the extent to which the distribution of
resources deviates from a perfectly equal
distribution
 Assess the degree of inequality in the distribution of income in a
country

 Uneven income distributions exists in almost every country

 Urban versus Rural income Distribution

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 Poverty
 Poverty the state of having little or no money and
few or no material possessions
 ~ condition in which a person or community is
deprived of, or lacks the essentials for, a minimum
standard of well being in life
 The essentials can be food, safe drinking water, shelter; social
resources such as education and access to information,
healthcare, and social status; opportunity to develop
meaningful connections with other people in the society

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Labor Costs and Productivity
 Labor Costs: The cost of labor is a key
element of total costs
 Consider labor cost for a factory worker across countries

 Productivity: Amount of output created

per unit input used
 Quantity produced per person per labor hour

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 Balance of Payments
 Balance of payments
 Officially known as Statement of International
Transactions
 Reports a country’s trade and financial transactions
with the rest of the world (usually over one year)
 Current account: Tracks all trade activities in
merchandise
 Capital account: Tracks both loans given to foreigners
and loans received by citizens

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 Economic Freedom
 Economic freedom – people have the
right to work, produce, consume, save,
and invest the way they prefer

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 Types of Economic Systems
 An economic system refers to the mechanism that
deals with the production, distribution, and
consumption of goods and services
 Set of structures and processes that guides the allocation
of resources and shares the conduct of business activities
in a country
 Major difference between economic systems is in terms
of their implications for economic matters such as
ownership and control and freedom of prices to balance
supply and demand

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Types of Economic Systems
Types of Economic Systems

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 Capitalism vs Communism
 Capitalism: free market system built on private
ownership and control
 Owners of capital have property rights
 Communism: centrally planned system built on state
ownership of all economic factors of production and
control of all economic activity

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Market Economy: Capitalism
 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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 Command Economy: Communism
 In a command economy the visible hand
of the state supersedes the invisible hand
of individuals
 Government
 owns and controls resources

 determines prices

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 Mixed Economy
 There are rarely pure capitalist or
communist countries now

 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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