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International Business

Environments & Operations


14e Global Edition
Daniels

Radebaugh

Sullivan

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Chapter 4
The Economic Environments Facing Business
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Learning Objectives
To communicate the importance of economic analysis To discuss the idea of economic freedom To profile the characteristics of the types of economic systems To introduce the notion of state capitalism To profile indicators of economic development, performance, and potential

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Introduction
Learning Objective 1: To communicate the importance of economic analysis

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Introduction

Managers assess a countrys 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

it is difficult to stipulate a definitive set of indicators to estimate the performance and potential of a countrys economy todays set of perfect measures may prove imperfect tomorrow interdependencies complicate interpreting the relationship among elements of the economic environment
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International Economic Analysis


Economic Factors Affecting International Business Operations

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Economic Freedom
Learning Objective 2: To discuss the idea of economic freedom

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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

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Economic Freedom
Economic Freedom by Region, with Population

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Economic Freedom
Global Distribution of Economic Freedom

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Value of Economic Freedom

Economic freedom affects

Growth rates Productivity Income levels Inflation Employment Life expectancy Literacy Political openness Environmental sustainability
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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

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Types of Economic Systems


Learning Objective 3: To profile the characteristics of the types of economic systems

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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 Types

Market economy Command economy Mixed economy

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Types of Economic Systems


Types of Economic Systems

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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

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Command Economy
Learning Objective 4: To introduce the notion of state capitalism

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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

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Mixed Economy

Most economies are mixed economies

fall between market and command economies


regulate economic activity with a focus on social equality and a fair distribution of wealth

Socialism

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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

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Economic Development, Performance, and Potential


Learning Objective 5: To profile indicators of economic development, performance, and potential

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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
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Gross National Income

Gross national income (GNI)

the broadest measure of economic activity for a country the total value of all final goods and services produced within a nation in a particular year
the total market value of goods and services produced by workers and capital within a nations borders
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Gross national product (GDP)

Gross domestic product (GDP)

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

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Improving Analysis
GNI per capita, 2009

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Improving Analysis
GNI per capita adjusted for Purchasing Power Parity

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Broader Conceptions of Performance and Potential

Green economics

gauge 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
importance of emotional prosperity in addition to financial prosperity
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Sustainable development

Happynomics

Features of an Economy

Managers should also consider

Inflation Unemployment Debt Income distribution Poverty Balance of payments

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Inflation

Inflation

a measure of the increase in the cost of living


when prices for products go down not up increase the money supply and reduce taxes to accelerate economic activity

Deflation

Reflation

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Unemployment

Unemployment rate

share of unemployed workers seeking employment for pay relative to the total civilian labor force
the sum of a countrys inflation and unemployment rates

Misery index

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Debt

Debt

the total of a governments financial obligations internal debt external debt


tax increases reduced growth rising inflation increasing austerity
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Growing public debt signals


Income Distribution

Income distribution

estimates the proportion of the population that earns various levels of income measures the extent to which the distribution of resources deviates from a perfectly equal distribution

Gini coefficient

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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
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Balance of Payments

Balance of payments

reports a countrys trade and financial transactions with the rest of the world tracks merchandise trade
tracks loans given to foreigners and loans received by citizens

Current account

Capital account

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Balance of Payments
Components of a Countrys Balance of Payments

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

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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