The Economic

Environments Facing
Businesses
Session 07

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Powerpoint Templates

Page 1

Todays agenda

Chapter 4
Homework

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Chapter 4

Learning objectives
1. Communicate the importance of economic
analysis
2. Discuss the idea of economic freedom
3. Profile the characteristics of the types of
economic systems
4. Introduce the notion of state capitalism
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Chapter 4

Learning objectives
5.

Profile leading indicators of economic

development, performance, and potential

6.

Profile the benefits and drawbacks of

economic growth

7.

Profile leading global indices of economic

performance

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Chapter 4
1. Economic analysis

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Chapter 4

The importance of economic analysis

What should managers know?

Managers assess a countrys 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

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institutions

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Chapter 4

The importance of economic analysis

Why is it difficult?

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 (butterfly effect)
Data Overload

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Complicates decision-making

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Chapter 4

The importance of economic analysis

Do you remember graphic from page 6?

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Chapter 4
2. Economic Freedom

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Chapter 4

Economic freedom
What is Economic Freedom?

Definition: people have the right to work,

produce, consume, save, and invest the way
they prefer
10 dimensions of EF:
Business freedom,
Monetary freedom,
Fiscal freedom,
Investment freedom,
Freedom from corruption,

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Chapter 4

Economic freedom

Definition: people have the right to work,

produce, consume, save, and invest the way
they prefer
10 dimensions of EF:
Property rights,
Trade freedom,
Government size,
Financial freedom,
And labor freedom

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Chapter 4

Economic freedom

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Chapter 4

Economic freedom

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Chapter 4

Global distribution of economic freedom

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Chapter 4

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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Chapter 4

Trends in economic freedom

The trend toward increased economic freedom is

no longer certain
Questions about the legitimacy of free
markets (2009 financial crisis)
The benefits of more state control

Do you believe in economic freedom?

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Chapter 4

Economic freedom: Standard of living

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Chapter 4
3. Types of
economic systems
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Chapter 4

Types of economic systems

What is an economic system?

Definition: an economic system refers to the

mechanism that deals with the production,
distribution, and consumption of goods and
services
3 types of economic systems:
1. Market economy
2. Command economy
3. Mixed economy

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Chapter 4

Types of economic systems

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Chapter 4

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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Chapter 4

Market economy

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Chapter 4

Market economy

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Chapter 4

Property rights example

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Chapter 4

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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Chapter 4
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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Chapter 4
4. State capitalism

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Chapter 4

State capitalism

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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Chapter 4

State capitalism example

The government of Norway has ownership

stakes in many companies:
37% of the Oslo stock exchange
67% of Statoil, world's 11th largest oil and
gas company (by Forbes / 36 countries)
100% of Statkraft, the 3rd largest energy
producer in the Nordic region, and the
largest energy producer based on
renewable energy sources in Europe

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Chapter 4
5. Economic Development,
Performance, and Potential

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Chapter 4

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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In which class of countries is Mexico?

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Chapter 4

Emerging Market Index

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Is it better to be a developed or an emerging economy?

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Chapter 4

Developed Vs Emerging economies

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Chapter 4

Developed Vs Emerging economies

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Chapter 4

A global vision of long term growth

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Chapter 4

Gross national income (GNI)

Gross national income (GNI)

measures the income generated both
by total domestic production plus the
international production activities of
national firms,
It is the market value of all final
goods and services newly produced
by a countrys domestically-owned
firms plus the net flows of factor
income (i.e., rents, profits, and
labor income) in a given year.

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Chapter 4

Gross national product (GNP)

Gross national product (GNP)

It is the value of all final goods and
services produced within a nation in
a given year, plus the income
earned by its citizens abroad, minus
income earned by foreigners.
Although GNI and GNP are
conceptually equal, they are often
calculated differently

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Chapter 4

Gross domestic product (GDP)

Gross domestic product (GDP)

It measures the value of goods and
services generated by both
domestic and foreign-owned firms
within a nations borders in a given
period, usually a year.

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Chapter 4

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 (PPP)

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Chapter 4
Only GNI

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Chapter 4

A divided world

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Chapter 4
GNI per capita

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Chapter 4

GNI per capita adjusted for purchasing parity

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Chapter 4

Improving analysis

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Chapter 4

Improving 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
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Chapter 4

Economic analysis

Managers should also consider

Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
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Chapter 4
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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Chapter 4
Unemployment

Unemployment rate
share of unemployed workers
seeking employment for pay relative
to the total civilian labor force

Misery index
the sum of a countrys inflation and
unemployment rates

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Chapter 4
Debt

Debt
the total of a governments
financial obligations
internal debt
external debt

Growing public debt signals

tax increases
reduced growth
rising inflation

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increasing austerity
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Chapter 4

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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Chapter 4
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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Chapter 4

Example of frugal engineering

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Chapter 4

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Chapter 4

Balance of Payments (BOP)

Balance of payments
reports a countrys 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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Chapter 4

Components of a Countrys BOP

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Chapter 4

Current Account Balances:

The Top and Bottom Five

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Chapter 4

Why do managers use BOP?

BOP and Economic Stability

Managers use the BOP to assess a
countrys economic stability.
By measuring a countrys
transactions with the rest of the
world, the BOP estimates a
countrys financial stability.

BOP and Company Strategy

Monitoring trends in BOP gives
managers more data in order to
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chart strategic choices.

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Chapter 4

Why do managers use BOP?

BOP and Economic Stability

Managers use the BOP to assess a
countrys economic stability.
By measuring a countrys
transactions with the rest of the
world, the BOP estimates a
countrys financial stability.

BOP and Company Strategy

Monitoring trends in BOP gives
managers more data in order to
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chart strategic choices.

Page 58

Questions
Do you have
any questions?

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Page 59

Homework

Upload BOP exercise on BB

And prepare the

Quiz 2 on Chapter 4!

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Page 60

Thank you for

your attention

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Page 61