BUS313_001ECONOMIC AND FINANCIAL ENVIRONMENT OF GLOBAL BUSINESS General Introduction
Theory vs Reality A good theory should predict reality; Exactly? Points a to e => good theory. Points e to g => Bad theory. Points e to f =>? Points f to g =>? e:f ≠ f:g Recorded path of Quantity over time. f Q Path predicted by “good” theory. b d e g a c Time = Minutes, Weeks, Decades, Centuries.
NEW TERMS & CONCEPTS Gross Domestic Product (GDP) Gross National Product (GNP) Microeconomics/Macroeconomics International Economics Exports/Imports Gross & Net Rational Markets
Two Key Assumptions 1. Economic agents (firms, consumers, workers) are rational. 2. The economy can best be understood as a set of markets (goods and services, labor, money, financial assets) in which prices adjust to equate supply and demand.
GNP, GDP, etc. What is gross about gross domestic product? Why domestic and not national? If there is a gross, is there a net?
GNP = Gross National Product US GNP: total final output produced by US nationals no matter where they are located. Included: Value added by Illinoisans working in India, Indonesia and Indiana. Excluded: Value added by Iranians, Iraqis or Israelis working in Idaho.
GDP = Gross Domestic Product US GDP: Total final output of Americans, Albanians and Saudi Arabians working within the borders of the 50 States, Guam, Puerto Rico and other US possessions. Included: Value added by Honda in USA. Excluded: Value added by Motorola in Japan.
GDP vs GNP GDP: Produced at home by anybody’s plant, but employs domestic labor. GDP: More closely under the control & influence of governments and more readily taxed. GNP: Borderless, produced anywhere by home owned plants using the nation’s capital stock but often foreign labor.
Income From GOODS MADE IN REST OF HOME WORLD COUNTRY G HOME OWNED FIRMS REST OF WORLD OWNED FIRMS O A O + b = GNPH D S + + M A D D = GNPROW c + E B = = Y GDPH GDPROW
WHY? • are A & D so large? • are b & c so small? • is GNPH = A + b? • is GNPROW = c + D? • is GDPH = A + c? • is GDPROW = b + D? What is A + b + c + D?