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
The World Economy
An Overview
* In the early twentieth century
economic integration was at
10%; today it is 0%
* !" and #A$TA are very
integrated
* %lobal competitors have
displaced or absorbed local
ones
The World Economy
An Overview
* The new realities
* &apital movements have
replaced trade as the driving
force of the world economy
* 'roduction has become
uncoupled from employment
* The world economy( not
individual countries( is the
dominating factor
The World Economy
An Overview
* The new realities( continued
* )*year struggle between
capitalism and socialism has
almost ended
* !*commerce diminishes the
importance of national
barriers and forces
companies to reevaluate
business models
Economic Systems
ar!et Capitalism
* Individuals and firms
allocate resources
* 'roduction resources are
privately owned
* +riven by consumers
* %overnment,s role is to
promote competition among
firms and ensure consumer
protection
Centrally "lanned
Socialism
* -pposite of market capitalism
* .tate holds broad powers to
serve the public interest;
decides what goods and
services are produced and in
what /uantities
* &onsumers can spend on what
is available
* %overnment owns entire
industries and controls
distribution
* +emand typically e0ceeds
supply
* 1ittle reliance on product
differentiation( advertising(
pricing strategy
Centrally "lanned
Capitalism
* !conomic system in which
command resource
allocation is used
e0tensively in an
environment of private
resource ownership
* !0amples
* .weden
* 2apan
Economic #reedom
* 3ankings of economic freedom
among countries
* free( mostly free( mostly unfree(
repressed
* 4ariables considered include such
things as5
* Trade policy
* Ta0ation policy
* &apital flows and foreign
investment
* 6anking policy
* 7age and price controls
* 'roperty rights
* 6lack market
Economic #reedom
* Free
* 8ong 9ong
* .ingapore
* Ireland
* 1u0embourg
* Iceland:";9;
* !stonia
* +enmark
* Australia:#ew <ealand:"nited .tates
* Repressed
* &uba
* 6elarus
* 1ibya:4ene=uela
* <imbabwe
* 6urma
* Iran
* #orth 9orea
Sta$es o% ar!et
&evelopment
* The 7orld 6ank has defined
four categories of development
using %ross #ational Income
>%#I? as a base
* BEMs( identified 10 years ago(
were countries in &entral
!urope( 1atin America( and Asia
that were to have rapid
economic growth
* Today( the focus is on BRIC(
6ra=il( 3ussia( India( and &hina
'ow(Income Countries
* %#' per capita of @AB or
less
* &haracteristics
* 1imited industriali=ation
* 8igh percentage of population
involved in farming
* 8igh birth rates
* 1ow literacy rates
* 8eavy reliance on foreign aid
* 'olitical instability and unrest
* &oncentrated in .ub*.aharan
Africa
* India is the only 63I& country
'ower(iddle(Income
Countries
* %#I per capita5 @ABC to
@D(B
* &haracteristics
* 3apidly e0panding consumer
markets
* &heap labor
* Eature( standardi=ed( labor*
intensive industries like
te0tiles and toys
* 63I& nations are &hina and
6ra=il
)pper(iddle(Income
Countries
* %#' per capita5 @D(BC to
@10(0C
* &haracteristics
* 3apidly industriali=ing( less
agricultural employment
* Increasing urbani=ation
* 3ising wages
* 8igh literacy rates and advanced
education
* 1ower wage costs than advanced
countries
* Also called newly industriali=ing
economies >#I!s?
