Eko Konspektai Palei Skaidres

7/31/2019 Eko Konspektai Palei Skaidres

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National Income, fiscal and monetary policy

National income a measure of the value of the output of the goods and services produced by an

economy over a period of time, usually one year.

Three methods that can be used to measure national income:

1.output

2.incomes

3.expenditure

p.325, Fig 9.1 Circular flow

Domestic households provide (tiekia) factor services (labour, loan capital, entrepreneurship, land) to

domestic firms which use their services to produce and output of goods and services -> households are

rewarded by income (wages, dividends, interest, rent) -> all the households income goes in consumption

ecpenditure ( C ) on the output of domestic firms.

p.326, Fig 9.2

Withdrawals (W) (-) Savings, Tax, Imports

any income received by a domestic household(H) not passed on to domestic firm(F)

any income received by a domestic firm(F) not passed on to domestic household(H)

passed onieinanios i rato

Savings (S) personal savings by domestic households, business savings (undistributed profits) by F

Taxes (T) taxes paid by (H) (income tax, council tax, VAT..), taxes paid by (F) (corporation tax, business

rates, VAT..)

Imports (M) imports by (F) or (H) of goods or services from overseas firms or households

Withdrawals = savings + taxes + imports

W = S + T + M


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Injections (J) (+) Investment, Government, Exports

income received by a (H) that does not come from a (F)

income received by a (F) that does not come from (H)

Investment (I) income is received by (F) which does not come from (H) but from other domestic firms

who purchase capital equipment, buildings etc. for investment purposes (tikslai)

Government expenditure (G) income is received by (F) which does not come from (H) but form the

government (e.g. government contracts). Alternatively, income is received by (H) which doesnt come

from (F) but from the government (e.g. public sector workers)

Exports (X)income is received by (F) which doesnt come from (H) but from overseas households and

firms. Alternatively, income is received by (H) not from (F) but from overseas firms and households (e.g.

interest and dividends from overseas, consultancy overseas etc.)

dividedas - akcins bendrovs pelno dalis, paskirstoma akcininkams.

Injections Investment + Government expenditure + Exports

J = I + G + X

National income definitions

Gross domestic product (GDP)

The value of output produced (and incomes received) by domestic residents (F and H) using resources

located within the domestic economy (e.g. within the UK)

Gross national product (GNP)

Value of output produced (and incomes received) by domestic residents from their ownership of

resources, wherever these resources happen to be located, whether inside or outside the domestic

economy. E.g. , GNP takes account of the fact that some UK residents (F and H) earn incomes such asprofits, interest and rent from owning resources located abroad. The netvalue to UK residents of such

receipts (gavimai) from abroad and the equivalent (atitinkamai) payments abroad is called net property

income from abroad in the national account.

GDP + Net property income from abroad = GNP


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Net national product (NNP) (grynasis nacionalinis produktas)

The total value of output produced and incomes received by UK residents in the course of a year. It

includes the full value of new plant and equipment produced during the course of the year ( i.e. gross

domestic fixed capital formation). However, over this period existing plant and equipment will have

depreciated (i.e. declined in value due to wear and tear and absolescence). In order to obtain a true

measure of national income and appropriate deduction for capital depreciation must be made, i.e.

GNP Depreciation = NNP

Market prices. The value placed on any output uses the prices observed in the marketplace. Prices may

be distorted by taxes and subsidies. Ex. Market prices of some products may be higher than they would

be due to taxes levied (apmokestintos) on them. Or market prices may be lower than they would be due

to subsidies received on them. Market prices is a valuation approach which includes these impacts on

price of taxes and subsidies.

Factor cost. Value placed on any output seeks to exclude the distorting impacts on the prices of

product of any taxes or subsidies.

Taxes are subtracted from the valuation at market prices.

Subsidies are added to the valuation at market prices.

Fiscal policy

Biudetin politika. Visuomenini ilaid keitimas, keiiant mokesius ir vyriausybs pirkimus.

Arba, valstybs veiksmai, darantys tak biudto formavimui, mokesi koregavimui ar reguliuojantys

valstybs skol.

Tikslasuimtumas (4-6% nedarbas) arba kainu pastovumas (t.y. 3-7% infliacijos tempas per metus tik

tiek turi pakilti kainos)

Changes in Government spendings and Taxes

Budget deficit TG

Balanced budget T=G


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Golden rule(ES rule) : over the economic cycle the government will only borrow to invest and will not

borrow to fund current expenditure

Public debt rule : over the economic cycle the ratio of public debt to national income will be held at a

stable and prudent level. Historically the government investment to national income is usually around

2-3% - therefore limits are defined.

Taxation:

1) Equitable (fair) - those who can afford to pay mopre should do so

2) Economic - more should be collected in tac than is needed to cover the costs of administration

3) Transparent - individuals should know how much tax thay are paying

4) Convenient - the taxpayer should not find it difficult to pay the tax

Direct :paid directly to Exchequer(valstybs idas) by individuals or companies

Individuals : Income tax, Employees National Insurance, Capital Gains(kapitalo pajamos),

Inheritance Tax (paveldjimo mokesiai)

Companies : Corporation tax, Employers National Insurance

Indirect : paid indirectly to Exchequer and usually via expenditures of individuals or companies; e.g. VAT,

customs and excise duties, etc.

Social contributions : paid into the social security founds ( ex. SoDra)

Progressive vs. regressive taxes

Progressive : Tax paid rises more than in proportion to income (pvz. Jei uzdirbi 800-1000Lt tai moki 10%;

jei nuo 1000Lt iki 2000Lt tai 20% ir t.t.)

