International

Business
Environments & Operations
Daniels ● Radebaugh ● Sullivan
 Chapter 4
The Economic
Environments Facing
Business
 Learning Objectives
 Communicate the importance of economic
analysis
 Differentiate the types of economic
environments
 Explain the idea of economic freedom
 Differentiate the types of economic
systems
 Profile leading indicators of economic
development, performance, and potential

4-3
 Introduction
Learning Objective4-1:
Communicate the importance of economic
analysis

4-4
 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

4-5
 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

4-6
 Types of Economic Environments
Objective 4-2
 Types of economics
 Developed
 Developing
 Economies in transition
 Degrees of development
 Emerging Economies
Objective 4-2
Map 4.1 Emerging Economies of the World
 International
Economic Analysis
Economic Factors Affecting International Business Operations

4-9
 Economic Freedom
Learning Objective4-3:
Discuss the idea of economic freedom

4-10
 Economic Freedom
 Economic freedom – people have the
right to work, produce, consume, save,
and invest the way they prefer
 measured across business freedom, monetary
freedom, fiscal freedom, investment freedom,
freedom from corruption, property rights, trade
freedom, government size, financial freedom,
and labor freedom

4-11
 Chart on Economic Freedom and Standard of Living
Objective 4-
3
Figure 4.4
Economic
Freedom and
the Standard
of Living

Source: Adapted
from Terry Miller
and Anthony Kim,
“Why Economic
Freedom Matters |
2015 Index of
Economic Freedom
Book.” 2016.
Accessed April 15.
http://www.heritag
e.org/index/book/ch
apter-2. Used by
permission.
Note: GDP is
adjusted for PPP.
 Global Distribution of Economic Freedom
Map 4.2 The Presence and Prevalence of Economic Freedom

Source: Terry Miller and Kim Holmes, 2016 Index of Economic Freedom, (Washington, DC: The Heritage
Foundation and Dow Jones & Co., Inc., 2016).
Value of Economic Freedom
 Economic freedom affects
 Growth rates
 Productivity
 Income levels
 Inflation
 Employment
 Life expectancy
 Literacy
 Political openness
 Environmental sustainability
4-14
Trends in Economic Freedom
 The trend toward increased economic
freedom is no longer certain
 Questions about the legitimacy of free markets
 The benefits of more state control

Copyright © 2015 Pearson Education, Inc. 4-15

Types of Economic Systems
Learning Objective4-4:
Profile the characteristics of the types of
economic systems

4-16
 Types of Economic Systems
 An economic system refers to the
mechanism that deals with the production,
distribution, and consumption of goods
and services
 Types
 Market economy
 Command economy
 Mixed economy

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Types of Economic Systems
Types of Economic Systems

4-18
 Market 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

4-19
 Command 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

4-20
 Mixed 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
 State Capitalism:
Detour or Destination?
 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

4-22
 Economic Development,
Performance, and Potential
Learning Objective4-5:
Profile leading indicators of economic
development, performance, and potential

4-23
 Economic 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 standard of
living
 like the U.S., Japan, France, Australia

4-24
 Gross National Income
 Gross national income (GNI)
 the broadest measure of economic activity for
a country
 Gross domestic product (GDP)
 the total market value of goods and services
produced by workers and capital within a
nation’s borders
 Gross national product (GNP)
 the total value of all final goods and services
produced within a nation in a particular year

4-25
 Improving 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

4-26
 The Ten Largest Economies
Table 4.7 The 10 Largest Economies, GDP Adjusted for Purchasing Power Parity,
2014

Source: World Bank Development Indicators 2015.

GNI per Capita, 2011

4-28
GNI Per Capita, 2011, Adjusted for
Purchasing Parity

4-29
 Economic Analysis
 Managers should also consider
 Inflation
 Unemployment
 Debt
 Income distribution
 Poverty
 Balance of payments

4-30
 Inflation
 Inflation
 a measure of the increase in the cost of living
 Deflation
 when prices for products go down not up
 Reflation
 increase the money supply and reduce taxes to
accelerate economic activity

4-31
 Unemployment
 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

4-32
 Debt
 Debt
 the total of a government’s financial
obligations
 internal debt

 external debt

 Growing public debt signals

 tax increases
 reduced growth
 rising inflation
 increasing austerity
4-33
 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

4-34
 Poverty
 Poverty the state of having little or no
money and few or no material possessions
 extreme 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

4-35
 Balance of Payments
 Balance of payments
 reports a country’s trade and financial
transactions with the rest of the world
 Current account
 tracks merchandise trade
 Capital account
 tracks loans given to foreigners and loans
received by citizens

4-36
 Balance of Payments
Current Account Balances: The Top and Bottom Five

4-37
 Sustainability in Economies

 Green Economies
 Sustainability
 Net National Product (NNP)
 Genuine Progress Indicators (GPI)
 Human Development Index (HDI)
 Stability in Economies

 Happynomics
 YBLI (Your Better Life Index)
 OECD, matters that people worldwide
believe are important (e.g., housing, health,
job, work-life balance..)
 GNWI (Gross National Wellness Index)
 Socioeconomic measures on individual well-
being. Satisfaction in terms of mental,
health, work, income, …
 HPI (Happy Planet Index)
 sustainablewellbeing for all (achieving long,
happy, sustainable lives)
 http://happyplanetindex.org/

 http://www.oecdbetterlifeindex.org/#/311
11111111

40
 Profile Elements of Economic Analysis

 Other elements of economic analysis for IB

managers to consider
 GCI (Global Competitiveness Index)
 GII (Global Innovation Index)
 WCI (World Competiveness Index)