Chapter 2: The Global Economic Environment

Learning Objectives

• Summarize significant historical changes in the global economic environment

• Identify trends in the world economy that affect global marketing decisions

• Describe how economic measures of freedom help drive or hinder global business
expansion and growth

• Describe the stages of market development

• Explain how global income distribution and population patters affect marketing
decisions

• Discuss the balance of payments and global trade patterns

Chapter Overview

The economic environment is a major determinant of global market potential and

opportunity. Global marketers should factor into their marketing strategies the profound

changes in the world economy and understand that global competition is now a feature of

almost every national market. Centers of economic activity are shifting dramatically

across the globe and across regions due to demographic changes, economic liberation,

technological developments, and, over the next decade, an estimated one billion new

consumers in emerging markets demanding products and services. Today, with the

exception of North Korea, almost all countries have mixed economic systems with a

major reliance on market allocation.

Lecture Outline

I. The World Economy – An Overview (p. 38)

II. The World Economy: Important Trends (p. 39)
a. Economic Activity Will Shift From West to East
 b. Aging Worldwide Population Will Demand Increasing Levels of
Productivity and Efficiency
c. Changing Industry Structures and Emerging New Models of Corporate
Organization Will be Characteristic of Growing Global Competition
d. The Demand for Natural Resources Will Continue to Grow, Resulting in
Growing Pressure on an Already Strained Global, Natural Environment
e. Scrutiny of Global Firms’ Worldwide Practices Will Increase as the Reach
and Scale of Global Firms Expand; Increasing Regulation Will Shape the
Structure and Conduct of Whole Industries
f. The Economics of Information Will be Transformed as the Ubiquitous
Nature of Information Expands
g. Talent Pools Have Become Global in Nature; Assimilating Talent into the
Leadership Structure of a Global Company Will be a Competitive
Advantage
III. The Market State: Varying Degrees of Economic Freedom (p. 46)
IV. Stages of Market Development (p. 49)
a. Low-Income Countries
b. Lower-Middle-Income Countries
c. Upper-Middle-Income Countries
d. High-Income Countries
V. Income and Purchasing Power Parity Around the Globe (p. 57)
VI. International Comparison Program (ICP) of the World Bank (p. 61)
VII. Actual Individual Consumption (p. 62)
VIII. The Location of Population (p. 63)
IX. Global Trade and Investment (p. 64)
a. The Balance of Payments
X. Global Trade Patterns (p. 65)
XI. Exchange Rates (p. 67)
XII. Degrees of Economic Cooperation (p. 69)
a. Free Trade Area
b. Customs Union
 c. Common Market
d. EU (European Union)
e. Asia-Pacific Economic Cooperation (APEC)
f. Commonwealth of Independent States (CIS)
g. MERCOSUR (SCCM)
h. North American Free Trade Agreement (NAFTA)
i. Association of Southeast Asian Nations (ASEAN)
XIII. Summary
Tables and Figures
Table 2-1 Index of Economic Freedom World Rankings (p. 48)
Table 2-2 World Bank List of Country Income Groups (p. 50)
Table 2-3 Countries Classified by Income – 2011 (p. 51)
Table 2-4 Stages of Economic Development (p. 59)
Table 2-5 GNP and PPP Per Capita, Top 10 Countries (p. 60)
Table 2-6 Richest Countries in the World GDP (PPP) (p. 60)
Figure 2-1 Rank Shift in GDP 2010 vs. 2020 (p. 61)
Table 2-7 Actual Individual Consumption per Capita (p. 62)
Table 2-8 Top 10 Highest Populated Countries (p. 63)
Table 2-9 Estimated 2010 Current Account Balances (p. 64)
Figure 2-2 Average PPP Consumption Across 146 Countries (p. 66)
Figure 2-3 Growth in Volume of World Merchandise Trade and GDP (p. 66)
Figure 2-4 GDP and Merchandise Trade by Region (p. 67)
Figure 2-5 Big Mac Index (p. 68)
Table 2-10 Degrees of International Economic Integration (p. 69)
Sidebars
Sidebar 1 20 Major Economies of the G20 (p. 58)
Sidebar 2 Bunfight (p. 68)
 Suggested Answers to Discussion Questions

1. What are the stages of national market development, and what percentage of

world income is found in each of the stages? Why is this information important to

global marketers?

