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The Global Economic Environment

The Global Economic Environment. Chapter 2 Global Marketing. Changes in the World Economy. Emergence of global markets Integration of world economy Increased volume of capital movements End of the Cold War Diminishing importance of national boundaries due to technological advancements.

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The Global Economic Environment

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  1. The Global Economic Environment Chapter 2 Global Marketing

  2. Changes in the World Economy • Emergence of global markets • Integration of world economy • Increased volume of capital movements • End of the Cold War • Diminishing importance of national boundaries due to technological advancements Keegan and Green, Chapter 2

  3. Economic Systems • Market capitalism • Centrally planned socialism • Centrally planned capitalism • Market socialism Keegan and Green, Chapter 2

  4. Figure 2-1: Economic Systems Resource Allocation Market Command Centrally Planned Capitalism Private Resource Ownership State Market Capitalism Centrally Planned Socialism Market Socialism Keegan and Green, Chapter 2

  5. Market Capitalism • Economic system in which individuals and firms allocate resources: • Production resources are privately owned • Consumers decide what goods are desired and firms determine what and how much to produce • Role of state is to promote competition and protect consumers Keegan and Green, Chapter 2

  6. 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 Keegan and Green, Chapter 2

  7. Centrally Planned Capitalism • Economic system in which command resource allocation is used extensively in an environment of private resource ownership • Examples: • Sweden • Japan Keegan and Green, Chapter 2

  8. Market Socialism • Economic system in which market allocation policies are permitted within an overall environment of state ownership • Examples: • China • India Keegan and Green, Chapter 2

  9. Degrees of Economic Freedom Table 2-1 • 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 Keegan and Green, Chapter 2

  10. 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 Degrees of Economic FreedomSelections from Table 2-1 Keegan and Green, Chapter 2

  11. Stages of Market Development • High income countries • Upper-middle income countries • Lower-middle income countries • Low income countries • Categories developed by The World Bank • Stages based on GNP Keegan and Green, Chapter 2

  12. China India Indonesia South Korea Brazil Mexico Argentina South Africa Poland Turkey BEMs: Big Emerging Markets Keegan and Green, Chapter 2

  13. 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 Keegan and Green, Chapter 2

  14. 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 Keegan and Green, Chapter 2

  15. 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 Keegan and Green, Chapter 2

  16. 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 Keegan and Green, Chapter 2

  17. G-7 Countries • Leaders from these high income countries work to establish prosperity and ensure monetary stability • United States • Japan • Germany • France • Britain • Canada • Italy Keegan and Green, Chapter 2

  18. OECD: Organization for Economic Cooperation and Development • 29 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 Keegan and Green, Chapter 2

  19. The Triad • Dominant economic centers of the world • Japan • Western Europe • United States • Expanded Triad • Pacific Region • North America • European Union Keegan and Green, Chapter 2

  20. 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 Keegan and Green, Chapter 2

  21. Exporters United States Germany Japan China France United Kingdom Canada Italy Importers United States Germany United Kingdom France Japan Netherlands Canada Italy Leading Exporters and ImportersTable 2-6 Keegan and Green, Chapter 2

  22. The Global Trade Environment Chapter 3 Global Marketing

  23. GATT • General Agreement on Tariffs and Trade • treaty among nations to promote trade among members • handled trade disputes • lacked enforcement power • replaced by World Trade Organization in 1995 Keegan and Green, Chapter 2

  24. World Trade Organization • Provides forum for trade-related negotiations among 141 members • based in Geneva • serves as dispute mediators • empowered with ability to enforce rulings • Countries found in violation of WTO rules are expected to change policies or else face sanctions Keegan and Green, Chapter 2

  25. Preferential Trade Agreements • Many countries seek to lower barriers to trade within their regions • Free Trade Areas • Customs Unions • Common Market • Economic Unions Keegan and Green, Chapter 2

  26. Free Trade Area • Two or more countries agree to abolish all internal barriers to trade amongst themselves • Countries continue independent trade policies with countries outside agreement • NAFTA Keegan and Green, Chapter 2

  27. Customs Union • Evolution of Free Trade Area • Includes the elimination of internal barriers to trade (as in FTA) AND • Establishes common external barriers to trade Keegan and Green, Chapter 2

  28. Common Market • Includes the elimination of internal barriers to trade (as in free trade area) AND • Establishes common external barriers to trade (as in customs union) AND • Allows for the free movement of factors of production, such as labor, capital, and information Keegan and Green, Chapter 2

  29. Economic Unions • Includes the elimination of internal barriers to trade (as in free trade area) AND • Establishes common external barriers to trade (as in customs union) AND • Allows for the free movement of factors of production, such as labor, capital, and information (as in common market) AND • Coordinates and harmonizes economic and social policy within the union Keegan and Green, Chapter 2

  30. Economic Unions (cont.) • Full evolution of economic union • creation of unified central bank • use of single currency • common policies on issues ranging from agriculture to taxation • requires extensive political unity Keegan and Green, Chapter 2

