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2005 Prentice Hall

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Chapter 2
The Global Economic
Environment
PowerPoint
by
Kristopher Blanchard
North Central University
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Introduction to Chapter
Market definition People or organizations
with needs and wants; both have the
willingness and ability to buy or sell
The global economic environment plays a
large role in the development of new
markets for organizations
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The World Economy An 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
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The World Economy An 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 re-
evaluate business models

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Economic Systems
4 main types of economic systems
Market Capitalism
Centrally planned socialism
Centrally planned capitalism
Market socialism
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Economic Systems
Market Command
Market
Capitalism
Centrally
Planned
Capitalism
Market
Socialism
Centrally
Planned
Socialism
Private

Resource
Ownership


State
Resource Allocation
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Economic Freedom
Rankings of economic freedom among countries
Ranges from free to repressed
Variables considered include such things as:
Trade policy
Taxation policy
Banking policy
Wage and price controls
Property rights
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Economic Freedom
Free
Hong Kong
Singapore
Ireland
New Zealand
United States
United Kingdom
Netherlands
Australia
Switzerland
Repressed
Bosnia
Vietnam
Laos
Iran
Cuba
Iraq
Libya
North Korea
Congo
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Stages of Market Development
World Bank has defined four categories of
development
High-income countries
Upper-middle income countries
Lower-middle income countries
Low-income countries
Based upon Gross National Product (GNP)
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Stages of Market Development
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Big Emerging Markets
China
India
Indonesia
South Korea
Brazil
Mexico
Argentina
South Africa
Poland
Turkey
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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
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Influencing the World Economy
Group of Seven (G-7)
Organization for Economic Cooperation
and Development
The Triad
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Marketing Implications of the
Stages of Development
Product Saturation
Levels
The percentage of
potential buyers or
households that own a
particular product
Graph shows that in
India a private phone is
owned by 1% of the
population
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Balance of Payments
Record of all economic transactions
between the residents of a country and the
rest of the world
Current account record of all recurring trade
in merchandise and services, private gifts, and
public aid between countries
trade deficit
trade surplus
Capital account record of all long-term direct
investment, portfolio investment, and capital
flows
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Balance of Payments
U.S. balance of payments statistics for the period
1999 to 2003
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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
Increases the risk to organizations that are
involved in global marketing
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Managed Dirty Float?
Definitions
Float refers to the system of fluctuating
exchange rates
Managed refers to the specific use of fiscal and
monetary policy by governments to influence
exchange rates
Devaluation is a reduction in the value of the local
currency against other currencies
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Managed Dirty Float?
Definitions
Dirty refers to the fact that central banks, as
well as currency traders, buy and sell currency
to influence exchange rates
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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
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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 US
after being converted to a dollar price
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Managing Economic Exposure
Economic exposure refers to the impact of
currency fluctuations on the present value
of the companys future cash flows
Transaction exposure is from sales/purchases
Real operating exposure arises when currency
fluctuations, together with price changes, alter a
companys future revenues and costs
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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
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Looking Ahead
Chapter 3 The Global Trade Environment:
Regional Market Characteristics and
Preferential Trade Agreements
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Market Capitalism
Individuals and firms allocate resources
Production resources are privately owned
Driven by consumers
Government should promote competition
among firms and ensure consumer
protection
Return
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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
Demand typically exceeds supply
Little reliance on product differentiation,
advertising, pricing strategy
Return
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Centrally-Planned Capitalism
Economic system in which command
resource allocation is used extensively in an
environment of private resource ownership
Examples:
Sweden
Japan

Return
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Market Socialism
Economic system in which market
allocation policies are permitted within an
overall environment of state ownership
Examples:
China
India
Return
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Low-Income Countries
GNP per capita of $785 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
Of these, only China and India are BEMs
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Lower-Middle-Income Countries
GNP per capita between $786 and $3,125
Sometimes called less-developed countries
(LDCs)
Characteristics
Early stages of industrialization
Cheap labor markets
Factories supply items such as clothing, tires, building
materials, and packaged foods
3 BEMs: Poland, Turkey, Indonesia
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Upper-Middle-Income Countries
GNP per capita between $3,126 to $9,655
Characteristics
Rapidly industrializing
Rising wages
High rates of literacy and advanced education
Lower wage costs than advanced countries
Sometimes called newly industrializing economies (NIEs)
3 BEMs: Argentina, Brazil, Mexico, South Africa
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High-Income Countries
GNP per capita above $9,656
Sometimes referred to as post-industrial countries
Characteristics
Importance of service sector, information processing
and exchange, and intellectual technology
Knowledge as key strategic resource
Orientation toward the future
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Group of Seven (G-7)
Leaders from these high income countries work to
establish prosperity and ensure monetary stability
United States
Japan
Germany
France
Britain
Canada
Italy
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Organization for Economic
Cooperation and Development
30 nations each with market-allocation
economic systems
Mission: to enable its members to achieve
the highest sustainable economic growth
and improve the economic and social well-
being of their populations
www.oecd.org
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The Triad
Dominant economic centers of the world
Japan
Western Europe
United States
Expanded Triad
Pacific Region
North America
European Union
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