This document discusses key economic concepts and metrics for analyzing a country's economic environment. It covers different types of economic systems, measures of economic development like GNI and GDP, indicators of economic performance such as inflation, unemployment, and debt levels, and the importance of considering concepts like economic freedom, sustainability, and income inequality in assessments. International economic analysis requires understanding a country's unique circumstances as well as global interdependencies and changes over time.

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Chapter 2
2(b)
The Economic
Environments Facing
Businesses

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Learning Objectives
 Communicate the importance of economic
analysis
 Discuss the idea of economic freedom
 Profile the characteristics of the types of
economic systems
 Introduce the notion of state capitalism
 Profile leading indicators of economic
development, performance, and potential

3. Learning Objectives
 Profile the benefits and drawbacks of
economic growth
 Profile leading global indices of economic
performance
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Introduction
Learning Objective:
Communicate the importance of economic
analysis

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Introduction
 Managers assess a country’s economic
environment knowing
 Countries differ in different ways
 Economic and political changes alter market
circumstances
 It is important to understand connections,
change, and consequences
 The challenges of the comeback
 Choices of citizens, policymakers, and
institutions

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International
Economic Analysis
 A universal assessment of economic
environments is difficult because of:
 System Complexity
 Identifying proper indicators is difficult
 Market Dynamism
 New economic circumstances
 Market Interdependence
 Markets influence each other
 Data Overload
 Complicates decision-making

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International
Economic Analysis
Economic Factors Affecting International Business Operations

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Economic Freedom
Learning Objective:
Discuss the idea of economic freedom

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Economic Freedom
 Economic freedom – people have the
right to work, produce, consume, save,
and invest the way they prefer
 measured across business freedom, monetary
freedom, fiscal freedom, investment freedom,
freedom from corruption, property rights,
trade freedom, government size, financial
freedom, and labor freedom

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Economic Freedom
Economic Freedom by Region, with Population

11. Global Distribution of Economic
Freedom
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Value of Economic Freedom
 Economic freedom affects
 Growth rates
 Productivity
 Income levels
 Inflation
 Employment
 Life expectancy
 Literacy
 Political openness
 Environmental sustainability

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Trends in Economic Freedom
 The trend toward increased economic
freedom is no longer certain
 Questions about the legitimacy of free markets
 The benefits of more state control

14. Standard of Living
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Types of Economic Systems
Learning Objective:
Profile the characteristics of the types of
economic systems

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Types of Economic Systems
 An economic system refers to the
mechanism that deals with the production,
distribution, and consumption of goods
and services
 Types
 Market economy
 Command economy
 Mixed economy

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Types of Economic Systems
Types of Economic Systems

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Market Economy
 In a market economy individuals rather
than governments make most economic
decisions
 Capitalism
 private ownership of capital
 Laissez-faire
 governmental noninterference in economic
affairs

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Command Economy
 In a command economy the visible hand
of the state supersedes the invisible hand
of individuals
 Government
 owns and controls resources
 determines prices
 Communism

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Mixed Economy
 Most economies are mixed economies
 fall between market and command economies
 Socialism
 regulate economic activity with a focus on
social equality and a fair distribution of wealth

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Command Economy
Learning Objective:
Introduce the notion of state
capitalism

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State Capitalism:
Detour or Destination?
 State capitalism refers to a system in
which the government explicitly
manipulates market outcomes for political
purposes
 promote certain industries to encourage
economic development
 develop national companies into global leaders
 foreign companies restricted from strategic
industries

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Economic Development,
Performance, and Potential
Learning Objective:
Profile leading indicators of economic
development, performance, and potential

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Economic Development,
Performance, and Potential
 Broad classes of countries include
 developing countries
 largest number of countries
 low per capita income
 emerging economies
 fast growing, relatively prosperous
 BRICs – Brazil, Russia, India, and China
 developed countries
 high per capita income and standard of
living
 like the U.S., Japan, France, Australia

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Gross National Income
 Gross national income (GNI)
 the broadest measure of economic activity for
a country
 Gross national product (GNP)
 the total value of all final goods and services
produced within a nation in a particular year
 Gross domestic product (GDP)
 the total market value of goods and services
produced by workers and capital within a
nation’s borders

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Improving Analysis
 GNI data should be adjusted for
 the growth rate of the economy
 the number of people in a country
 the local cost of living

27. GNI Data
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28. A Divided World
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29. GNI per Capita, 2011
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30. GNI Per Capita, 2011, Adjusted for
Purchasing Parity
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Broader Conceptions of
Performance and Potential
 Green economics
 gauge economic performance in terms of the
effect of current choices on long-term
sustainability
 Sustainable development
 meet the needs of the present without
compromising the ability of future generations
to meet their own needs
 Happynomics
 importance of emotional prosperity in addition
to financial prosperity

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Economic Analysis
 Managers should also consider
 Inflation
 Unemployment
 Debt
 Income distribution
 Poverty
 Balance of payments

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Inflation
 Inflation
 a measure of the increase in the cost of living
 Deflation
 when prices for products go down not up
 Reflation
 increase the money supply and reduce taxes to
accelerate economic activity

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Unemployment
 Unemployment rate
 share of unemployed workers seeking
employment for pay relative to the total
civilian labor force
 Misery index
 the sum of a country’s inflation and
unemployment rates

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Debt
 Debt
 the total of a government’s financial
obligations
 internal debt
 external debt
 Growing public debt signals
 tax increases
 reduced growth
 rising inflation
 increasing austerity

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Income Distribution
 Income distribution
 estimates the proportion of the population that
earns various levels of income
 Gini coefficient
 measures the extent to which the distribution
of resources deviates from a perfectly equal
distribution

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Poverty
 Poverty the state of having little or no
money and few or no material possessions
 extreme poverty
 less than $1.25 per day
 moderate poverty
 less than $2.00 per day
 Today the world population is 80% poor,
10% middle income, and 10% rich
 Base of the Pyramid
 Frugal engineering

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Balance of Payments
 Balance of payments
 reports a country’s trade and financial
transactions with the rest of the world
 Current account
 tracks merchandise trade
 Capital account
 tracks loans given to foreigners and loans
received by citizens

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Balance of Payments
Components of a Country’s Balance of Payments

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Balance of Payments
Current Account Balances: The Top and Bottom Five

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