  31. Major Regions • North America • Latin America • Asia-Pacific • Western, Central, and Eastern Europe • Middle East • Africa Keegan and Green, Chapter 2

  32. North America • Canada, United States, Mexico • NAFTA established free trade area • all three nations pledge to promote economic growth through tariff reductions and expanded trade and investment • no common external tariffs • restrictions on labor and other movements remain Keegan and Green, Chapter 2

  33. Latin America • Caribbean, Central, and South America • 4 preferential trade agreements in place • Central American Integration System • Andean Community • Common Market of the South • Caribbean Community and Common Market Keegan and Green, Chapter 2

  34. Central American Integration System • El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, Panama • All member countries conform to a common external tariff (CET) of 5 to 20% for most goods • Common rules of origin were adopted to encourage freer movement of goods • Integration remains a struggle Keegan and Green, Chapter 2

  35. Andean Community • Bolivia, Colombia, Ecuador, Peru, Venezuela • Customs union • Agreement abolished foreign exchange, financial and fiscal incentives, and export subsidies • Common external tariffs were established Keegan and Green, Chapter 2

  36. Common Market of the South(Mercosur) • Argentina, Brazil, Paraguay, Uruguay • Customs union, seeks to become common market • internal tariffs eliminated • common external tariffs up to 20% established • in time, factors of production will move freely through member countries • Chile and Bolivia - • associate members • participation in free trade area but not customs union Keegan and Green, Chapter 2

  37. Caribbean Community and Common Market (CARICOM) • Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts, St. Lucia, St. Vincent, the Grenadines, Trinidad, Tobago • Replaced Caribbean Free Trade Association • Agreed to establish economic union with common currency in 1998 Keegan and Green, Chapter 2

  38. Asia-Pacific • Includes 23 countries and 56% of world population • Japan • Newly industrializing economies • Association of Southeast Asian Nations Keegan and Green, Chapter 2

  39. Japan • Generates 14% of world’s GNP • Key factors • population density • geographic isolation • Recent economic struggles despite status as high income country • Strong culture requires flexibility and commitment from global marketers Keegan and Green, Chapter 2

  40. Newly Industrializing Economies (NIEs) • Strong economic growth in recent decades • foreign investment • export-driven industrial development • Sometimes called the 4 Tigers of Asia • South Korea • Taiwan • Singapore • Hong Kong Keegan and Green, Chapter 2

  41. Association of Southeast Asian Nations (ASEAN) • Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Cambodia, Laos, Burma • Goal to implement a free trade area by 2003 • Tariffs of 20+% will be reduced to 0 - 5% • Singapore represents great success among ASEAN nations Keegan and Green, Chapter 2

  42. Europe • European Union • European Free Trade Area • European Economic Area • The Lome Convention • Central European Free Trade Association (CEFTA) Keegan and Green, Chapter 2

  43. European Union • Initially began with the 1958 Treaty of Rome • Objective to harmonize national laws and regulations so that goods, services, people and money could flow freely across national boundaries • 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro) Keegan and Green, Chapter 2

  44. Austria Belgium Denmark Finland France Germany Greece Ireland Expected to join by 2002 Czech Republic Hungary Poland Estonia Slovenia Current EU Members • Italy • Luxembourg* • Netherlands • Portugal • Spain • Sweden • United Kingdom* *Countries have chosen not to adopt the Euro Keegan and Green, Chapter 2

  45. European Free Trade Area and the European Economic Area • Austria, Finland, Sweden, Norway, Iceland, Liechtenstein, Switzerland • Free trade area • Members (excluding Switzerland) chose to establish European Economic Area (EEA) • Non-EU members of the EEA are expected to adopt EU guidelines • Norway, Iceland, Liechtenstein, and Switzerland maintain free trade agreements with other countries as well Keegan and Green, Chapter 2

  46. The Lome Convention • An accord between EU and 71 countries in Africa, Caribbean, and the Pacific • Promotes trade and provides poor countries with financial assistance from a European Development Fund • Currently working to establish a successor agreement Keegan and Green, Chapter 2

  47. Central European Free Trade Association (CEFTA) • Hungary, Poland, Czechoslovakia • Allows for cooperation in many areas including: • infrastructure and telecommunications • sub-regional projects • inter-enterprise cooperation • tourism and retail trade Keegan and Green, Chapter 2

  48. The Middle East • Afghanistan, Cyprus, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen • Primarily Arab, some Persian and Jews • 95% Muslim • 3 key regional organizations • Gulf Cooperation Council • Arab Maghreb Union • Arab Cooperation Council Keegan and Green, Chapter 2

  49. Africa • 53 nations over three distinct areas • Republic of South Africa • North Africa • Black Africa • Regional agreements • Economic Community of West African States • East African Cooperation • South African Development Community Keegan and Green, Chapter 2

  50. Economic Community of West African States(ECOWAS) • Benin, Burkina Faso, Cape Verde, The Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo • Free trade area with unified monetary zone Keegan and Green, Chapter 2

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