International

Business
Environments & Operations
15e

Daniels ● Radebaugh ● Sullivan

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 Chapter 4
The Economic
Environments Facing
Businesses

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 Learning Objectives
 Communicate the importance of economic
analysis
 Discuss the idea of economic freedom
 Profile the characteristics of the types of
economic systems
 Introduce the notion of state capitalism
 Profile leading indicators of economic
development, performance, and potential

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 Introduction
 Managers assess a country’s economic
environment knowing
 Countries differ in different ways
 Economic and political changes alter market
circumstances
 It is important to understand connections,
change, and consequences
 The challenges of the comeback
 Choices of citizens, policymakers, and
institutions

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 International
Economic Analysis
 A universal assessment of economic
environments is difficult because of:
 System Complexity
 Identifying proper indicators is difficult
 Market Dynamism
 New economic circumstances
 Market Interdependence
 Markets influence each other
 Data Overload
 Complicates decision-making

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 Economic Freedom
 Economic freedom – people have the
right to work, produce, consume, save,
and invest the way they prefer
 measured across business freedom, monetary
freedom, fiscal freedom, investment freedom,
freedom from corruption, property rights, trade
freedom, government size, financial freedom,
and labor freedom

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 Evergreen Solar Inc. will eliminate 800 jobs in Massachusetts and shut its
new factory at the former military base in Devens, just two years after it
opened the massive facility to great fanfare and with about $58 million in
taxpayer subsidies.

 The company announced yesterday that it will close the plant by the end of
March, calling itself a victim of weak demand and competition from
cheaper suppliers in China, where the government provides solar
companies with generous subsidies.

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Economic Freedom
Economic Freedom by Region, with Population

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Global Distribution of Economic
Freedom

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 Economic Freedom: Value and
Trend
 Economic freedom affects: Growth rates,
Productivity, Income levels, Inflation,
Employment, Life expectancy, Literacy,
Political openness, Environmental
sustainability
 The trend toward increased economic
freedom is no longer certain
 The legitimacy of free markets has been
questioned
 The benefits of more state control
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Standard of Living

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 Types of Economic Systems
 An economic system refers to the mechanism
that deals with the production, distribution, and
consumption of goods and services
 Types
 Market Economy: a free-market (capitalistic) economy
built upon the private ownership and control of the
factors of production
 Command Economy: a centrally-planned economy built
upon government ownership and control of the factors
of production
 Mixed Economy: an economy in which economic
decisions are largely market-driven and ownership is
largely private, but significant government intervention
is still evident

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 Evaluating Market, Mixed and
Command Economy
Criteria Market Mixed Command

Degree of economic
freedom
Ownership of means of
production
Role of price in the
system
Role of government

Trade and investment

policy
Fiscal and monetary
policy 13
Types of Economic Systems
Types of Economic Systems

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 Economic Development,
Performance, and Potential
 Broad classes of countries include
 developing countries
 largest number of countries

 low per capita income

 emerging economies
 fast growing, relatively prosperous

 BRICS – Brazil, Russia, India, China and

South Africa
 developed countries
 high per capita income and standard of living

 like the U.S., Japan, France, Australia

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 The Rise of the Emerging Nations
 Emerging Nations are the center of most
economic discussions today
 Who are these nations? What is their
impact in a globalized world?
 Impact of Emerging Markets
 See my presentation under Teaching Aids
 BRICS and plus nations
 Measures of Economic
Performance
 Gross national income (GNI)
 the broadest measure of economic activity for
a country
 Gross national product (GNP)
 the total value of all final goods and services
produced within a nation in a particular year
 Gross domestic product (GDP)
 the total market value of goods and services
produced by workers and capital within a
nation’s borders
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 Improving Analysis
 GNI data should be adjusted for
 the growth rate of the economy
 the number of people in a country
 the local cost of living

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GNI Data

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A Divided World

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GNI per Capita, 2011

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GNI Per Capita, 2011, Adjusted for
Purchasing Parity

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 National Performance and
Potential: Broader Concepts
 GNI data should be adjusted for
 the growth rate of the economy
 the number of people in a country
 the local cost of living
 Green economics: gauge economic performance
in terms of the effect of current choices on long-
term sustainability
 Sustainable development: meet the needs of the
present without compromising the ability of future
generations to meet their own needs
 Happynomics: importance of emotional prosperity
in addition to financial prosperity
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 Purchasing Power Parity
 PPP is the number of units of a country’s currency
required to buy the same amounts of goods and
services in the domestic market that $1 would
buy in the United States.
 The relative price index makes the difference.
Example: The price of tomato in USA and India is
$2.00 and $0.20 respectively. If an Indian earns
$3000 per year, how much an American will have
to earn to buy the same amount of tomato?
 As we evaluate an economy, the purchasing
power parity should also be taken into
consideration
 Economic Analysis
 Managers should also consider
 Inflation
 Unemployment
 Debt
 Income distribution
 Poverty
 Balance of payments

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 The Balance of Payments
 Reports the total of all money flowing into
a country less all money flowing out of
that country to any other country during a
given period of time
 Records a country’s international
transactions amongst companies,
governments, and/or individuals
 Concept of trade surplus and trade deficit

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 Balance of Payments (BOP) Account

A. Current Account C. International Reserve

Merchandise Trade Gold, Silver, and Precious Metals
Foreign Currency
Services
Special Drawing Rights (SDR)
Unilateral Transfer

B. Capital Account D. Net Statistical

Portfolio Investment Discrepancy
Direct Investment
Short term loans

Equation: A+B = C+D

BOP Account must balance

27
 Chapter 4: Discussion Questions
1. Define “economic freedom” and explain its implication in
an economy.
2. What are the three types of economic systems? What
criteria can we use to evaluate them? Explain.
3. Discuss the impact of “emerging nations” in a globalized
world.
4. Explain how we can evaluate an economy using traditional
and nontraditional(broader) measures of economic
performance.
5. Explain the Balance of Payments account of a country
with its four subheads. Why is it important to in
international business manager?

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