Regressive : Tax paid rises less than in proportion to income (kuo daugiau uzdirbi, tuo maziau mokesciu)

Proportional : Tax paid rises exactly in proportion to income (pvz. Visiems nuskaiciuojama 20% nuo

pajamu)

Government spending

Case for controlling?

Freedom and choice. Excessive government expenditure adversely affects individual freedom

and choice. It spoonfeeds individuals, taking away the incentive for personal provision, as with

private insurance for sickness or old age. / The state may provide goods/services that are in little


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demand while discouraging others (via taxation) that might otherwise have been bought. / With

government provision, the good/service may be free or subsidised , so that the amount paid by

the consumer will understate the true cost (higher taxes etc.) of providing him/her with that

good or service, thereby encouraging excessive consumption of the item.

Crowding out the private sector.

Control of money supply. Government expenditures must be cut in order to limit the growth of

money supply and to curb inflation. / Public expenditure must be restricted not only to limit the

supply of money, but also its price the rate of interest. A major policy aim of governments

has been to control public sector borrowing.

Incentives to work, save and take risks. Increased public spending not only pushes up

government borrowing, but also leads to higher taxes, thereby reducing the incentives to work,

save and take risks. Higher taxes undermine the work ethic is largely inconclusive.

Balance of payments stability. The growth of public expenditure may create problems for thebalance of payments. Higher public spending raises interest rates and attracts capital inflow,

which in turn raise the demand for sterling and therefore the exchange rate. A higher pound

then makes exports dearer and imports cheaper so that the balance of payments deteriorates.

Built-in stabilization

Automatic rise in withdrawals and/or fall in injections in times of boom. Ex. When the economy is

growing rapidly, individual incomes, business incomes and spending on goods/services will all be rising

in value, thereby increasing the governments revenue from both direct and indirect taxes.Unemployment is likely to be falling, reducing the governments spending on social security,

unemployment etc. Automatic rise in withdrawals and reduction in injections will help to dampen any

excessive growth in national income which might otherwise result in rapid inflation and unsustainable

boom conditions.

-||- fall in withdrawals and/or rise in injections in times of recession. Ex. When the economy is

contracting, individual incomes, business incomes and spending on goods/services will all be falling in

value, thereby reducing the governments tax revenue from both direct and indirect taxes.

Unemployment -> rising, increasing the governments spending on social security, unemployment etc.

Discretionary stabilization

Governments will intervene in the economy for specific purposes, such as reinforcing the built-in

stabilizers

If an inflationary gap is identified then the government may seek to reduce G or raise T to

eliminate it.


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If a deflationary gap is identified then the government may seek to raise G or reduce T to close

it.

Time lags

Recognition lag. It takes time for the government to collect and analyse data, recognize any

problem that may exist, and then decide what government spending and taxation decisions to

take.

Execution lag. Having made its fiscal policy decisions, It takes time to implement these changes

and it also takes time for these changes to have an effect on the eco.

Monetary Policy

Government manipulates the supply of, or demand for, money in order to achieve objectives.

Concentrates on two key variables:

MONEY SUPPLY

What is money?

Act as a medium of exchange or means of payment. It is the only asset which is universally

acceptable in exchange for goods, services, labor etc.

Act as a unit of account. Express value, reflect services/goods value.

Act as a store of wealth.

Act as a standard for deferred payment.

Equities these are the various types of shares issued by companies.

Bonds these are longer-term securities (usually 3 years and upwards) issued by governments and

companies seeking borrow money. By government often called gilts, by private companies

debentures.

Sterling commercial paper. Covers securities (7-364 days) issued by companies seeking to borrow.

Company promises to pay back a guaranteed sum in sterling at the specified future date.

Certificates of deposit (CD). Document certifying that a deposit has been placed with a bank, is repayable

with interest after a stated time, minimum value usually 50,000(pounds), CDs normally mature in 12

months, although they have been issued with a five-year maturity.


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Treasury bills. Are issued by the Bank of England on behalf of the government and normally are

repayable 91 days after issue. Is a promise to pay a fixed sum of money at a specified future date.

Purchaser of the Treasury bill earns a return by discounting it.

More Liquid Less Liquid

Cash>Sight deposits>Time deposits>Sterling Commercial paper>Certificates of dep.>Bills>Equities>Bonds>Land/Build./Phys.assets

Controlling the money supply

When the government wishes to stimulate the economy, it is likely to seek to increase the

money supply.

When wishes to dampen down the economy, it is seek to reduce the money supply.

Government can influence the supply of money by:

Issuing notes and coins. Government can decide on the value of notes,coins to be issued

through the Bank of England and by the Royal Mint.

Open market and other operations. Making available more liquid assets in the financial system

(e.g. Treasury Bills). Ex. Bank of England might be instructed to buy securities in the open

market with cheques drawn on the government. This will increase cash and liquidity for the

financial institutions, individuals selling their bonds and bills.

RATE OF INTEREST - example, a loan for a longer period of time wil tend to carry a higher rate of

interest, as might a loan to smaller companies or to individuals considered to be "higher risk" by the

lender ( skolintojas ). However, all these rates of interest tend to move upwoards or downwards in line

with the monthly rate of interst set by the bank of England. The Monetary Policy Committee ( MPC )

take into account the "inflation target" the government has set and projections for future inflation when

deciding upon the rate of interest.

changing the interest rate affects the economy in a number of ways:

1) Saving - high interest rates encourage saving

2) Borrowing - higher interest rates discourage borrowing as it has now become more

expensive, whilst ( tuo tarpu ) lower interest rates encourage borrowing as it has now become cheaper

3) Discretionary ( savos nuoziuros ) expenditure - To avoid losing for many people their

mortgage ( homes ), people must keep up with the mortgage repayments. If interest rates rise they must

pay back more per month, leaving less income to spend on other things and opposite.


