Chapter 2 - The global economic environment Flashcards
Give an Overview of the world economy
- In the early 20th century economic integration was at 10%; today it is 50%
- EU and NAFTA are very integrated
- Global competitors have displaced or absorbed local ones
- The new realities:
– Capital movements have replaced trade as the driving force of the world economy
– Production has become uncoupled from employment
– The world economy, not individual countries, is the dominating factor - The struggle between capitalism and socialism began in 1917 is over
- E-Commerce diminishes the importance of national barriers and forces companies to reevaluate business models
Zeroing on on Economic Systems - what to consider?
Globalization has made it harder to pigeonhole economies within the four‐cell matrix
Also consider:
– Type of economy: advanced industrial state, emerging or transition economy, or developing nation?
– Type of Government: Monarchy, dictatorship, tyrant? One‐party system? Dominated by another state? Democracy? Terrorist?
– Trade and capital flows: Free trade, part of trading bloc? Currency board or exchange controls?
– The commanding heights: Transportation, communications & energy sectors. State, private, or mixed ownership?
– Services provided by the state or state funded: Pensions, health care, education.
– Institutions: Country characterized by transparency, standards, absence of corruption? Standards ignored and court system compromised?
– Markets: Entrepreneurial high risk/high reward? Socialized market? Government dominated price and wage controls?
Describe the economic system matrix
Resource Allocation (Market/Command)
Resource Ownership (Private/State)
Market/Private: Market Capitalism
Market/State: Market Socialism
Command/Privat: Centrally Planned Capitalism
Commant/State: Centrally Planned Socialism
Describe market capitalism the economic system matrix
- Individuals and firms allocate resources
- Production resources are privately owned
- Driven by consumers
- Government’s role is to promote competition among firms and ensure consumer protection
Describe Market socialism the economic system matrix
Describe centrally planned capitalism the economic system matrix
Economic system in which command resource allocation is used extensively in an environment of private resource ownership
Example:
– Swedish government controls 2/3s of all spending; a hybrid of CPS and capitalism (Market Socialism)
– Swedish government plans move towards privatization
Describe centrally planned socialism the economic system matrix
- Opposite of market capitalism
- State holds broad powers to serve the public interest; decides what goods and services are produced and in what quantities
- Consumers can spend only what is available
- Government owns entire industries and controls distribution
- Demand typically exceeds supply
- Little reliance on product differentiation, advertising, pricing strategy
- China, India, and the former USSR now moving towards some market allocation and private ownership
List variables considered when ranking economic freedom among countries
– Trade policy
– Taxation policy
– Capital flows and foreign investment
– Banking policy
– Wage and price controls
– Property rights
– Black market
Name 5 Countries who are economically free and 5 who are economically repressed based on the ranking of 2015
Free:
- Hong Kong
- Singapore
- New Zealand
- Australia
- Switzerland
Repressed:
- Argentina
- Republic of Congo
- Iran
- Turkmenistan
- Equatorial Guinea
Name the stages of market development and which countries were in focus 10-20 years ago and which are now
The World Bank has defined four (five) categories of development using Gross National Income (GNI) as a base
- Low-Income Countries
- Lower-Middle-Income Countries
- Upper-Middle-Income Countries
- (Newly Industrialising Economies)
- High-Income Countries
BEMs, identified 10 years ago, were countries in Central Europe, Latin America, and Asia that were to have rapid economic growth
Today, the focus is on BRICS: Brazil, Russia, India, China and South Africa
Describe Low‐Income Countries
GNI per capita of $1,045 or less
Characteristics
– Limited industrialization
– High percentage of population in farming
– High birth rates
– Low literacy rates
– Heavy reliance on foreign aid
– Political instability and unrest
– Concentrated in Sub‐Saharan Africa
Describe Lower‐Middle‐Income Countries
GNI per capita: $1,046 to $4,125
Characteristics
– Rapidly expanding consumer markets
– Cheap motivated labor
– Mature, standardized, labor‐intensive industries like footwear, textiles and toys
- 50 bottom‐ranked countries are LDCs—least developed countries
- India is the only BRIC nation
Describe Upper‐Middle‐Income Countries
GNP per capita: $4,126 to $12,745
Characteristics:
*Rapidly industrializing, less agricultural employment
*Increasing urbanization
*Rising wages
*High literacy rates and advanced education
*Lower wage costs than advanced countries
* Also called industrializing or developing economies
* BRICS: Brazil, China, South Africa
* Other countries: Malaysia, Chile, Venezuela, Mexico
Venezuelans have to cope with a shortage of goods as oil prices have dropped.
