1. 2.2. The economic environment

2. Class Objective
 Know the importance of economic analysis
 Major dimensions of international economic analysis
 Macroeconomic indicators
 Types of economic systems
 Economic freedom

3. 2.2.1. The importance of economic
analysis
 Every country has its own economic development
 From 1975 to 2008, world economic output has tripled
 2009: registration of worse economic contraction since
WWII
 Reduction of 30% of exportation in 2009

4. 2.2.1. The importance of economic
analysis
 Globalization: countries are interrelated to each others
directly or indirectly
 World Bank database identifies 208 discrete economic
environments
 194 countries and 14 others with more than 30 000
inhabitants
 Thumb rule: invest in economies with the greatest
return and the least risk
 Managers have to understand, anticipate and adapt
constantly the company to economic environment.

5. 2.2.2. The elements of economic
environment
 GNI: Measure of income generated by both domestic
production as well the production at international
level of a national company.
 GNP: all goods and services produced + income earned
by citizens abroad - income earned by foreigners from
domestic production
 GDP: Total value of all final goods and services
produced within nation’s border whether the company
is national or not.

6. 2.2.2. The elements of economic
environment
 GNI, GNP and GDP per capita
 Division of production by the number of inhabitants.
 Comparison of relative economic performance of
countries
 Cases of high income countries with few economic
activities: KSA, Kuwait, Algeria, etc.

7. 2.2.2. The elements of economic
environment
 GNI rate of change: good indicator on a potential of an
economy measured with the rate of population
growth.
 GNI and the Purchase power of parity: GNI does not
tell the cost of living.
 1$ in New-York does not buy the same amount of
products in Mumbai
 PA x S = PB
 The Big Mac index

8. 2.2.2. The elements of economic
environment
 Degree of human development: Alternative to
monetary indicators.
 HDI from UN have three main dimensions
 Longevity
 Knowledge
 Standard of living: GNI per capita ajusted with PPP

9. 2.2.2. The elements of economic
environment
 Inflation: Sustained rise of price that is measured
against a standard level of purchasing power. It has a
influence on:
 real interest rate, exchange rate, living costs, general
economic confidence, and political stability
 On cost of living: lose of purchase power
 Hyperinflation: Difficult to make long term plan of
investment. Give no incentives to save and investments
instrument become speculative.
 Deflation: Opposite of inflation when price variation
rate is less than zero. USA and Japan

10. 2.2.2. The elements of economic
environment
 Unemployment
 High unemployment rate make a risky business
environment.
 Long term unemployment depress economic growth,
create social pressure and political instability
 Indicator for efficiency in human resource management
in a country
 Careful with underestimation of unemployment…
 Variation in public support
 The pension problem: Canada, USA, Europe, Japan

11. 2.2.2. The elements of economic
environment
 Debt
 Larger is debt the more uncertain is the country
 Short term perspective: Money goes to payment of
interest and not on more productive use
 Long term: preocupation of future generation’s ability to
pay
 High debt = tax increase, reduced growth, rising
inflation

12. 2.2.2. The elements of economic
environment
 Income distribution
 Gini coefficient: measure of degree of inequality in the
distribution of family income in a country. 0 perfect
distribution 1 perfect inequality.
 Higher rate indicate an economic and social inefficiency
which cause higher crime, corruption, political risk, etc.
 Higher rate also limit a potential market that can be
consumers.

13. 2.2.2. The elements of economic
environment
 Limit of Gini coefficient and poverty
 Extreme case of India: has 36.8 and USA has 46.3 but
India has 80% of its population living with less than 2$
per day.
 Poverty according to World Bank: 80% poor, 10% middle
income, 10% rich.
 In extreme poverty market may not existm national
infratructure absent, higher criminal behavior, etc.
 However, managers see a good potential in poor
markets. Ex: Tata car 2100 USD and Tata house 800-
15000 USD

14. 2.2.2. The elements of economic
environment
 Labor cost: Cost of labor may be a key element for total
cost of product
 The balance of payment: System recording all of a
country’s economic transactions with the rest of the
world over a one year period.
 Used by managers to assess a country’s economic
stability and also financial stability.

15. 2.2.2. The elements of economic
environment
 The components of BP
 Current account
 Value of export and imports of physical goods
 Receipt and payments for services: banking or advertising and
other intangible goods (invisible trade)
 Private transfers (remittances and other business transfer)
 Official transfers like international aid
 Capital account
 Long term capital flows (investments in foreign firms or
profits from selling investments)
 Short term capital flows (money invested in foreign currency,
funds, etc.)

16. 2.2.3. Integrating Economic
Analysis
 Logically high income markets are the best foreign
markets
 1 bilion person = 80% of world wide consumption
 However managers see a potencial in emerging
markets with teir accelerated growth.

17. 2.2.2. Integrating Economic
Analysis
 Types of economic systems
 Market economy: free market
 Command economy: centrally planned
 Mixed: Most economies today, promote free market but
there is a part of government intervention.
 Types of interventions government intervention
 Influence on private production and consumption decisions
 Redistribution of income and wealth

18. 2.2.2. Integrating Economic
Analysis
 The dynamic of economic transitions
 Belief in free markets
 Economic freedom index (Heritage foundation and
WSJ)
 Def: The absence of government coercion or constraint on the
production, distribution or consumption of goods and
services beyond the extent necessary for citizens to protect
and maintain liberty itself.
 The index indicates the level of free economic choice and
enterprise.

19. 2.2.2. Integrating Economic
Analysis
 The expanding role of the state
 State intervention more present since 2008
 USA: Obama fires GM CEO and inject money in banking
system
 Signals of transition to market or command economy
 Privatization or government acquisition
 Regulation: restrictions on free operations of markets and
business
 Property right: protection support a competitive economy
 Fiscal and monetary reform:
 Anti-trust laws: eliminate monopolistic behavior

20. Thank you! Questions?