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The Global Economic Environment

This chapter provides an overview of the global economic environment and discusses key topics such as: - The world economy has become increasingly integrated over time with capital movements now driving integration more than trade. - There are different types of economic systems ranging from free market capitalism to centrally planned socialism. - Countries can be classified into development stages from low-income to high-income based on factors like GNI per capita. - International organizations like the G8 and OECD work to promote global economic cooperation and development. - The balance of payments and foreign exchange markets are important aspects of international trade and finance.

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40 views33 pages

The Global Economic Environment

This chapter provides an overview of the global economic environment and discusses key topics such as: - The world economy has become increasingly integrated over time with capital movements now driving integration more than trade. - There are different types of economic systems ranging from free market capitalism to centrally planned socialism. - Countries can be classified into development stages from low-income to high-income based on factors like GNI per capita. - International organizations like the G8 and OECD work to promote global economic cooperation and development. - The balance of payments and foreign exchange markets are important aspects of international trade and finance.

Uploaded by

achsuraj
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 2 The Global Economic Environment

Introduction
This chapter includes
An overview of the world economy A survey of economic system types The stages of market development The balance of payments

2-2

The World EconomyAn Overview


In the early twentieth century economic integration was at 10%; today it is 50% EU and NAFTA are very integrated Global competitors have displaced or absorbed local ones
2-3

The World EconomyAn Overview


The new realities
Capital movements have replaced trade as the driving force of the world economy Production has become uncoupled from employment The world economy, not individual countries, is the dominating factor

2-4

The World EconomyAn Overview


The new realities, continued
75-year struggle between capitalism and socialism has almost ended E-commerce diminishes the importance of national barriers and forces companies to reevaluate business models

2-5

Economic Systems
Resource Allocation
Market
Private
Market capitalism

Command
Centrally planned capitalism

Resource Ownership
State

Market socialism

Centrally planned socialism


2-6

Market Capitalism
Individuals and firms allocate resources Production resources are privately owned Driven by consumers Governments role is to promote competition among firms and ensure consumer protection
2-7

Centrally Planned Socialism


Opposite of market capitalism State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities Consumers can spend on what is available Government owns entire industries and controls distribution Demand typically exceeds supply Little reliance on product differentiation, advertising, pricing strategy
2-8

Centrally Planned Capitalism


Economic system in which command resource allocation is used extensively in an environment of private resource ownership Examples
Sweden Japan
2-9

Economic Freedom
Rankings of economic freedom among countries free, mostly free, mostly unfree, repressed Variables considered include such things as: Trade policy Taxation policy Capital flows and foreign investment Banking policy Wage and price controls Property rights Black market
2-10

Economic Freedom
Free
1. 2. 3.

Repressed
150. 151. 152.

4.
5. 7. 8.

9.

Hong Kong Singapore Ireland Luxembourg Iceland/U.K. Estonia Denmark Australia/New Zealand/United States

153.
154. 155. 156.

Cuba Belarus Libya/Venezuela Zimbabwe Burma Iran North Korea

2-11

Stages of Market Development


The World Bank has defined four categories of development using Gross National Income (GNI) as a base BEMs, identified 10 years ago, were countries in Central Europe, Latin America, and Asia that were to have rapid economic growth Today, the focus is on BRIC, Brazil, Russia, India, and China
2-12

Low-Income Countries
GNP per capita of $825 or less Characteristics
Limited industrialization High percentage of population involved in farming High birth rates Low literacy rates Heavy reliance on foreign aid Political instability and unrest Concentrated in Sub-Saharan Africa India is the only BRIC country
2-13

Lower-Middle-Income Countries
GNI per capita: $826 to $3,255 Characteristics
Rapidly expanding consumer markets Cheap labor Mature, standardized, labor-intensive industries like textiles and toys

BRIC nations are China and Brazil


2-14

Upper-Middle-Income Countries
GNP per capita: $3,256 to $10,065 Characteristics
Rapidly industrializing, less agricultural employment Increasing urbanization Rising wages High literacy rates and advanced education Lower wage costs than advanced countries