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4) Exchange rate - increasing interest rates in the UK tends to make holding sterling (patikimas )

deposits (imokas) in the UK more attractive. Raising the exchange rate will make exports more

expensive abroad and imports cheaper in the UK and opposite.

Inflation - is a term ofthen applied to a situation in which there is a persistent tendency for

the general level of prices to rise. It tells us how much money we wuold need now in order to

be able to purchase the same goods or services now as we did some time ago.

Cost of inflation:

1) Shoe leather costs - whereby individuals and business make more frequent trips to banks

since holding cash is more expensive

2) Menu costs - whereby business have to change price tags, cash tills, vending ( smulkiu prekiu

) machines and price lists more frequently

3) Decision-taking costs - whereby future contracts became less certain, with business now

requiring a higher future return ( higher risk premium ) to cover increased future incertainties

from inflation

4) Redistribution ( perskirstymo ) costs - whereby business on fixed contracts or individuals on

fixed money income lose out. Also creditors lose since the eral value of repayments to the

lender is reduced in the future

5) Fiscal drag - whereby if the government fails to increase tax allowance in line with inflation,

then even tax rates unchanged more tax is paid by business ( corporation tax ) and individual (

income tax ) than before. The extra withdrawals from the circular flow may then discourage

economic activity

Benefits of inflation:

1) business will find it easier to pass on cost increases ( higher wages ) as price increased during

times of modest inflation

2) business and individuals who owe money ( are debtors 0 will gain since inflation reduces the

real value of their debt

Hyperinflation - if inflation gets out of hand, then it can take on the extreme form. this word

tends to be used for extreme situations where, prices are rising in double-digit figures on a daily

or weekly basis. Danger is that money is fast undervaluting and you would need much more to

by som good or service.


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Demand-pull inflation - an increase in the components of aggregrate ( sudaryti ) demand (

cinsumption, investment, public expenditure, exports ). A rise in any of these components will

shoft aggregate demand upwords and to the right. This rises the avarage level of prices and

raises national output. Consumers buying more, but requires a higher price to cover the extra

production costs ( marginal and avarage ) incurred.

Cost-push inflation - an increase in the costs of production, which occurs independently of

the level of aggregate demand. Firms then pass on these higher costs to consumers in the form

of higher prices. The aggregate supply curve shifts upwords and to the left, with less output

supplied at any given price. This rises the avarage level of prices, but reduces national output.

Unemployment and Employment

Output and employment >>> as national output rises, so too will employment since, for a given

level of technology, more labour input will be needed to produce more ouput.

Jobless growth >>> a situation where a rise in national output does not seem to be associated

with higher levels of employment. Explanations:

1) New technologies have raised the

productivity of labour significantly in mane

activities.

2) Outsourcing of jobs by multinational

companies relocating labour intensive

process to lower wage economies.

Counting the unemployment in the UK :

1) Survey method - people wothout a job who were available to start work within the next two

weeks and who had either looked for work within the four weeks prior to interview or who

were waiting to start a job

2) Claimant count - a monthly count by the benefits Agency of the number of people claiming

unemployment-related benefits.

Types of unemployment:

1) Frictional (search) -

>>> there is always this type as some workers will always be in the process of changing

jobs.


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>>> will always exist, but it might be reduced

>>> remedies proposed include: 1) improved information

2) reduction in unemployed related benefits

2) Structural -

>>> this results from longer-term changes in the demand for, and supply of, labour in

specific industries as the structure of the economy changes ( decline in shipbiulding and in

textiles in the UK )

>>> renedues proposed includ: 1) retraining those made redundant ( nereikalingas)

2) relocation of workers

3) regional - this results from changes in demand for the outputs of industries which tend to be

located in specific regions of a country ( shipbuilding in Clydeside ( scotland) and Tyneside (

england ) )

4) Technological - it may lead to sagnificiant changes in labour and captial productivity,

resulting in job loses.

5) Real wage - this results from regidities ( wtf?) in the labour market which prevents the real

wage from falling to a level that would "clear" the market. Real wages seen as too high for "full

employment"

6) Demand deficient - where the major cause is excess supply ( lack of demand ) in the product

market: often associated with economic recessions

remedies:

1) expansionary fiscal policy - raising expenditures and lowering taxes

2) expensionary monetary policy - raising money supply and lowering interest rates.

7) natural rate - defined as the rate of unemployment at which there is no excess or deficiency

of demand for labour and in which exists even if the real wage is at the equilibrium level which

"clears" the market.

Balance of payments - a record of all recorded transactions between one country and the

rest of the world in a particular financial year.

Components include:

1) Current account :


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- balance on good is split into oild and non-oil goods

- balance on services includes shipping,insurance (draud), finance.

- investment invome balance ( net income from interest, profits

and dividends )

- transfer balance ( net value of government transfers to

institution such as EU, World Bank and etc. )

2) Capital account - this record the flow of money into the country and out of the country

resulting from the purchase or sale of fixed assets ( land ) selected capital transfer.

3) Financial account - this record flows of money into country and out of the country resulting

from investment-related or other financial activity.

- direct incestment usually involves physical assets of a company

( plant, equipment )

- portfolio investment usually invloves paper assets ( shares,

bonds)

- other financial flows may involve the movement of deposits

between countries

If the net value of the items mentioned in the three account so far are negative, we speak of a

balance of payments deficit if positive of a balance of payments surplus.

4) Balancing item - the overall accounts are constructed so that they must balance ( accounting

identity ) with this balance achieved by either drawing on reserves ( if deficit ) or adding to

reserves ( if surplus ). so it represents these values, which are required ti maintain the

accounting identity.

