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Class Objective Know the importance of economic analysis Major dimensions of international economic analysis Macroeconomic indicators Types of economic systems Economic freedom
2.2.1. The importance of economicanalysis 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
2.2.1. The importance of economicanalysis 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.
2.2.2. The elements of economicenvironment 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.
2.2.2. The elements of economicenvironment 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.
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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.
2.2.2. The elements of economicenvironment 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
2.2.2. The elements of economicenvironment 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.
2.2.2. The elements of economicenvironment 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.)
2.2.3. Integrating EconomicAnalysis 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.
2.2.2. Integrating EconomicAnalysis 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
2.2.2. Integrating EconomicAnalysis 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.
2.2.2. Integrating EconomicAnalysis 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
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