International Business Environments and Operations, 13/e Global Edition

Part Two Comparative Environmental Frameworks

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Chapter Four
The Economic Environments Facing Businesses

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Chapter Objectives
To understand the importance of economic analysis To identify the major dimensions of international economic analysis To compare and contrast macroeconomic indicators To profile the characteristics of the types of economic systems To discuss the idea of economic freedom To profile the drivers of economic transition
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Importance of Economic Environments

Managers study economic environments to estimate how market trends and government policy influence the performance of their companies. A countrys economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms. Economic development directly impacts citizens, managers, companies, policymakers, and institutions.
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Economic Factors Affecting International Business Operations

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Elements of the Economic Environment

Gross National Income (GNI): the income generated both by total domestic production as well as the international production activities of national companies Gross domestic product (GDP): the total value of all final goods and services produced in a country in a given year equal to total consumer, investment, and government spending, plus the value of exports, minus the value of imports.
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GNI & GDP

Gross national income (GNI) and gross domestic product (GDP) are both measures of a country's economic output and well-being, though they have their disparities. The main difference between GNI and GDP is their measurement and components. For instance, GNI and GDP both consist of the total market value of all goods and services produced in a particular country in a given period. Unlike GDP, however, GNI goes a step further to include the net income obtained from other nations. This net income is derived by subtracting profits and income earned overseas, by locally owned firms, from similar profits and income that go abroad from foreign-owned 4-7 firms.

 The components of GDP are the totals of final household consumption, business investment, government spending, and imports minus exports for a given country. GNI is comprised of the same components as GDP in addition to others, such as interest and dividends derived from foreign nations. Moreover, profits earned by foreign firms are subtracted from a nation's GNI. Thus, GNI and GDP values may be very different for a particular country. In many cases, however, they tend to be close in value due to a balancing effect of the inflows and outflows of income.
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 One way to look at the difference between GNI and GDP is that the measurement of GNI is based on ownership, whereas that of GDP is based on location. For example, if a US-owned corporation has operations in Japan, then its profits from this country will not count toward the US GDP but toward the GNI. Conversely, the US corporation's goods and services produced in Japan will count toward Japan's GDP. That is, the US-owned corporation has operations located in Japan, so its economic output produced within Japan's borders contributes to the nation's GDP. On the other hand, the owners of the corporation receive interest and dividends from the corporation's activities in Japan, which count toward 4-9 the US GNI.

 GDP and GNI are both used to rank and compare the standard of living and performance of countries. Since the ways of measuring GNI and GDP is different, for some countries this creates a big discrepancy in ranking. For example, some countries have many foreign firms located within their borders, and they do not have as many locally owned firms located overseas to offset this. In these countries, the outflow of income may be significantly greater than the corresponding inflow. Therefore, their ranking in terms of GNI and GDP would accordingly be different.
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GNP
Gross National Product (GNP): the value of all final goods and services produced within a nation in a given year, plus the income earned by its citizens abroad, minus the income earned by foreigners from domestic production.

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What can we tell from the GNI Figure?

Per Capita conversion= The term per capita refers to the amount per person; to achieve the GNI per capita figure, the GNI is divided across the population of each country. Analysts use this GNI per capita figure as an indicator of the average income of a citizen in any country. Figures produced can provide an indication of the overall economic state of a country and of the general living standards of the citizens there. In general, those countries with a high GNI per capita figure possess a higher standard of environmental and social health than those countries with a low per capita figure.

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Cont
In a similar relationship, those citizens living in a low per capita country generally experience higher mortality rates, lower educational standards, and an overall lower standard of living than those in a high per capita country. The correlation between GNI and the well-being of the populace is obvious. When less money is being generated by a country, the overall economy of that country will suffer. Those citizens within that country will therefore have less income, disposable or otherwise.

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PPP(purchasing power parity)

Purchasing-power parity theory. A theory which states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent. In short, what this means is that a bundle of goods should cost the same in Canada and the United States once you take the exchange rate into account. To see why, we'll use an example.
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Other Features of an Economy

Inflation Unemployment Debt Income distribution Poverty Labor costs Productivity Balance of payments
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Inflation
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
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Hyper inflation
When associated with depressions, hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked this causes prices to increase, as the currency loses its value. When associated with wars, hyperinflation often occurs when there is a loss of confidence in a currency's ability to maintain its value in the aftermath. Because of this, sellers demand a risk premium to accept the currency, and they do this by raising their prices. One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.

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Unemployment
Problems in Measuring

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Debt
Internal Debt: Portion of the government debt that is denominated in the countrys own currency and held by domestic residents External Debt: Debt owed to foreign creditors and denominated in foreign currency.
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Income Distribution
Gini Coefficient- Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution.

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Poverty
World Bank Definition Poverty and the Economic Environment The Potential of the Poor
Bottom of the Pyramid Phenomenon

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Labor Costs
Labor and Total Costs For many goods and services, the cost of labor is a key element of total costs. Consequently, companies scan the world, looking for markets that offer lower-cost labor.

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Balance of Payments
Current and Capital Accounts
Current Account: tracks all trade activity in merchandise Capital Account: tracks both loans given to foreigners and loans received by citizens

BOP and Economic Stability

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Definition of Economic System

A mechanism that deals with the production, distribution, and consumption of goods and services Types:
Market economy (Capitalism) Command economy (Communism) Mixed economy

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