Economics Systems and Market

Methods

 Jashim Uddin, PhD

Associate Professor, East West University, Bangladesh
Understanding the economic opportunities
of a country
Factor Conditions:
 Physical resources
 Human resources
 Knowledge resources
 Capital resources
 Infrastructure
Demand Conditions:
 Composition of home demand (quality of demand)
 Size and pattern of growth of home demand (quantity of
demand)
 Internationalization of demand
Factor conditions are crucial for investments in producing goods, but demand
conditions are crucial for market-seeking investments
Elements of economic environment and
their use
Size of particular economy undoubtedly reflects its investment
potential. Thus, the measures to understand the economic size
require extensive focus.
 Gross Domestic Product (GDP) and Gross National
Income (GNI)
GDP is the value of all final goods and services produced in the
country within a given period. Receipt of payments from abroad
for domestically owned factors are added to GDP to compute
GNP, which is synonymously used as GNI. In Bangladesh GNI
is US$ 171.25 billion and GDP is US$ 172.88 billion in the year
2014. Per capita GNI of Bangladesh is US$ 1080 ($ 3330 at
PPP) in 2014. (Source: WB)

Countries with high population and high per capita GNI are most desirable in terms of market
potential. Those with low per capita GNI and low populations are least desirable, and the other
countries fit somewhere in between.
 Per capita GNI
Per capita GNI is considered to understand the size of demand of a country, as
WB is using it for its landing activities.
Per capita income classifications (July 1, 2014)
Low income: US$ 1045 or less
Middle income: more than US$ 1045 – lass than US$ 12736
High income: US$ 12736 or more
Low and middle income countries are called developing countries or emerging
economies. High income countries are known as developed or industrialized
countries.
Per capita GNI (also Per capita GNI at PPP, explained in the next slide) reports
how much income the average person earns. Because not everyone is average,
neither indicator tells us what share of income goes to what segments of the
population. So, the issue of income distribution among different segments or
measurement of income inequality becomes a concern.
The Gini Coefficient: Managers estimate income distribution in a particular
country by examining in Gini coefficient. The more nearly equals a country’s
income distribution, the lower its Gini coefficient (for example, Sweden, with an
index of 25.0). The more unequal a country’s income distribution, the higher its
Gini coefficient (Bangladesh 32.1, USA 40.8, South Africa 63.1)
 Per capita GNI at PPP (Purchasing Power Parity)

Per capita GNI at PPP is based on law of one price and have
significant implication to understand business potential of a
country. High difference between GNI per capita at PPP and actual
per capita GNI require more analysis to understand the business
potential of a country. Higher per capita GNI at PPP can mean:
 More goods and services in domestic land that $1 can buy in US
 Rate of inflation in domestic land can be less than US
 Factor payments in domestic land can be less
 Local currency is undervalued
 Degree of human development
GNI, including its expression in terms of per capita, growth rate, and PPP, profiles
growth and development in an economy. Some argue that these indicators, by
focusing on growth only as measured by monetary indicators, misrepresent the scale
and scope of a country’s level of development. Managers can deal with these
concerns by looking at a country’s degree of human development-in terms of both
economic and social factors-to estimate its current and future economic activity.

The United Nations has translated this view into its human development report and
its principal indicator, the Human Development Index (HDI), the HDI aims to
capture long-term progress in human development rather than short-term changes.
The HDI measures the average achievements in a country on three dimensions:
 Longevity, as measured by life expectancy at birth
 Knowledge, as measured by the adult literacy rate and the combined primary,
secondary, and tertiary gross enrollment ratio
 Standard of living, as measured by GNI per capita expressed in PPP for U.S.
dollars
Economic System
The ownership and control of economic activity in a country by
public or private or both explain the economic system of that
country. Dominance of public sector depicts the government
control on economic activity, more it will be free when private
sector dominate the same activity. Economic freedom in a country
is measured by Economic Freedom Index and data shows that
when economic freedom is high economic growth is also high.
Different type of economic systems are:
Market economy
Command economy
Mixed economy
Market socialism and State capitalism

Economic Freedom Index estimates the extent to which the government of a country
intervenes with the principles of free choice and free enterprise that go beyond the basic
need to protect property, liberty, citizen safety, and market efficiency.
 Key macroeconomic issues affecting
business strategy
Economic growth
The understanding of economic growth mostly depends on historical data
and prudent predictions should be made based on that data. Growth rate
observations should be made on the basis of real GDP. It is important to
note that developing countries with high growth rates are often unstable
politically or offer other challenges.
 Inflation
Inflation occurs because aggregate demand is growing faster than aggregate
supply. It also occurs when government spending rising faster than tax
revenue. Increase in money supply generate inflation. Inflation effects
interest rates, exchange rates, the cost of living, and general confidence in a
county’s political and economic system.
 Surpluses and deficits
The balance of payment is record of the economic transactions between the
residents of one country and the rest of the world. A credit transaction is
one that results in a receipt of a payment from foreigners. A debit
transaction is one that leads to a payment to foreigners. The most important
balance of BOP is current account balance. Contd…
Components of the Current account includes:
Merchandise import (debit-) and export (credit+) includes tangible
goods
Service import (debit-) and export (credit+) includes travel,
passenger fares, royalties and fees on cross-border licensing
agreements.
Income receipts (credit+) and payments (debit-) include dividends
and interest on local capital employed in foreign land and payment on
foreign assets invested in domestic land.
Unilateral transfers as receipts (credit+) or payment (debit-)
include private transfer payments in cash and kind, remittance from
immigrants outside (as NRBs), government transfers as gifts and
grants to and from foreign governments.
Components of Capital and Financial account include:
Capital and financial inflow(credit+) and outflow(debit-) include
local liability to foreigners rise/decrease, local claim on foreigners
decrease/increase, foreign held assets in domestic land rise/reduce,
country’s assets overseas reduces/increases.
Official Settlement transactions include official reserve assets (gold,
SDR, reserve at IMF, convertible forex) and liabilities to foreign official
agencies (liability of local bank to foreign agencies, treasury bills, bonds or
certificates)
Some indications from surplus and deficits
Surplus in goods and services balance means increase in GDP value
and deficit means the opposite. Increase in trade deficit (goods) puts
pressure on exchange rate to be depreciated.
Unilateral transfer surplus arising from remittance, earning from
foreign assets means increase in local capital formation and increase
in consumption capacity by residents. But surplus arising from
foreign grants is an indication of poor economy.
The Current account surplus means a net receipt of financial claims
by home residents which can be used to build up financial assets or
to reduce liabilities with rest of the world. So, the nation becomes
lender to the world. The deficit means the opposite.
Surplus in Capital and Financial account for FDI inflow can bring
Current account deficit in near future for profit repatriation.
 External Debt
The external debt can be measured as the total amount of debt and debt as
percentage of GDP, when both the amounts are larger the economy also
become unstable. MNEs investments in unstable economy is more
cautious.
 Internal Debt and Privatization
Internal debt results from an excess of government expenditures over
revenues. It can result from poor collection of tax, huge defense and
welfare expenditure inconsistent to revenue, subsidized state owned
enterprises. When privatization enhanced internal debt can be reduced as
burden of subsidized units goes off. Privatization pose opportunities for
MNEs also bring threats to deal with existing employees.
Transition to a market economy
Transition from command economy to market economy provide
significant opportunities for MNEs. Possibility of export increases
and privatization open up investment opportunity. Transition most
of the cases experience difficulties as battle between conservatives
and reformers intensifies.