Exchange rate - number of units of the foreign currency needed to purchase one unit of the

domestic currency.

1) a fall ( depreciation ) in the sterling ( patikimas ) exchange rate makes UK exports cheaperabroad ( in the foreign currency ) and imports into UK dearer ( brangesni ) at home

2) a rise ( depreciation ) in the sterling ( patikimas ) exchange rate makes UK exports dearer

abroad ( in the foreign currency ) and imports into UK cheaper ( brangesni ) at home

Types of exchange rate:


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1) Nominal exchange rate - this rate at which one currency is quoted against any other

currency. The nominal exchange rate is therfore a bilateral ( two country ) exchange rate.

2) Effective exchange rate ( EER ) - this is a measure which takes into account the fact that

sterling varies in value by different amounts against other currencies. The EER is a multilateral (

many country ) exchange rate, expressed as an index number.

3) Real exchange rate - is designed to measure the rate at which home products exchange from

other countries, rather than rate at which the currency themselves are traded. In other words

RER is equal to the effective exchange rate multiplied by the ratio of home price, P(UK), to

foreign price P(F),of products.

- if U prices rise relative to foreign prices, the real exchange rate ( RER ) will rise, unless

the sterling effective exchange rate ( EER ) falls sufficiently to offset this impact.

- Similarly, if steling EER rises, the RER will rise, unles UK prices fall sufficiently relative toforeign prices.

Demographic and Social factors

NUTS Idaniausiai visa alis, bet kai kuriais atvejais gali bti ir smulkesni teritoriniaidariniai, susij su federacine i ali santvarka (pvz.,Vokietijos em,Belgijosregionas);

NUTS IIsantykinai dideli regionai (5%%%%Pranczijos, Italijos regionas, Ispanijos

autonomin provincija; Nyderlandprovincijos); NUTS IIItarpinis lygmuo tarp regiono ir municipaliteto (Vokietijos apskritis,

Pranczijos departamentas, 50%%%%vedijoslenas, Suomijosem);

NUTS IVsavivaldyb (Pranczijos, vedijos komuna, Vokietijos municipalitetas);

NUTS Vu savivaldybes smulkesni teritoriniai vienetai (seninija).

Population changes naturally over time. For any given time period, the change in population is

given by:

Population change = Births - Deaths + Net migration

Net migration - is the difference between the number if people entering the country to live (

immigration ) and the number leaving permanently ( emigration ).

immigration - emigration = net migration
http://lt.wikipedia.org/wiki/Vokietijahttp://lt.wikipedia.org/wiki/Vokietijahttp://lt.wikipedia.org/wiki/Belgijahttp://lt.wikipedia.org/wiki/Belgijahttp://xn--20pranczijos%22pranczijos-18en/http://xn--20pranczijos%22pranczijos-18en/http://lt.wikipedia.org/wiki/Italijahttp://lt.wikipedia.org/wiki/Ispanijahttp://lt.wikipedia.org/wiki/Nyderlandaihttp://lt.wikipedia.org/wiki/Nyderlandaihttp://xn--20vedijos%22vedijos-wxdk/http://xn--20vedijos%22vedijos-wxdk/http://xn--20vedijos%22vedijos-wxdk/http://lt.wikipedia.org/wiki/Nyderlandaihttp://lt.wikipedia.org/wiki/Ispanijahttp://lt.wikipedia.org/wiki/Italijahttp://xn--20pranczijos%22pranczijos-18en/http://lt.wikipedia.org/wiki/Belgijahttp://lt.wikipedia.org/wiki/Vokietija


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The population is ageing because:

1.More people are living longer: improved health care and a better standard of living improved

nutrition and housing.

2. Fall in the birth rate ( lower proportion of young people )

Consequences :

1. Progressive fall in the "support ratio" i.e. in the number of workers to non-workers2. Increasing problem in funding ( finansavimas ) state pensions and benefits to growing number

if non-working population since shrinking ( mazejant ) tax base.

3. Shortages of labour for productive activities

Aging population remedies ( priemones pagerinti tai )

>>>>>Increase the size of the economically active population:

1. Increase female participation rates.

2. Increase the overall participation rate. ( It would add more workforce and exceed the shortfallin labour )

3. Increase fertility ( vaisingumo ) rates. ( experts think that the monetary incentives will have

only a short-term effect )4. Encourage later retirement.

5. Discourage early retirement on medical grounds. ( people who ritre early owning to ill health

would have to face stiffer ( grieztesnius ) medical examinations to determine whether they were

indeed ill.6. Raise the retirement age.

>>>>>> Make the workforce more productive (increased productivity brings higher wages and

thus increased tax revenues )

>>>>>> Reduce the "black economy - unofficial economy" ( this could be a source considerable

untapped ( neisnaudotos ) tax revenues.

Business implications of demographic and social

changes

>>>Rise of the "grey market" - this is one of the fastest-growing market segments. By 210 one-fifth of European will be aged 62 or over. By the modern standards of living, these people will be

relatively healthy and leading what marketers like to call "multidimensional lives". They may

have lower incomes than younger segments but most will have paid off their mortgages and berelatively debt-free yet have considerable leisure time in which to "shop around".