Also called newly industrializing economies (NIEs) Examples: Malaysia, Chile, Venezuela, Hungary, Ecuador
2-15

Marketing Opportunities in LDCs


Characterized by a shortage of goods and services Long-term opportunities must be nurtured in these countries
Look beyond per capita GNP Consider the LDCs collectively rather than individually Consider first mover advantage Set realistic deadlines
2-16

Mistaken Assumptions About LDCs

1. The poor have no money. 2. The poor will not waste money on nonessential goods. 3. Entering developing markets is fruitless because goods there are too cheap to make a profit. 4. People in BOP (bottom of the pyramid) countries cannot use technology. 5. Global companies doing business in BOP countries will be seen as exploiting the poor.
2-17

High-Income Countries
GNI per capita: $10,066 or more Also know as advanced, developed, industrialized, or postindustrial countries Characteristics
Sustained economic growth through disciplined innovation Service sector is more than 50% of GNI
2-18

High-Income Countries
Characteristics, continued
Importance of information processing and exchange Ascendancy of knowledge over capital, intellectual over machine technology, scientists and professionals over engineers and semiskilled workers Future oriented Importance of interpersonal relationships
2-19

G-8, the Group of Eight


Goal of global economic stability and prosperity
United States Japan Germany France Britain Canada Italy Russia (1998)

2007 G-8 leaders in Germany


2-20

OECD, the Organization for Economic Cooperation and Development


30 nations PostWorld War II European origin Canada, United States (1961), Japan (1964) Promotes economic growth and social well-being Focuses on world trade, global issues, labor market deregulation
2-21

The Triad
United States, Western Europe, and Japan Represents 75% of world income Expanded triad includes all of North America and the Pacific Rim and most of Eastern Europe Global companies should be equally strong in each part
2-22

Product Saturation Levels


The percentage of potential buyers or households who own a product India: 1% of people have telephones Autos: 1 per 20,000 Chinese; 21 per 100 Poles; 49 per 100 EU citizens Computers: 1 PC per 6,000 Chinese; 11 PCs per Poles; 34 PCs per EU citizen
2-23

Balance of Payments
Record of all economic transactions between the residents of a country and the rest of the world Current accountrecord of all recurring trade in

merchandise and services, and humanitarian aid Trade deficitnegative current account Trade surpluspositive current account Capital accountrecord of all long-term direct investment, portfolio investment, and capital flows

2-24

Balance of Payments

2-25

Top Exporters in 2004


See Tables 2-7 and 2-8

2-26

Top Importers in 2004


See Tables 2-7 and 2-8

2-27

Overview of International Finance


Foreign exchange makes it possible to do business across the boundary of a national currency Currency of various countries are traded for both immediate (spot) and future (forward) delivery Currency risk adds turbulence to global commerce
2-28

Foreign Exchange Market Dynamics


Supply and demand interaction
Country sells more goods/services than it buys There is a greater demand for the currency The currency will appreciate in value

Exchange risks and gains in foreign transactions


2-29

Purchasing Power Parity (PPP) The Big Mac Index

Is a certain currency over-/under-valued compared to another? Assumption is that the Big Mac in any country should equal the price of the Big Mac in the United States after being converted to a dollar price
2-30

Managing Economic Exposure


Economic exposure refers to the impact of currency fluctuations on the present value of the companys future cash flows Two categories of economic exposure
Transaction exposure is from sales/purchases Real operating exposure arises when currency fluctuations, together with price changes, alter a companys future revenues and costs

2-31

Managing Economic Exposure


Numerous techniques and strategies have been developed to reduce exchange rate risk
Hedging involves balancing the risk of loss in one currency with a corresponding gain in another currency Forward contracts set the price of the exchange rate at some point in the future to eliminate some risk
2-32

Looking Ahead to Chapter 3


The global trade environment

2-33

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