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International Business Lecture 3: The economic environment. Aims of the lecture. To compare national economies using the tools of macroeconomics To examine key aspects of national economies, including growth, employment, inflation and balance of payments

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aims of the lecture
Aims of the lecture
  • To compare national economies using the tools of macroeconomics
  • To examine key aspects of national economies, including growth, employment, inflation and balance of payments
  • To identify differences in national economic systems, spanning developed, developing and transition economies, pointing out implications for business strategy
  • To assess the extent and depth of regional integration
  • To highlight the prospects and challenges faced by the least-developed countries
comparing countries size and income
Comparing countries: size and income
  • GNI and GDP per capita allow comparisons between countries.
  • Gross national income (GNI) – total income from all final products produced within a country, including that arising from foreign investments of its residents.
  • Gross domestic product (GDP) – value of total economic activity within a country.
  • Purchasing power parity (PPP) makes adjustments for differing costs of living among countries.
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Figure 3.1: GDP of selected countries

Source: IMF (2006) IMF Economic Outlook database, www.imf.org

economic development
Economic development
  • Definition: processes of change in economic activities and organizations, on which the country’s wealth and prosperity depend.
  • Types of economic activity:

1. Primary– agriculture, mining and fishing

2. Secondary – manufacturing and industrial production

3. Tertiary – services

  • Economic development usually progresses through these three stages, although in resource-rich countries, wealth is mainly generated by exploiting their resources (often through FDI).
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Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan).

Table 3.1:Selected high-, middle- and low-income countries

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Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

Table 3.2:

Selected developed, transition, developing and least-developed countries

economic growth
Economic growth
  • Definition: percentage growth in GDP or GNI from year to year.
  • High growth rates are typically enjoyed by industrializing countries and those rich in natural resources, both of which attract FDI.
  • Growth tends to slow as GDP per capita rises. Slowing growth in developed countries has led MNEs to seek new markets in the emerging economies.
  • Governments seek sustainable growth, but global economic factors constrain governments’ influence.
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Figure 3.2:Economic growth in selected countries

Source: The Economist Economic Indicators (2007), www.economist.com/indicators

comparing countries inflation and employment
Comparing countries: inflation and employment
  • Inflation can be measured using the consumer price index (CPI) for each country.
    • Inflation has become a global (as well as national) phenomenon.
  • Improving labour productivity can lead to raising economic growth.
  • Country differences in employment policies and costs of labour are influential in stimulating (or discouraging) business activity.
  • Unemployment is linked to weak economic growth, and can have social, as well as economic, implications.
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Figure 3.3: CPI inflation

Sources: Financial Times, 8, 30 November 2004; 30 November 2005; 24 May 2006

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Figure 3.4: Annual growth in GDP per hour worked

Source: OECD (2008) Databases at Source OECD, oecd.org

slide14

Figure 3.6:Unemployment in selected countries, 2006

Source: UNDP (2007) Human Development Report 2007–2008 (Basingstoke: Palgrave Macmillan)

balance of payments
Balance of payments
  • Definition: total credit and debit transactions between a country’s residents and those of other countries.
  • Current account balance – A country may have a surplus (meaning that it exports more than it imports), or a deficit.
    • A country’s balance of payments reflects the competitiveness of its exporters and the demand of its consumers for imports.
    • Trade imbalances have become a global issue – the US has a huge trade deficit, while China has a trade surplus.
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Figure 3.7:Current account balances (as percentage of GDP)

Source: The Economist Economic Indicators (2007), www.economist.com/indicators

inequality
Inequality
  • Income inequality is measured by the Gini coefficient and by calculating the proportion of income earned by each quintile (20%) of the population.
  • Accumulation of wealth in a few hands is associated with liberal market economic systems of advanced economies, but the concentration of land and wealth in the developing world is also responsible for inequality.
  • Inequality, especially combined with high levels of poverty, can lead to social tensions and political instability.
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Table 3.3: Inequality measurements for selected countries

Note on Gini coefficient: 0 = perfect equality, 100 = perfect inequality

Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

public finances
Public finances
  • Governments are responsible for the country’s ‘coffers’, taking in and spending huge sums of money.
  • The national budget balance and national debt represent the state of government finances.
  • Budget deficits have become a fact of life in many countries.
  • Both direct and indirect taxes are raised by governments.
    • Levels of taxation are important considerations for firms contemplating FDI in a country; the flat tax favoured by new EU member states has helped to attract FDI.
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Figure 3.8:Budget deficits in selected countries (as percentage of GDP)

Source: The Economist Economic Indicators (2007), www.economist.com/indicators

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Figure 3.9:Top rates of corporation tax

Source: Financial Times, 3 October 2005

diverse economic systems
Diverse economic systems
  • Planned economy – supply, demand and prices controlled by the state.
  • Liberal market economy – principles of capitalism:
    • Maximum freedom to carry on enterprises
    • Protection of private property
    • Minimum government intervention.
  • Social market economy – market tempered by state role, especially in social protection and welfare.
  • Asian economic systems – alliance capitalism: market economies based on links between government and business.
transition economies
Transition economies
  • Economies of Central and Eastern Europe – making transition from communism to capitalist market models.
    • Central European states, including new EU members, have been recognized as market economies.
    • Countries of South-East Europe and nations of the former Soviet Union are making the transition to market economies, including privatizations; the legacy of the strong state remains in the latter nations.
  • China’s market reforms – growing influence of market forces in the economy, but continuing dominance of communist party political rule and state-controlled enterprises.
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Figure 3.11:FDI flows to selected countries in Central and Eastern Europe

Source: UN (2007) World Investment Report 2007 (Geneva: UN)

regional integration
Regional integration
  • Regional ties among countries can be between governments, businesses and individuals – both formal and informal.
  • Regional economic integration …
    • Has been facilitated by falling trade barriers, enshrined in regional trade agreements.
    • Is most developed in the EU, and especially in the eurozone. However, divergence in national economic systems continues.
  • The ‘Triad’theory of trade focuses on three major regions: North America, Europe and Japan (although the 3rd bloc should be broadened to Asia).
the least developed economies
The least-developed economies
  • The world’s poorest countries, mainly dependent on fragile agriculture and vulnerable to effects of climate change (such as desertification and flooding).
  • Mainly in sub-Saharan Africa, but also Asia (such as Bangladesh).
  • The challenges:

◊ Poverty alleviation

◊ Building social cohesion

◊ Establishing stable government

◊ Promoting economic development

conclusions
Conclusions
  • National economies diverge in their size, the nature of their economic activities, and their economic systems.
  • A growing number of countries are experiencing economic growth and development, creating opportunities for international business.
  • Despite growing economic integration globally
    • Diverse national economic systems persist
    • Regional integration is growing.
  • The least-developed countries are attracting international business, but poverty and weak governance persist.