>>>Rise of technological consumerism ( vartotojiskumas )


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>>> Changing labour force - a shortage of labour will force up wages, thus a shrinking

workforce might well mean higher real wages for employers to pay. Firms vannot pay market-clearing wages have the fallowing options:

1) Go out of busiiness

2) Stay in business but change to a product with greater value added

3) Relocate production abroad4) Increase productivity by:

- increased capital investment

- improved training of workforce- rethinking current working practices

Political, legal, ecological and technological

environment

PESTEL analysis:

Political : EU enlargement , the euro, international trade, taxation

Economic : Interest rates, exchange rates, inflation, unemployment

Social : Aging population, attitudes ( poziuris ) to work, income distribution ( paskirstymas)

Technological : innovation ( naujove ), new product development, rate of technological

obsolescence ( senejimo )

Environmental : global warming, environmental issues

Legal : competition law, health and safety, employment law

Political environment

Political risk: uncertainty that stems, in whole or in part, from the exercise of power by

governmental and non-governmental actors

Macro-political risks - affect all firms in a country, as in the case of war, a sudden change ofgovernment....

Micro-political risks - affect specific firms, industries or types of venture. Such risks may takethe form of new regulations or taxes imposed ( nustatytus ) on specific types of business in the

country.

Responding to political risk:


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1) First risk assessment is usually done too late

2) Structured risk analysis

Accessing political risk factors:

- Internal (vidiniai) and external (isoriniai) information sources: libraries. the internet,

government agencies, banks, risk assessment companies, specialists in particular businessactivities...

Prioritising political risk factors:1) Box A showes risks requiring immediate action, resulting in attempts by the firm to

reduce either the probability of their occurrence or the adverse (nepalankus) impacts should they

occur.2) It would also be sensible to have in place contingency (atsitiktinius) plans to cover

some of the risks in boxes B and C, but hose in D would be of lesser concern ( mazesnis

susirupinimas)

Legal environment:

1) Common law - this is the foundation ( pagrindas ) of the legal system in the UK and its former

colonies, including US, Canada, Australia ... When a judge makes a particular (konkretu)

decision, then a legal precedent (paprotys) is established.

2) Statute law - common law countries depend not only on case law but also on statutory

(nustatytas istatymo) law i.e. legislation, laws passed by government.

3) Code law - It is an explicit (aiskus) codification (kodifikavimo) in written terms of what is and

what is not permissible (leidziamas).

4)Religious law - is based on rules related to the faith and practice of a particular religion. A

country that works in this way is called a theocracy ( Iran ).

5)Bureaucratic law - this occurs in dictatorship and communist countries when bureaucratslargely determine what the laws are, even if these are contrary ( priesingybe ) to the historical

laws of the land.

EU institutions - pipline remember it

The domestic business environment

Market analysis:

1) Environmental analysis - this may involve scanning the environment for risks and opportunities, and

seeking to identify factors outside the firm's control. Market segmentation, market research and market

planning and management are the key elements in devising such a strategy.


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2) Buyer behaviour - firms need to have a profile of their existing and potential customers base, and to

know hot and why their customers purchase. Seeks to identify the buyers, their potential motivation for

purchase, education levels, income, class, age and so on...

3) Market research - this is the process by witch much of the information about the firm's customers and

its environment is collected.

Environmental analysis:

SWOT , PEST , PESTLE and other techniques of assessing the external and internalenvironment.

S - strengths P - political

W - weakness E - economicO - opportunities S - social

T - threats T - technological

L - legal

E - environment

Buyers behaviour - Major decisions need to be taken as to which market segments to target.When these segments have been identified and decision is made, then the product can be

positioned to meet the particular needs or wants which characterise that segment. The task is to

ensure that the product has a particular set of chracteristics which make it competitive with otherproducts in the market.

VALS framework - this framework focuses on psychological, demographic and lifestylefactors to segment consumer groups. :

1) Innovators - high esteem ( pagarba ), take charge, curious. Purchases reflect cultivated

( isugdytus ) tastes for up-market, niche products and services.2) Thinkers - motivated by ideas, mature, well educated and refletive. Purchases favourdurability ( patvarumas ), functionality and value.

3) Believers - strongly traditional and respect authority. Choose familiar products and

established brands.4) Achievers - goal-oriented lifestyle centered on family and career. Purchase premium

products that demonstrates success to their peers ( bendraamziai )

5) Strivers - trendy ( madingas ) and fun-loving. Purchase products that emulate(megdzioja) the purchase of higher income groups.

6) Experiencers - unconventional, active and impulsive. Purchase fashionable products

and those related to socialising and entertainment..

7) Makers - practical, responsible and self-sufficient. Purchase basic products, reflectingvalue rather than luxury.

8) Survivors - lead narrowly focused live with few resources, seek safety and security.

Purchase low-cost, well-known brands.

Marketing research can be divided into two types :1) Desk research - which means using information which has already been gathered for

another purpose ( secondary data )


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2) Field research - which involves obtaining information specifically directed towards a

particular marketing issue and which is usually original; ( primary data )

Desk research ( secondary sources ) :

1) National publications - information is available on most advanced industrialised

economies.2) National trade associations and Chamber of Commerce - these business agencies in the

various countries can be invaluable in providing up-to-date market information.

3) Financial press - The various FT indices and ratios provide an invaluable source of up-to-date information on firms and industrial sectors.

4) Trade journals - these often provide up-to-the-minute of various aspects of industries,

countries or specific market sectors.5) Internet - many web pages are commercially based, and companies will not reveal any

secrets that they feel might be useful to their competitors.

Field research ( primary sources ) :

1) research agencies - in most countries there are mane entreprises that are specialists inresearch. Companies can specify the type of data they are interested in and the agency will carry

out the research on their behalf.2) Company networks - sometimes members of a company are sent to investigate the

nature of specified markets through "shopping trips" which, whilst not rigorously ( tiksliai )

scientific, can help the organisation "get a fell" of the types of market they may enter.

