Chapter Four

The Economic Environments Facing Businesses

International Business Part Two

Comparative Environmental Frameworks

4-2 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

4-3 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

Importance of Economic Environments

• Company managers study economic environments to estimate how trends affect their performance

• A country’s economic policies are a leading indicator of government’s goals and its planned use of economic tools and market reforms.

• Economic development directly impacts citizens, managers, policymakers, and institutions.

4-4 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

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 nation’s borders over one year, no matter whether domestic or foreign-owned companies make the product.

4-5 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

Adjustments to GNI

• Number of people in a country

• Growth rate

• Local cost of living

• Economic sustainability

4-6 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

Other features of an economy

• Inflation• Unemployment• Debt• Income distribution• Poverty• Labor costs• Productivity• Balance of payments

4-7 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

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

4-8 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

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.

4-9 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

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

4-10 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

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