International Business

Part Two
Comparative Environmental
Frameworks
Chapter Four
The Economic Environment

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter Objectives
To understand the importance of economic
analysis of foreign markets
To identify the major dimensions of international
economic analysis
To compare and contrast macroeconomic
indicators
To profile the characteristics of the types of
economic systems
To discuss the idea of economic freedom
To profile the idea, drivers, and constraints of
economic transition
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-2

Importance of Economic
Environments
Company managers study economic
environments to estimate how trends affect their
performance
A countrys economic policies are a leading
indicator of governments goals and its planned
use of economic tools and market reforms.
Economic development directly impacts citizens,
managers, policymakers, and institutions.

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-3

Economic Factors Affecting

International Business Operations

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-4

Elements of the Economic

Environment
Gross national income (GNI): the income
generated both by total domestic
production as well as the international
production activities of national companies
Gross domestic product (GDP): the total
value of all goods and services produced
within a nations borders over one year, no
matter whether domestic or foreign-owned
companies make the product.
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-5

Adjustments to GNI

Number of people in a country

Growth rate
Local cost of living
Economic sustainability

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-6

Other features of an economy

Inflation
Unemployment
Debt
Income distribution
Poverty
Labor costs
Productivity
Balance of payments
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-7

Components of a Countrys Balance

of Payments

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-8

Definition of Economic System

A mechanism that deals with the
production, distribution, and consumption
of goods and services
Types:
Market economy
Command economy
Mixed economy
Click for Video
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-9

The Economic Freedom Index

Approximates the extent to which a
government intervenes in the areas of free
choice, free enterprise, and market-driven
prices for reasons that go beyond the
basic need to protect property, liberty,
citizen safety, and market efficiency
Countries with the freest economies have
had the highest annual growth and a
greater degree of wealth creation.
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-10

Dimensions of The Economic

Freedom Index

Business freedom
Trade freedom
Monetary freedom
Freedom from government
Fiscal freedom
Property rights
Investment freedom
Financial freedom
Freedom from corruption
Labor freedom
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-11

Transition to a Market Economy

Liberalizing economic activity

Reforming business activity
Establishing legal and institutional frameworks
Success is linked to how well the government
deals with:

Privatization
Deregulation
Property right protection
Fiscal and monetary reform
Antitrust legislation
Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-12

Reforms and
Economic Progress

Copyright 2009 Pearson Education, Inc. publishing as Prentice Hall

4-13