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Chapter 2 The Global Economic Environment. Introduction to Chapter. Market definition – People or organizations with needs and wants; both have the willingness and ability to buy or sell The global economic environment plays a large role in the development of new markets for organizations.

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introduction to chapter
Introduction to Chapter
  • Market definition – People or organizations with needs and wants; both have the willingness and ability to buy or sell
  • The global economic environment plays a large role in the development of new markets for organizations
the world economy an overview
The World Economy – An Overview
  • The new realities:
    • Capital movements have replaced trade as the driving force of the world economy
    • Production has become uncoupled from employment
    • The world economy, not individual countries, is the dominating factor
the world economy an overview1
The World Economy – An Overview
  • The new realities continued:
    • 75-year struggle between capitalism and socialism has almost ended
    • E-Commerce diminishes the importance of national barriers and forces companies to re-evaluate business models
economic systems
Economic Systems
  • 4 main types of economic systems
    • Market Capitalism
    • Centrally planned socialism
    • Centrally planned capitalism
    • Market socialism
economic systems1
Economic Systems

Resource Allocation

Market Command















economic freedom
Economic Freedom
  • 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
economic freedom1

Hong Kong



New Zealand

United States

United Kingdom












North Korea


Economic Freedom
stages of market development
Stages of Market Development
  • World Bank has defined four categories of development
    • High-income countries
    • Upper-middle income countries
    • Lower-middle income countries
    • Low-income countries
  • Based upon Gross National Product (GNP)
big emerging markets
Big Emerging Markets
  • China
  • India
  • Indonesia
  • South Korea
  • Brazil
  • Mexico
  • Argentina
  • South Africa
  • Poland
  • Turkey
marketing opportunities in ldcs
Marketing Opportunities in LDCs
  • Characterized by a shortage of goods and services
  • Long-term opportunities must be nurtured in these countries
    • Look beyond per capita GNP
    • Consider the LDCs collectively rather than individually
    • Consider first mover advantage
    • Set realistic Deadlines
influencing the world economy
Influencing the World Economy
  • Group of Seven (G-7)
  • Organization for Economic Cooperation and Development
  • The Triad
marketing implications of the stages of development
Marketing Implications of the Stages of Development
  • Product Saturation Levels
    • The percentage of potential buyers or households that own a particular product
    • Graph shows that in India a private phone is owned by 1% of the population
balance of payments
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
balance of payments1
Balance of Payments
  • U.S. balance of payments statistics for the period 1999 to 2003
overview of international finance
Overview of International Finance
  • Foreign exchange makes it possible to do business across the boundary of a national currency
  • Currency of various countries are traded for both immediate (spot) and future (forward) delivery
  • Increases the risk to organizations that are involved in global marketing
managed dirty float
Managed Dirty Float?
  • Definitions
    • Float refers to the system of fluctuating exchange rates
    • Managed refers to the specific use of fiscal and monetary policy by governments to influence exchange rates
      • Devaluation is a reduction in the value of the local currency against other currencies
managed dirty float1
Managed Dirty Float?
  • Definitions
    • Dirty refers to the fact that central banks, as well as currency traders, buy and sell currency to influence exchange rates
foreign exchange market dynamics
Foreign Exchange Market Dynamics
  • Supply and Demand interaction
    • Country sells more goods/services than it buys
    • There is a greater demand for the currency
    • The currency will appreciate in value
purchasing power parity ppp the big mac index
Purchasing Power Parity (PPP) – The Big Mac Index
  • Is a certain currency over/under- valued compared to another?
  • Assumption is that the Big Mac in any country should equal the price of the Big Mac in the US after being converted to a dollar price
managing economic exposure
Managing Economic Exposure
  • Economic exposure refers to the impact of currency fluctuations on the present value of the company’s future cash flows
    • Transaction exposure is from sales/purchases
    • Real operating exposure arises when currency fluctuations, together with price changes, alter a company’s future revenues and costs
managing economic exposure1
Managing Economic Exposure
  • Numerous techniques and strategies have been developed to reduce exchange rate risk
    • Hedging involves balancing the risk of loss in one currency with a corresponding gain in another currency
    • Forward Contracts set the price of the exchange rate at some point in the future to eliminate some risk
looking ahead
Looking Ahead
  • Chapter 3 – The Global Trade Environment: Regional Market Characteristics and Preferential Trade Agreements
market capitalism
Market Capitalism
  • Individuals and firms allocate resources
  • Production resources are privately owned
  • Driven by consumers
  • Government should promote competition among firms and ensure consumer protection


centrally planned socialism
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


centrally planned capitalism
Centrally-Planned Capitalism
  • Economic system in which command resource allocation is used extensively in an environment of private resource ownership
  • Examples:
    • Sweden
    • Japan


market socialism
Market Socialism
  • Economic system in which market allocation policies are permitted within an overall environment of state ownership
  • Examples:
    • China
    • India


low income countries
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


lower middle income countries
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


upper middle income countries
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


high income countries
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


group of seven g 7
Group of Seven (G-7)
  • Leaders from these high income countries work to establish prosperity and ensure monetary stability
    • United States
    • Japan
    • Germany
    • France
    • Britain
    • Canada
    • Italy


organization for economic cooperation and development
Organization for Economic Cooperation and Development
  • 30 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


the triad
The Triad
  • Dominant economic centers of the world
    • Japan
    • Western Europe
    • United States
  • Expanded Triad
    • Pacific Region
    • North America
    • European Union