The Economic Environment Facing Global Business

KEY MACROECONOMIC INDICATORS Economic Growth Inflation Surpluses & Deficit KEY MACROECONOMIC INDICATORS : ECONOMIC GROWTH
GDP and GNI (or GNP) High or Low total amount of goods and services produced in a year within the domestic territory)
or GNI (GDP + net income) Per capita GNI (total GNI divided by total population) PPP GNI (unmber of units of a countrys currency required to buy the same goods and services in the domestic market that $1 will buy in USA

KEY MACROECONOMIC INDICATORS : INFLATION

Increase in prices Inflation rate percentage increase in the change in prices from one period to another, usually a year Demand more than supply Inflation effects interest rates exchange rates cost of living and General confidence in a countrys political and economic system

KEY MACROECONOMIC INDICATORS : INFLATION Inflation and Interest rates High inflation High interest rates KEY MACROECONOMIC INDICATORS : INFLATION
Inflation and Exchange Rate Higher inflation devaluation Case 1 UK exporter US distributor Cost 100 pounds Exchange rate $1.59 / GBP

Cost to US distributor $159

Case 2 High Inflation exchange rate constant exports will be costly Cost 110 pounds Exchange rate $1.59 / GBP Cost to US distributor $174.90 High Inflation currency devaluation exports will be competitive Cost 110 pounds Exchange rate $1.47 / GBP Cost to US distributor $161.70

KEY MACROECONOMIC INDICATORS : INFLATION

Inflation and cost of living Less disposable income with consumers

Inflation and government Under pressure to bring down inflation Rise interest rates for slow economic growth social unrest Protest if any control over wages KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT

Balance of Payment Record of countrys international transaction between companies, individuals and government Composed of current and capital account Current Account Merchandise trade Balance of trade - trade deficit or surplus Trade in Services Income Receipts or payment on assets, receipt on FDI Unilateral transfers govt and private relief grants and income transferred from
abroad

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT Capital Account Transactions in real or financial assets Foreign Direct Investment Purchase of securities Official Asset Reserve e.g Gold, SDRs and Foreign Currency KEY MACROECONOMIC INDICATORS : SURPLUSES AND

DEFICIT
External Debt Total debt or debt as percentage of GDP Larger external debt unstable economy

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT Internal Debt Excess of Government expenditure than revenues Budget deficit
Poor tax system Huge expenditure on defense and welfare Sick state owned enterprises

Privatization
CLASSIFYING ECONOMIC SYSTEMS

Economic System and Implications for Business

CPE - State trading corporations participates in international

trade Market Based Economy Individual firms Mixed Economy Both the systems are found

Understanding Economic Environment

Demand for its products Expected cost of production & net earnings Consumption behavior Availability of Human or physical resources Network of infrastructure Fiscal, Monetary and Industrial Policy Strength of External sector Repatriation of earnings

Understanding Economic Environment : Demand conditions

Level of income & its distribution tendency to consume

 Rate of inflation

Understanding Economic Environment : Demand conditions

Level of income and its distribution GDP Per Capita income Countries classified by World Bank on basis on Per capita income as

Understanding Economic Environment : Demand conditions

Based on GDP, GNI, Income level and other economic and socio

economic factors countries are divided into Developed Economies Developing Economies and Least Developed Economies

Demand conditions and Implications for business

MNCs also enter low income countries for high price goods Huge population, low wages , cheap labor force Distribution of national income Unequal distribution e.g population of 500 million, 10% of the population has 60% of the income ,
company can sell high price goods

Equal distribution , company can sell low price goods

Not per capita income but income distribution that influences the international
business decision

Understanding Economic Environment : Inflation

Purchasing power of consumer depend upon real income Higher level of inflation lower real income and purchasing power Cost of production will be higher ( beneficial to export from home country where inflation level is low)

Understanding Economic Environment : Consumption behavior

Low income country price conscious customers Rural areas of LDCs savings or real estate investment LDCs income spent on fulfilling basic needs e.g food and housing High literacy rate quality conscious

 Less educated price conscious Less social security prefer savings with low tendency to consume

Understanding Economic Environment : Availability of Human or physical resources

Easy availability lower manufacturing cost Availability of physical resource e.g factors of production Indian companies have shifted to Sri Lanka for manufacture of

rubber products and to Nepal for herbal products

Understanding Economic Environment : Network of infrastructure

Power supply, good road/ rail / air links, communication system

Understanding Economic Environment : Fiscal, Monetary and Industrial Policy

Fiscal policy Income tax, excise duties, tariff Fiscal deficit Monetary Policy Money supply, rate of inflation, rate of interest and cost of credit Inflation within limits, low interest rates Industrial Policy Sectors open to foreign participation

Understanding Economic Environment : Strength of External sector

Strong Balance of payment position Huge Forex reserves Favourable when government adopts liberal policies Current account deficit when imports are more than exports Capital account deficit due to difference in inflow and outflow of currency

Understanding Economic Environment : Repatriation of Earnings

Possible when govt have liberal policy strong balance of payment position foreign exchange reserves is large

Analysing Economic Environment

Data collection Secondary data - International organisations like World Bank, IMF, United Nations etc. Primary data own sources or consultants Statistical Analysis of data to predict demand for the product Analyse economic trends etc.