MIB 502: Foundation of

International Trade and Business

Lecture 6
Economic Environment
Reference:
Chapter 4: The Economic Environments Facing Business
John D. Daniels, Prashant Salwan, Daniel P. Sullivan and Lee H.
Radebaugh,
New • Managers study a country’s
economic environment to
• Countries Differ in
Various Ways
Markets, assess its development,
explain its performance, and • Economic and Political
Changes Alter Market
estimate its potential.
New • Studying an economic
Circumstances

Perspectives environment helps

managers make better
investment choices and
operating decisions.
• Resource constraints require
managers to identify which
countries in the world
warrant investment as well
as those they must avoid.
• Connections, Change,
and Consequences
• Challenges of the
Comeback
• Choices of Citizens,
Policymakers, and
Institutions

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International Economic Analysis

The study of economics has identified a host of objective measures that help systematize evaluation.

System Complexity
• The complexity of even the simplest economic system defies straightforward classification. Stipulating indicators that definitively
represent a country’s economic performance and potential is difficult. Certainly, managers consult an ever expanding set of
indicators.

Market Dynamism
• Often, market changes make today’s valid measures invalid tomorrow. In the wake of the global financial crisis, some indicators
that worked in 2007 were flawed by 2009 and remained dubious in 2013.

Market Interdependence
• Just as no one is an island, no country is isolated. The consequence of connections is an integrated system in which actions in one
market influence outcomes in others. Interdependencies complicate interpretations.

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 Economic Factors Affecting International Business Operations

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 Economic Freedom
Economic freedom is the “absolute right
of property ownership, fully realized
freedoms of movement for labor, capital,
and goods, and an absolute absence of
coercion or constraint of economic liberty
beyond the extent necessary for citizens
to protect and maintain liberty itself.”
Economic freedom does not exist
independent of the state. Rather, it is both
protected and regulated by the state.
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The Economic Freedom Index estimates
the extent to which a government
constrains free choice and free enterprise
for reasons that go beyond the need to
protect property, liberty, safety, and
efficiency. The index rests on Adam
Smith’s notion that “basic institutions that
protect the liberty of individuals to pursue
their own economic interests result in
greater prosperity for the larger society.
5
Dimensions
of the Index
of Economic
Freedom

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 The Heritage Foundation

Economic Freedom of the World: 2023 Annual

Report ( Published on September 19, 2023)
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 The Value of • The track record of free markets around the world
indicates that economic freedom is positively related to
Economic financial prosperity, economic stability, and standards
of living.
Freedom • Prosperity is highly correlated with freedom
• Freedom tends to lead to prosperity
• Autocracies tend to be unprosperous

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 • Managers watch key events to gauge the contest
between economic freedom and state control. These
include how the government

Economic 1. regulates the economy

2. protects property rights
Freedom and 3. sets fiscal and monetary policies
4. enforces antitrust regulation
State Control • The global financial crisis, by spurring a resurgence of
state intervention, has interrupted the decades-long
expansion of economic freedom.
• The surge in state capitalism helps explain why many
emerging and developing economies deemphasize
economic freedom.

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Assessing Economic Development

• A developing country is not just poor, but also has low levels of education, health,
Developing countries and industrialization. Their standard of living, income, economic and industrial
development remain more or less below average.

Economies in
Transition/Emerging • A transition economy or transitional economy is an economy which is changing from
a centrally planned economy to a market economy
economies

• A developed country is a sovereign state with high industrial and Human

Developed countries Development Index compared to other countries. It must also have a technologically
advanced infrastructure, and its economy must be highly developed. It is also
referred to as industrialized country or more developed country.

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 Transition Economy

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New World Bank country classifications by income level: 2022-2023

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World Trade Organization

There are no WTO definitions of “developed” and “developing” countries.

Members announce for themselves whether they are “developed” or
“developing” countries. However, other members can challenge the decision
of a member to make use of provisions available to developing countries.

The WTO recognizes as least-developed countries (LDCs) those countries

which have been designated as such by the United Nations.

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Least Developed Countries (UN)
The LDC category was established by the UN General Assembly in 1971 as an
acknowledgment by the international community that special support measures were
needed to assist the least developed among the developing countries.

LDC CRITERIA:

• Income: Countries must have an average per capita income of below USD$1,018 for inclusion, and above
USD$1,222 for graduation;
• Human Assets: Countries must also have a low score on the Human Assets Index, a tool that measures health
and education outcomes, including under-five mortality rate, maternal mortality, adult literacy rate and gender
parity for secondary school enrolment;
• Economic and Environmental Vulnerability: Countries must score high on the Economic and Environmental
Vulnerability Index, which measures factors like remoteness, dependence on agriculture and vulnerability to
natural disasters.

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 Types of Economic Systems

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 Means and Methods of a Market Economy

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Measures of Economic Performance
Gross National Income (GNI) is the broadest measure of a country’s economy. It measures the
value of all production in the domestic economy together with the income that the country receives
from other countries (mainly interest and dividends), less similar payments it has made to other
countries.

Gross National Product (GNP) is 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.

Gross Domestic Product (GDP) The total market value of all output produced within a nation’s
borders, no matter whether generated by a domestic or foreign-owned company, is reported as a
nation’s GDP

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Adjusting Analytics
• GNI and its offshoots estimate an economy’s absolute performance. Despite their
strengths, they can mislead managers when comparing countries.
1. Managers improve the usefulness of GNI by adjusting it for the
2. Growth rate of the economy
3. Number of people in a country
4. Local cost of living/Purchasing Power Parity
• Purchasing power parity provides a method of measuring the relative
purchasing power of different countries’ currencies for the same basket of
goods and services.

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Shadow Economy
• The Shadow Economy refers to all work activity and business
transactions that occur ‘below the radar’ – economic activity
that is undeclared, hidden, and for which taxes that should
be paid are not.
• Also known as the informal sector, the black economy, the
underground economy, or the gray economy, the shadow
economy includes criminal activities such as drug dealing
and smuggling, as well as legal jobs, such as gardening,
working in construction, or selling products to car drivers at
traffic lights.
• The shadow economy is perhaps best described by the
activities of those operating in it: work done for cash, where
taxes aren’t paid, and regulations aren’t strictly followed.

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 Integrating Economic Analysis

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