Primary sources e.g. questionnaires:1) question important - rhetorical, cultural bias etc

2) Sample design imprtant - use random or cluster ( grupe ) samples as appropriate totarget market

3) Data analysis important - regression, correlation, hypothesis testing

Marketing mix - four P's :

1) product - what characteristics ?

2) price - what pricing strategies?3) promotion - how do we make consumers aware of product?

4) place - what routes to market?

Marketing mix: product

Case for a standardized product where:

Rapid technology change reduces product life cycle

Substantial scale economies

Strong brand image

Homogeneous consumer preferences

Case against a standardized product where:

Slow technology change creates more segmentation

opportunities

Few scale economies


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Weak brand imageHeterogeneous consumer preferences

Marketing mix: price

1) Penetration pricing - here price for new product may even be set below average cost inorder to capture market share.

2) Price skimming - here a high price is set for a new product in the introduction/early

growth stages, which "skims off" a small but lucrative (peliningas) part of the market.3) Other pricing approaches :

- price elasticity of demand (if demand for the product is relatively

inelastic, a price increase and reduction may rise revenue.)- prestige pricing ( where higher prices are associated with higher

quality)

- firm objective ( the more interested the firm is in profit rather

than revenue or market share objectives, the higher price the firm is likely to set)- competitor pricing ( where the firm fallows the prices set by the

market leader or engages ( uzsiima ) in price warfare under oligopoly market structures.

- price discrimination ( if demand for a given product can bebroken down into market segments, some being more price sensitive than other, then revenue

and profits can be increased by charging a differen price in each market segment

Marketing mix: promotion

1) Includes advertising, sales promotion, personal selling, publicrelations, etc.

2) Helps shift the demand curve to right (increase)3) Helps pivot the demand curve, making it less elastic (less

responsive) to price increases4) "push" tactics - focus on the producer offering incentives to key players in

each distributional "channel" to promote their products5) "pull" tactics - focus on the final consumer, the idea being to stimulate

consumer demands which will then stimulate (pull) retailers/wholesalers into stockingthe firm's products.

Marketing mix: place

Types of distribution channel :

1) Customer characteristics - wherever possible, marketers will put the customer at the centre of his choice:

geographical location of customer, how often they purchase, where do they expect to find product...

2) Product characteristics - for example products such as fruit, vegetables and even daily newspaper mustselect distributional channels which minimise time-to-customer.

3) Channel characteristics - the lowest-cost route to customer may influence channel choice, as may the

channel already selected by competitors.

Routes to market will depend upon:

The value and type of product

The cost and speed of alternative types of transport

The ease with which a route (channel) to market can be


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managed

What the competitors are doing

Human Resource Management (HRM) - involves a wide range of activities that deal with thehuman side of an organisation.

HRM responsibilities :1) Recruitment and selection

2) Training and development

3) Human resource planning

4) Assessing performance of employees

5) Payment and reward systems

6) Initiatives to align employee developments to corporate

strategies

Motivation theory: Elton Mayo

Work pacing. The pace at which people produce is one set informally by the work group.

Recognition. Acknowledgement of an employee's contribution by those in authority tends to increaseoutput, as do other forms of social approval.

Social interaction. The opportunities provided by the working situation for social interaction between

fellow workers, especially if they could select for interaction those with

whom they were compatible, enhanced job satisfaction and sometimes influenced output.

The Hawthorne effect. Regardless of what changes were made to the way the employees were treated,

productivity went up as they seemed to enjoy the novelty (naujove) of the situation and the extra attention - the so-

ca lied 'Hawthorne effect'.

Grievances (nusiskundimai). Employees responded well to having someone to whom to let off steam by

talking through problems they were having.

Conforming. The pressure from workmates in the group was far more influential on

behaviour than any incentive from management.

internationalization methods

1)Indirect exportingIndirect exporting happens when a firm does not itself undertake any special internationalactivity but rather operates through intermediaries. Under this approach theexporting function is outsourced to other parties which may prepare the export documentation,take responsibility for the physical distribution of goods and even set up

the sales and distribution channels in the foreign market. The role of the interrnediarymay be played by export houses, confirming houses and buying houses .

Export hause buys products from a domestic firm and seIls thern abroad on its own account Canfirming hauseacts for foreign buyers and is paid on a commission basis. BringsseIlers and buyers into direct contact (unlike export house) and guaranteed paymentwill be made to exporter by end user. Buying hause performs similar functions to those of the confirming house but is

more active in seeking out seIlers to match the buyer's particular needs.

Direct exportingDirect exporting would typically involve a firm in distributing and selling its own

products to the foreign market. This would generally mean a longer-term commitmentto a particular foreign market, with the firm choosing local agents and distributorsspecific to that market. In-house expertise would need to be developed to keep upthese contacts, to conduct market research, prepare the necessary documentation andestablish local pricing policies. The advantages of such an approach are that it:

allows the exporter to closely monitor developments and competition in the host


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market; prornotes interaction between producer and end-user; involves long-term commitments, such as providing after-sales services to encouragerepeat purchases.

FranchisingMcDonald's and Burger King are perhaps the two best-known examples of international

franchises. However, franchising is a very popular method of market entryand is not limited to the fast food industry. Examples include cleaning (Chem-Dry),clothing (Benetton) and childcare (Tiny Tots).

In international franchising, a supplier (franchiser) permits a dealer (franchisee) the rightto market its products and services in that country in exchange for a financial commitment.This commitment usually involves a fee upfront and royalties based on product sales. Advantages far the franchisee are that they are buying into an existing brand and

should receive full support from the franchiser in terms of marketing, training andstarting up. When customers walk into a McDonald's restaurant; they know exactlywhat to expect. This is one advantage of global branding. Disadvantages far the franchisee include restrictions on what they can and can't do.

