International Business and

Trade
Economic Environment
Learning Goals and Standards
• To appreciate the importance of economic analysis of
foreign market.
• To identify the major dimensions of international
economic analysis.
• To compare and contrast the economic indicators of
countries.
• To profile the characteristics of the types of economic
systems.
Learning Goals and Standards
• To discuss the idea of economic freedom.
• To profile the idea, drivers, and constraints of
economic transition.
Introduction
The economic environment of a country establishes its
attractiveness to foreign investors. Managers assess
economic environments and forecast market trends in
the effort to make better investment choices, operating
decisions, and competitive strategies. Understanding the
economic environments of foreign companies and
markets can help managers predict how trends and
events in those environments might affect their
company's future performance.
Introduction
Economic analysis looks at several indicators of an
economic environment with emphasis given to how local
conditions require adjusting analysis and interpretation.
Managers recognize that the power of economic analysis is
a function of identifying the best possible indicators and
then understanding how they work in isolation and
interactively. Important economic dimensions are GNI,
GNI per capita, purchasing power parity (PPP), growth
rate, distribution of income, and degree of human
development.
Introduction
The benefits of doing business in a country are directly
influenced by the size of the market (GNI or PPP), the
present wealth (either GNI or PPP per capita) of
consumers, and the likely future wealth of consumers
(in terms of income distribution and human
development). Gross national product is a broad
measure of national income that is the market value of
final goods and services produced by domestically
owned factors of production.
Introduction
Per capita GNP is used to rank countries in terms of
their individual wealth. The wide range in the cost of
living worldwide spurs managers to pinpoint the true
purchasing power of a nation. A country with low GNI
per capita may, when considered in terms of PPP, have a
vibrant economy. Managers refine their sense of
economic performance and potential by evaluating the
state of inflation, unemployment, poverty, debt, and
balance of payments.
Introduction
Economic freedom is the degree to which governments
intervene in the economic environment. Free countries tend
to have higher economic growth, higher standards of
living, and greater macroeconomic stability than do less
free or repressed countries. The type of economic system is
a strong predictor of a country's present economic
performance and future economic prospects. The system
determines who owns and controls factors of production
and, by extension, the price and quantity of goods and
services.
Introduction
In a pure market economy, the goods and services that a
country produces, and the quantity in which they are
produced, are not planned by anyone. Rather, price and
quantity are determined by the invisible hand of supply
and demand. In a pure command economy, the
government plans what goods and services a country
produces, the quantity in which they are produced, and
the price at which they are sold. A mixed economy
includes some elements of each.
Introduction
Market forces as well as the government play a
significant role in directing the investment activities of
private enterprise and consumption activities of
individuals. The transition to a market economy takes
place when command and mixed economies liberalize
their economic policies and transfer more ownership
and control of the economy to market forces.
Lesson Presentation
Managers need to understand economic environment to
predict trends that might affect their company’s
performance.
A country’s economic policies are a leading indicator of
the governments goals and its planned use of economic
tools and market reforms.
The matter of economic development is important to
citizens, managers, policymakers, and institutions.
Lesson Presentation
Key economic forces include
• The general economic framework of a country
• Economic stability
• The existence and influence of capital markets
• Factors endowments
• Market size
• Availability of an economic infrastructure
Lesson Presentation
Gross national income is the value of all final goods and
services produced within a nation in a given year.
Gross domestic product the value of production that
take place within a nations borders.
Managers improve the usefulness of GNI by adjusting it
for the number of people in a country, growth rate, and
the local cost of living.
Lesson Presentation
GNI per capita is the value of all goods and services
produced in the economy divided by the population.
Purchasing power parity is an adjustment in gross
domestic product per capita to reflect differences in the
cost of living.
The human development index combines indicators of
real purchasing power, education, and health to give a
more comprehensive measure of economic development.
Lesson Presentation
Inflation is a measure of the increase in the cost of living.
The consumer price index measure the average change in
consumer prices over time in a fixed market basket of
goods and services.
High inflation results in higher interest rates because.
• Banks need to offer high interest rates to attract money.
• Governments raise interest rates to slow down economic
growth.
Lesson Presentation
Unemployment is a measure of the number of workers
that want to work but do not have jobs.
Unemployment insurance provides temporary income to
unemployed workers who actively seek employment
and who meet other qualifications.
Misery index the sum of a country’s inflation and
unemployment rates.
Lesson Presentation
A country has two types of debt
Internal portion of the government debt that is
denominated in the country’s own currency and held by
domestic residents.
External debt owed to foreign creditors that is
denominated in a foreign currency.
Lesson Presentation
HIPC those poor countries with large debts that are the
target of initiatives to forgive that debt as a means of
assisting their developments.
Income distribution is a description of the fractions of a
population that are at various levels of income.
A global concern is the growing gap between rich and
poor.
Lesson Presentation
Balance of payments a record of a country’s
international transactions.
Current account trade in goods and services and income
from assets abroad.
Capital account transaction in real or financial assets
between countries, such as the sale of real estate to a
foreign investor.
Lesson Presentation
Merchandise trade balance the net balance of exports
minus imports of merchandise.
Deficit imports exceed exports.
Surplus exports exceed imports.
Companies monitor the balance of payments to watch
for factors that could lead to currency instability or
government actions to correct an imbalance.
Lesson Presentation
An economic system is a mechanism that deals with the
production, distribution, and consumption of goods and
services in a particular society.
A market economy permits an open exchange of goods and
services between producers and consumers.
Command economy all dimensions of economic activity
are determined by a central government plan.
Government intervention in the economy takes various
forms.
Lesson Presentation
Factors that determine economic freedom
• Trade policy
• Fiscal burden of government
• Government intervention in the economy
• Monetary policy
• Capital flows and investment
• Banking and finance
Lesson Presentation
• Wages and prices
• Property rights
• Regulation
• Black market activity
Countries with the freest economies have the highest
annual growth in GNI
Lesson Presentation
Over the past few decades, more countries have moved
toward greater economic freedom.
Most command economies are going through the
process of transition to market economies.
Transition includes liberalizing economic activity,
reforming business activity, and institutional
frameworks.
Lesson Presentation
Privatization the sale of state owned enterprise to the
domestic or foreign private sector, this process helps
governments reduce internal debts.
Deregulation is the removal of rules that control or restrict
the operations of an industry or company.
Property rights permit on individual to own property and
keep the income earned from it.
Antitrust laws aim to maintain and promote market
competition
Integration