The stages of development include low-income countries (<$1025 GNP per capita; 36

countries); lower-middle-income countries ($1036-$4035; 54 countries); upper-

middle- income countries ($4036-$12,475; 54 countries); and high-income countries

(GNP per capita >$12,475; 70 countries). While it is not necessary for students to

memorize the income level and stage of market development for every country, they

should have a general fell for which countries fall into which category. This

information helps a marketer to define their target markets.

2. What are the major trends in the world economy in the first two decades of the

21st century? How do these trends impact global marketing decisions? Cite

several subtrends that relate, in your opinion, to these major trends.

a. Economic Activity Will Shift From West to East

b. Aging Worldwide Population Will Demand Increasing Levels of

Productivity and Efficiency

c. Changing Industry Structures and Emerging New Models of Corporate

Organization Will be Characteristic of Growing Global Competition

d. The Demand for Natural Resources Will Continue to Grow, Resulting in

Growing Pressure on an Already Strained Global, Natural Environment

 e. Scrutiny of Global Firms’ Worldwide Practices Will Increase as the Reach

and Scale of Global Firms Expand; Increasing Regulation Will Shape the

Structure and Conduct of Whole Industries

f. The Economics of Information Will be Transformed as the Ubiquitous

Nature of Information Expands

g. Talent Pools Have Become Global in Nature; Assimilating Talent into the

Leadership Structure of a Global Company Will be a Competitive

Advantage

A business leader’s ability to assess trends in a rapidly changing competitive

marketplace, and use these to appropriately gauge their impact on profitability of the

firm, is a critical competence. Subtrends could include 1. A growing world-wide middle

class demand for goods and service and 2. Increased demand from this expanding

consumer base will place increasing stress on already constrained resources and create

unsustainable environmental degradation.

3. What is the pattern of income distribution in the world today? How is it different

than even 10 years ago? What are the implications of these patterns of income

distribution across the globe for the strategic marketer?

As indicated in Table 2-2, p. 50, the high-income countries are those with a per capita

of greater than $12,475. The 70 countries that qualify as high-income account for

approximately 32% of countries. Generally speaking, income distribution has become

more equalized across the world’s population base. Today, approximately 50% of the

world’s population can be categorized as living in upper- or lower-middle income

countries (108 upper- and middle-income countries/214 total countries). The number
of countries qualifying as high-income has risen dramatically over the past years. The

share of the population in the developing world has been halved from 52% to 25%.

Global extreme poverty is projected to drop to about 15% of global population by

2015. As the overall living standards of the world continue to increase, new and

expanding markets for consumer goods are opening.

4. A manufacturer of online gaming devices is assessing the world market potential

for her products. She asks you if she should consider emerging countries as

potential markets. How would you advise her?

Emerging countries should indeed prove attractive. Although the per capita income in

emerging countries is low, in many instances it is rapidly growing. Consider

Indonesia (per capita income has risen from $250 (in 1985) to $2,050 (in 2009).

Residents are experiencing increases in discretionary (disposable) income. As a

result, domestic consumer markets are expanding. These consumers are no longer just

living day-to-day, but are earning relatively substantial incomes, not all of which is

needed to survive.

5. Are income and standard of living the same thing? What is meant by the term

standard of living; how is it best measured and why?

Income reported in dollars measure the total value of all goods and services produced

in an economy at a given rate of exchange. However, standard of living reflects what

products and services are available to a nation’s people and how much their incomes

will buy. Income figures that have been adjusted to indicate purchasing power parity

are a better way to compare standard of living. Of course, upper-income segments

may enjoy a higher standard of living than other segments. Also, as noted in the text,
a low-income country’s standard of living may be higher than income figures suggest

if the government, for little or no cost, provides education, health care, and housing.

6. Describe the importance of international trade alliances and economic

cooperation agreements. In your view, are these beneficial to the global

marketer? If so, why? If not, why not?

Most of the forms of economic integration discussed eliminate tariffs and quotas

among member nations. As free trade agreements and foreign-trade zones develop as

an important indicator of globalization and the economic interdependence between

countries and across regions, global firms increasingly face decisions about where

best to source and establish manufacturing. Companies need to optimize their

understanding and knowledge of how best to utilize if not exploit FTAs and their

regulatory, administrative, legal, and often judicial strategies for regional

competitiveness in the global marketplace.

7. Interview several local business owners to determine their attitude toward world

trade. Why, in your opinion, do they hold these attitudes and on what factual

information or experience are they based?

Answers to this assignment will vary dramatically based on the student and their

access to local business owners. It is important here to encourage the students to

delve deeply into the possible attitudes that may be driving the owners’ opinions and

to seek out the information on which their opinions/attitudes are based.