For example, McDonald's have very strict regulations concerning marketing, pricing,training etc. A franchisee cannot simply change the staff uniform, alter pricesor vary opening hours as the company operates a standardised approach to doingbusiness.

Advantages far the franchiserare that overseas expansion can be much lessexpensive and that any local adaptations can (with agreement) be made by thoseweIl acquainted with cultural issues in that country. Disadvantages far the franchiserinclude possible conflict with the franchisee fornot following regulations and agreements as weIl as a threat that the franchisee may

opt to 'go it alone' in the future and thus become a direct competitor.

Joint ventureNarrowly defined, a joint venture occurs when two or more firms pool a portion oftheir resources within a common legal organisation. A joint venture is popular for

firms entering an international market at a large cultural distance (p. 550) from thehorne market. For example, many Western firms opt for a joint venture when enteringChina and Taiwan, simply because of major cultural differences, including language,social relationships, style of management and political environment. A joint venture

takes place because both firms believe that their partner has something to offer. In thecase of a Western firm entering Taiwan, the Western firm is getting access to new markets,a partner with locallanguage and cultural knowledge and an already established

network of contacts. It is likely that the Taiwanese firm is in turn expecting to ga in accessto new technology, to marketing expertise and above aIl to extra finance from

their Western partner. evertheless, international joint ventures tend to experiencehigh failure rates.Two particular types of international joint venture are considered below .

Equity joint venture (EJV). This remains a popular method of market entry for foreigncompanies with the equity stake by the foreign partner usuaIly not lower than25% of voting shares. The equity joint venture requires investment from all of the

parties who jointly operate it, share the risks of it in accordance with their differentproportions of investment, and are jointly held responsible for the profits and lossesof it. For companies looking to access a large share of the Chinese market, theestablishment of multiple equity joint ventures provides a means for obtaining the

connections necessary for doing business in China . Co-operative joint venture (CJV). This differs from an equity joint venture in that itusuaIly has a profit sharing mechanism rather than equity ownership by each company.Reasons for choosing a cooperative joint venture may include less need toformaIly value capital contributions, greater flexibility in relation to profit sharing

and fewer restrictions on management structure.Of course, there is a risk that the extent to which each partner relies on the other'sskills can change over time, sometimes to such an extent that there may no longer be a need for the international joint venture tocontinue. Studies have found that, at the timemany international joint ventures were formed, each partner admitted that they could

not have carried out the task without their partner's help, but that within a short space


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of time the partners learned so much from each other that they no longer feIt the needfor shared management. However, international joint ventures canalso lead to increased trust and commitment. In Chinese cuIture, personal

trust develops over time and involves 'getting to know' a partner.Past experience between partners is extremely important because it canhelp develop dose long-term relationships built on trust and commitment,which can then lead on to even doser collaboration in the future.

Foreign direct investment (fdi)Foreign direct investment (fdi) is a high-risk strategy whereby a firm sets up its ownfacilities in an international market. Some of the problems of joint ventures (especiallythose involving decision making and culture dashes) can be avoided by wholly owning

the foreign subsidiaries. This can be achieved through acquisition of an existing firmor through establishing an entirely new foreign operation ('greenfield' investment).Acquisition of an existing foreign company has a number of advantages comparedto 'greenfield' investment; for example, it allows a more rapid market entry, so thatthere is a quicker return on capital and a ready access to knowledge of the local market.

Because of its rapidity such acquisition can pre-empt a rival'sentry into the same market. Further, many of the problems associatedwith setting up a 'greenfield' site in a foreign country (such as cultural,legal and management issues) can be avoided. By involving a

change in ownership, acquisition also avoids costly competitive reactions

from the acquired firm.

Investment abroad reasons

Supply factors

Production costs

Distribution (dalijimosi) costs

Availability of natural resources

Access to key technology

Incentive schemes to reduce costs

Demand factors

Saturation ( prisotinamas ) of home market

Avoidance of trade barriers

International product life cycleDemand from business customers abroad

Demand from overseas governments for inward ( vidinis) FDI

Strategic issues: e.g. seeking more local responsiveness

High and low context culturesHigh-context cultures: Much information transmitted by the physical context (i.e. non-verbal means, e.g.body language) or internalised within people.

Strong bonds and high involvement between people (more group oriented thanindivid ualistic).

Greater distinctions between insiders and outsiders. Cultural patterns long lived and slow to change. Punctuality and schedules have low priority.

Low-context cultures: Much information transmitted by explicit, coded messages (less via non-verbalmeans, e.g. body language). Fragile bonds and low involvement between people (more individualistic thangroup oriented).

Fewer distinctions made between insiders and outsiders. Change easy and rapid. Punctuality and schedules important.

Hofstedes survey revealed four


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underlying dimensions of

culture:Power Distance - The appropriateness of power/authority within organisations

Uncertainty Avoidance - An emotional response to uncertainty and change

Individualism/Collectivism - Relative importance of the interests of the individual vs. the

interests of the groupMasculinity/Femininity - What motivates people to achieve different goals

(Long-Term Orientation) - The extent to which members of a culture adopt a long-term or ashort-term outlook on work and life

IHRM approaches

Four approaches have been identified to describe the ways in which M Es might conduct

their international HRM policies.

The ethnocentric approach. In the ethnocentric approach, all key position in the

host country subsidiary are filled by nationals of the parent company. This approach

offers the most direct control by the parent company over the host countrysubsidiary, and is often adopted when there is felt to be a need to maintain

good communications between the headquarters of the MNE and the subsidiary.

This ethnocentric approach is often followed in the early stages of internationalisation

when the MNE is seeking to establish a new business or product in another

country.

