1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-2 Chapter 4 The Economic Environments Facing Business

3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-3 Learning Objectives  To communicate the importance of economic analysis  To discuss the idea of economic freedom  To profile the characteristics of the types of economic systems  To introduce the notion of state capitalism  To profile indicators of economic development, performance, and potential

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-4 Introduction Learning Objective 1: To communicate the importance of economic analysis

5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-5 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

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-6 International Economic Analysis  A universal assessment of economic environments is difficult because it is difficult to stipulate a definitive set of indicators to estimate the performance and potential of a country’s economy today’s set of perfect measures may prove imperfect tomorrow interdependencies complicate interpreting the relationship among elements of the economic environment

7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-7 International Economic Analysis Economic Factors Affecting International Business Operations

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-8 Economic Freedom Learning Objective 2: To discuss the idea of economic freedom

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-9 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

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-10 Economic Freedom Economic Freedom by Region, with Population

11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-11 Economic Freedom Global Distribution of Economic Freedom

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-12 Value of Economic Freedom  Economic freedom affects Growth rates Productivity Income levels Inflation Employment Life expectancy Literacy Political openness Environmental sustainability

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-13 Trends in Economic Freedom  The trend toward increased economic freedom is no longer certain Questions about the legitimacy of free markets The benefits of more state control

14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-14 Types of Economic Systems Learning Objective 3: To profile the characteristics of the types of economic systems

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-15 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 Command economy Mixed economy

16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-16 Types of Economic Systems

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-17 Market Economy  In a market economy individuals rather than governments make most economic decisions Capitalism  private ownership of capital Laissez-faire  governmental noninterference in economic affairs

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-18 Command Economy Learning Objective 4: To introduce the notion of state capitalism

19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-19 Command Economy  In a command economy the visible hand of the state supersedes the invisible hand of individuals Government  owns and controls resources  determines prices  Communism

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-20 Mixed Economy  Most economies are mixed economies fall between market and command economies  Socialism regulate economic activity with a focus on social equality and a fair distribution of wealth

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-21 State Capitalism: Detour or Destination?  State capitalism refers to a system in which the government explicitly manipulates market outcomes for political purposes promote certain industries to encourage economic development develop national companies into global leaders foreign companies restricted from strategic industries

22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-22 Economic Development, Performance, and Potential Learning Objective 5: To profile indicators of economic development, performance, and potential

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-23 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, and China developed countries  high per capita income and standard of living  like the U.S., Japan, France, Australia

24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-24 Gross National Income  Gross national income (GNI) the broadest measure of economic activity for a country  Gross national product (GDP) 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

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-25 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

26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-26 Improving Analysis GNI per capita, 2009

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-27 Improving Analysis GNI per capita adjusted for Purchasing Power Parity

28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-28 Broader Conceptions of Performance and Potential  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

29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-29 Features of an Economy  Managers should also consider Inflation Unemployment Debt Income distribution Poverty Balance of payments

30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-30 Inflation  Inflation a measure of the increase in the cost of living  Deflation when prices for products go down not up  Reflation increase the money supply and reduce taxes to accelerate economic activity

31. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-31 Unemployment  Unemployment rate share of unemployed workers seeking employment for pay relative to the total civilian labor force  Misery index the sum of a country’s inflation and unemployment rates

32. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-32 Debt  Debt the total of a government’s financial obligations  internal debt  external debt  Growing public debt signals tax increases reduced growth rising inflation increasing austerity

33. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-33 Income Distribution  Income distribution estimates the proportion of the population that earns various levels of income  Gini coefficient measures the extent to which the distribution of resources deviates from a perfectly equal distribution

34. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-34 Poverty  Poverty the state of having little or no money and few or no material possessions extreme poverty  less than $1.25 per day moderate poverty  less than $2.00 per day  Today the world population is 80% poor, 10% middle income, and 10% rich  Base of the Pyramid Frugal engineering

35. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-35 Balance of Payments  Balance of payments reports a country’s trade and financial transactions with the rest of the world  Current account tracks merchandise trade  Capital account tracks loans given to foreigners and loans received by citizens

36. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-36 Balance of Payments Components of a Country’s Balance of Payments

37. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-37 Balance of Payments Current Account Balances: The Top and Bottom Five

38. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 4-38 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.