* !0amples5 Ealaysia( &hile(
4ene=uela( 8ungary( !cuador
ar!etin$ Opportunities
in '&Cs
* &haracteri=ed by a shortage of
goods and services
* 1ong*term opportunities must be
nurtured in these countries
* 1ook beyond per capita %#'
* &onsider the 1+&s collectively
rather than individually
* &onsider first mover advantage
* .et realistic deadlines
ista!en Assumptions
About '&Cs
* The poor have no money;
* The poor will not FwasteG
money on non*essential
goods;
* !ntering developing markets is
fruitless because goods there
are too cheap to make a profit;
* 'eople in 6-' >bottom of the
pyramid? countries cannot use
technology;
* %lobal companies doing
business in 6-' countries will
be seen as e0ploiting the poor;
*i$h(Income Countries
* %#I per capita5 @10(0CC or
more
* Also know as advanced(
developed( industriali=ed( or
postindustrial countries
* &haracteristics
* .ustained economic growth
through disciplined innovation
* .ervice sector is more than
0% of %#I
*i$h(Income Countries
* &haracteristics( continued
* Importance of information
processing and e0change
* Ascendancy of knowledge
over capital( intellectual over
machine technology(
scientists and professionals
over engineers and
semiskilled workers
* $uture oriented
* Importance of interpersonal
relationships
G(+, the Group o% Ei$ht
* %oal of global economic stability
and prosperity
* "nited .tates
* 2apan
* %ermany
* $rance
* 6ritain
* &anada
* Italy
* 3ussia >1HHA?
OEC&, the Or$ani-ation
%or Economic
Cooperation and
&evelopment
* D0 nations
* 'ostI7orld 7ar II
!uropean origin
* &anada( "nited .tates
>1HC1?( 2apan >1HCJ?
* 'romotes economic growth
and social well*being
* $ocuses on world trade(
global issues( labor market
deregulation
The Triad
* "nited .tates( 7estern
!urope( and 2apan
* 3epresents )% of world
income
* !0panded triad includes all
of #orth America and the
'acific 3im and most of
!astern !urope
* %lobal companies should be
e/ually strong in each part
"roduct Saturation
'evels
* The percentage of potential
buyers or households who
own a product
* India5 1% of people have
telephones
* Autos5 1 per B0(000
&hinese; B1 per 100 'oles;
JH per 100 !" citi=ens
* &omputers5 1 '& per C(000
&hinese; 11 '&s per 'oles;
DJ '&s per !" citi=en
.alance o% "ayments
* 3ecord of all economic
transactions between the
residents of a country and the
rest of the world
* &urrent accountKrecord of all
recurring trade in merchandise and
services( and humanitarian aid
* Trade deficitKnegative current
account
* Trade surplusKpositive current
account
* &apital accountKrecord of all
long*term direct investment(
portfolio investment( and capital
flows
.alance o% "ayments
Top E/porters in 2001
* .ee Tables B*) and B*A
Top Importers in 2001
* .ee Tables B*) and B*A
Overview o%
International #inance
* $oreign e0change makes it
possible to do business
across the boundary of a
national currency
* &urrency of various
countries are traded for both
immediate >spot? and future
>forward? delivery
* &urrency risk adds
turbulence to global
commerce
#orei$n E/chan$e
ar!et &ynamics
* .upply and demand
interaction
* &ountry sells more
goods:services than it buys
* There is a greater demand for
the currency
* The currency will appreciate in
value
Exchange risks and gains in foreign
transactions
"urchasin$ "ower
"arity 2"""3
The .i$ ac Inde/
* Is a certain currency over*:under*valued
compared to anotherL
* Assumption is that the 6ig Eac in any country
should e/ual the price of the 6ig Eac in the
"nited .tates after being converted to a
dollar price
ana$in$ Economic
E/posure
* Economic exposure refers to
the impact of currency
fluctuations on the present value
of the company,s future cash
flows
* Two categories of economic
e0posure
* Transaction exposure is from
sales:purchases
* Real operating exposure arises
when currency fluctuations(
together with price changes( alter
a company,s future revenues and
costs
ana$in$ Economic
E/posure
* #umerous techni/ues and
strategies have been
developed to reduce
e0change 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 e0change rate at
some point in the future to
eliminate some risk
'oo!in$ Ahead to
Chapter 4
* The global trade
environment