The polycentric approach. Here, host country nationals are recruited to manage the

subsidiaries in their own country. This allows the MNE to take a lower profile in

sensitive economic and political situations and helps to avoid intercultural management

problems.

The geocentric approach. This approach utilises the best people for all the key jobs

throughout the organisation, whatever their nationality or whatever the geographicallocation

of the post to be filled. In this way an international executive team

can be developed. The regiocentric approach. Here the MNE divides its operations into geographie

regions and moves staffwithin particular regions, e.g. Europe, America, Asia rather

than between regions.

Choice of IHRM approach depends upon:Degree and type of internationalization

Type of industry and markets served

Characteristics of staff

Cultural preferences

Should we go internatioal?

Increasing the size of the market. Developing new markets abroad may permit thefirm to fully exploit scale economies, particularly important when these are substantialfor that product. In some ca ses the minimum efficient size for a firm'sproduction may be greater than the total sales potential of the domestic market. Inthis ca se the firm's average costs can only be reduced to their lowest level by finding

extra sales in overseas markets.

Examine the international environmentBefore entering a new marketplace extensive research needs to be carried out on theinternational environmental issues facing the company. For example, the number ofcompetitors, state of the economy, is there a market for our product or services? What


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do potential customers think about us? A firm may produce a short list of potentialinternational markets. The factors for selecting an international market are many, butultimately depend on the potential demand from consumers and the extent of the

competition.The approach to market research in anational (UK) setting has already beenconsidered in Chapter 13 (p. 492). Key factors in undertaking international marketresearch include:

Extending the product life cycle. Finding new markets abroad may help extend thematurity stage of the product life cycle. This can be particularly important whendomestic markets have reached 'saturation point' for a product.

Supportinginternational specialisation. In an attempt to reduce overall productioncosts, separate elements of an overall product may be produced in large scale indifferent geographicallocations worldwide. For example, labour-intensive components will often be produced in low-cost labour locations, whereas capital-intensive

components are more likely to be produced in high technology locations. The finalproduct, once assembled, must by definition be marketed internationally to achievethe huge sales volumes which are aprerequisite for international special isa ti on

>Helping reduce investment pay-back periods. Finding overseas markets helps

achieve high-volume sales early in the product life cyde, thereby reducing the payback

period needed to return the initial capital outlay and making many investment

projects more attractive. This may help to compensate for modern trends towardsshorter product life cydes which are tending to inhibit investment expenditure .

Reducing stock-holding costs. Overseas markets may provide new sales outlets for surplus

stocks (inventories), thereby reducing warehousing and other stock-holding costs

Advantages of decentralized IHRMGroups within the subsidiary (pagalbinis) can gain in status

Groups within the subsidiary become more cohesive (rislus),

fostering (puoseleti) group identity

IHRM takes place within a culture appropriate to the local

workforce and customers

Disadvantages of decentralized IHRMTendency to become exclusiveLoss of central control, higher administrative costs as

HRM function is sent down the lineLoss of organizational control and organizational identity

Generic strategieshelp

position the firm to best

advantageOverall cost leadership strategyseeks to be lowest cost providerDifferentiation strategyseeks to create something unique, unmatched by competitorsFocus strategyseeks to identify a particular segment within the broader market and todominate that segment

Porter's generic strategiesWriting in 1980 in his pioneering book on Competitive Strategy, Porter described three

generic strategies open to firms. These are overall cost leadership, differentiation and focus.

>>Overall cast leadership strategy requires the business to achieve lower costs than other

competitors in the industry while maintaining product quality. This strategy requires

aggressive investment in efficient plant and machinery, tight cost controls and cost minimisation

in functional areas. An organisation must understand the critical activities in the

business's value chain that are the sources for cost advantage and endeavour to excel in

one or more of them.

Figure 15.2(a) illustrates Porter's generic strategies.

>>>Differentiation strategy is based on creating 'something unique, unmatched by its competitors'


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which is 'valued by its buyers beyond offering simply a lower price' (Porter, 1985).

This entails achieving industry-wide recognition that the business produces different and

superior products compared to competitors, which might result from using superior technology

or providing superior customer service.

>>>Focus strategy involves selecting 'a particular buyer group, segment of the product line, or

geographie market' as the basis for competition rather than the whole industry. This strategy

is 'built around serving a particular target very weil' in order to achieve better results.

Within the targeted segment the business may attempt to compete on a low cost or differentiation

basis.

Ansofrs product-market strategiesIgor Ansoff (1968) used the implications of policies for markets and for products to

define strategie options. He presented the various strategie options in the form of a matrix

Market penetration strategy refers to gaining a larger share of the market by exploiting the

firm's existing products. Unless the particular market is growing, this will involve taking

business away from competitors, perhaps using one or more ofthe 4 Ps (see Chapter 13,

p. 497 and Chapter 14, p. 565) in anational or international context respectively.

Market deve/opment strategy involves taking present products into new markets, and thus

focusing activities on market opportunities and competitor situations.

Product deve/opment strategy is where new products are introduced into existing markets,

with the focus moving towards developing, launching and supporting additions to the

product range.

Diversification strategy involves the company branching out into both new products and

new markets. This strategy can be further subdivided into horizontal, vertical and

conglomerate diversification.


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Stars have high market share, high growth, but limited cash flow due to the substantial

amount of investment required to maintain growth. Successful Stars go onto become Cash Cows.

Cash Cows have a high market share but slow growth. They tend to genera te a very

positive cash flow that can be used to develop other products.

Dogs have a low share of a slow-growth market. They may be profitable, but only

at the expense of cash reinvestment, and thus genera te little for other products.

Problem Children have a low share of a fast-growing market and need more cash

than they can genera te themselves in order to keep up with the market.


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