Describe Newly Industrializing Economies (NIEs)
Lower‐middle and upper income economies with the highest sustained rates of economic growth
– Greater industrial output that developing economies
– Exports of manufactured and refined products
– Next ‐11 (N‐11) a new country grouping identified by Goldman Sachs
- NIEs include Egypt, Indonesia, the Philippines, (lower‐middle income) Mexico, and Turkey (upper‐middle income)
Mistaken Assumptions about LDCs
- The poor have no money.
- The poor will not “waste” money on nonessential goods.
- Entering developing markets is fruitless because goods there are too cheap to make a profit.
- People in BOP (bottom of the pyramid) countries cannot use technology.
- Global companies doing business in BOP countries will be seen as exploiting the poor
Descibe High‐Income Countries
GNI per capita: $12,476 or more
- Also known as advanced, developed, industrialized, or postindustrial countries
Characteristics:
–Sustained economic growth through disciplined innovation
–Service sector is more than 50% of GNI
–Households have high ownership levels of basic products
–Importance of information processing and exchange
–Ascendancy of knowledge over capital, intellectual over machine technology, scientists and professionals over engineers and semiskilled workers
–Future oriented
–Importance of interpersonal relationships
Who’s part of the G‐7, the Group of Seven
Goal of global economic stability and prosperity
– U.S.
– Japan
– Germany
– France
– Britain
– Canada
– Italy
Russia joined in 1998 changing the group to the G-8 but its membership was suspended in 2014
Who’s part of the G‐20, Group of Twenty
Established in 1999
- Finance Ministers and central bank governors of 19 countries and the EU
- Russia remains a member, unlike in the G‐7
Describe the OECD, the Organization for Economic Cooperation and Development
- 34 nations
- Post‐WW II European origin; based in Paris
- Canada, U.S. (1961), Japan (1964)
- Promotes economic growth and social wellbeing
- Focuses on world trade, global issues, labor market deregulation
– Anti‐bribery (Bestechung) conventions
What is the triad?
- U.S., Western Europe, and Japan
- Represents 75% of world income
- Expanded Triad includes all of North America and the Pacific Rim and most of Eastern Europe
- Global companies should be equally strong in each part
What are Product Saturation Levels? Give some examples with numbers?
The percent of potential buyers or households who own a product
- India: 20% of people have telephones
- Autos: 1 per 43,000 Chinese, 21 per 100 Poles, 49 per EU adults, 8 per 1,000 Indians, 200 out of 1,000 in Russia, 565 out of 1,000 in Germany
- Computers: 1 PC per 6,000 Chinese; 11 PCs per 100 Poles; 34 PCs per 100 EU citizen
What is Balance of Payments? Define und compare current account and capital account
Record of all economic transactions between the residents of a country and the rest of the world
Current account
–record of all recurring trade in merchandise and services, and humanitarian aid
* trade deficit—negative current account
* trade surplus—positive current account
Capital account
–record of all long‐term direct investment, portfolio investment, and capital flows
Give an overview of international finance
Define Spot market, forward market, devaluation, mercantalism o competitibe-currency politics, and revaluation
- Foreign exchange allows companies to do business globally with different currencies
- Exchange risk occurs when the value of a currency changes as it is traded
- Spot market: immediate delivery
- Forward market: future delivery
- Currency market participants include countries’ central banks, companies that convert foreign currency into their home currencies, currency speculators
- Devaluation: the reduction of a nation’s currency against other currencies
- Mercantilism or Competitive‐currency politics: Countries do not allow their currency to fluctuate
- Revaluation: A nation allows its currency to strengthen
- Foreign exchange makes it possible to do business across the boundary of a national currency
- Currency of various countries are traded for both immediate (spot) and future (forward) delivery
- Currency risk adds turbulence to global commerce
Describe Foreign Exchange Market Dynamics with focus on supply and demand interactions
– Country sells more goods/services than it buys
– There is a greater demand for the currency
– The currency will appreciate in value
Managing Economic Exposure - Define and explain in which cases it occurs
Economic exposure refers to the impact of currency fluctuations on the present value of the company’s financial performance.
- Occurs when sales are in a foreign currency
– Nestlé generates 98% of sales outside home country
– Euro zone companies GlaxoSmithKline, Daimler AG, BP, for example, generate 1/3 of sales in the U.S.
