Chapter 4: Economic Environments Facing Businesses Flashcards
By 2050, how many of the world’s largest economies will be in greater Asia?
4 out of 6
In 2009, how much of total world GDP did emerging economies make up?
Over half
Which country was the most central trading power in the world in 2012?
China
What do changing economic environments indicate about the corresponding governments?
Government ambitions and highlight implications for economic freedom
What are some challenges of “the comeback” of emerging economies?
- Distort traditional economic indicators
- Greater competition for scarce resources –> increase price of commodities –> decrease price of manufactured goods
- More people working worldwide, but poverty increases
- More than 70% of world’s growth in next few years will be in emerging markets
Why is the assessment of economic environment more conditional than universal?
- System complexity
- Market dynamism
- Market interdependence
- Data overload
How should managers evaluate a country’s economy?
- Level of economic freedom for investments/ops
- Country’s economic system & current macro policies
- Drivers of economic change
What is economic freedom?
- Right of property ownership
- Freedoms of movement for labor, capital, & goods
- Absence of coercion or constraint of economic liberty beyond extent necessary for preservation of liberty
What is the economic freedom index?
Estimates extent to which government constrains free choice/enterprise for reasons that go beyond need to protect property, liberty, safety, and efficiency
What are some results of economic freedom?
- Growth
- Productivity
- Financial prosperity
- Economic stability
- Higher standards of living
How did the global financial crisis affect perception of free markets?
Induced fear of freer markets
What is the market test?
Test used by managers to gauge economic freedom vs. state control. Includes how government…
- Regulates economy
- Protects property rights
- Sets fiscal & monetary policies
- Enforces anti-trust regulation
What are the characteristics of a market economy?
- Individuals make most decisions
- Capitalism
- Mostly private ownership of resources
- Bias towards entrepreneurial innovation
- Applies invisible hand, laissez-faire
What are the characteristics of a command economy?
- Government owns and controls most resources
- Bias towards large-scale, capital-intenstive production
- Applies visible hand of state, central planning, & collectivism
- Communism
What are characteristics of a mixed economy?
- Gov/private ownership of resources mixed
- Goal of balancing economic efficiency but protecting against greed and self-interest
- Socialism
What is state capitalism?
Economic system whereby political officials decide how assets are valued and when/where they are used
What are characteristics of state capitalism?
- Government explicitly manipulates market outcomes for political purposes
- Promote stability and growth
- Does not stipulate ideological component
- Promotes growth of particular industries
- State favors local businesses over foreign ones
What is Gross National Income (GNI)?
Value of all production in domestic economy + income from other countries - payments to other countries
What is Gross National Product (GNP)?
Total value of all final goods/services produced within a nation in a particular year
What is Gross Domestic Product (GDP)?
Total market value of goods/services produced by workers and capital within nation’s borders (Truest measure of economic activity)
What adjustments must be taken into consideration when measuring a nation’s economy?
- Growth rate of economy
- Population
- Local cost of living
What is purchasing power parity (PPP)?
Method of measuring relative purchasing power of different countries’ currency for same basket of goods/services
What is Net National Product?
Measures depletion of natural resources & degradation of environment that results from generating GNI
What is the Genuine Progress Indicator (GPI)?
Adjusts GDP to account for environmental quality, population health, security, equity, free time, & education
What is the Human Development Index (HDI)?
Measures physical, intellectual, and social standards that shape quality of life
What does inflation measure?
Increase in cost of living
What does deflation measure?
Decrease in general price level of goods/services
What is the unemployment rate equation?
Jobless citizens seeking employment / total civilian labor force
What is the misery index?
Country’s inflation + unemployment rates
What is internal debt?
Denominated in country’s own currency and held by domestic residents
What is external debt?
Owed to foreign creditors (in foreign currency)
What are costs of the widening gap in income distribution?
- Widening inequality threatens stability that supports growth
- Fuels conflicts that create social divisions
- Can erode country’s sense of identity
What is the Gini coefficient?
indicates extent to which income share deviate from perfectly equal distribution
- 0 = perfect equality
- 1 = perfect inequality (1 person has all income)
What is considered extreme poverty?
Living on less than $1.25 per day (1.3 billion people)
What is considered moderate poverty?
Living on less than $2.00 per day (2.5 billion people)
What is the distribution of wealth in the world population?
80% poor
10% middle income
10% rich
What is the Base of the Pyramid and why are managers interested in it?
- Largest, but poorest socioeconomic group in world
- 4 billion on less than $4 per day
What will firms need to do to have success developing products for the Base of the Pyramid?
- Think differently @ threats/complexity
- Develop affordable, easy to use, eco-sensitive products that work in harsh environments
What is the Balance of Payments (BOP)?
Reports country’s trade and fiscal transactions with rest of world
What is a current account transaction?
Tracks cross- border payments for goods/services
What is a capital account transaction?
Tracks loans for cross-border payments for assets
What is the Global Competitiveness Index (GCI)?
Summarizes performance of country based on competitive indicators such as financial market development, macroeconomic environment, technological readiness, market efficiency, and innovation
What is the World Competitiveness Index (WCI)?
- Assesses nation’s ability to create and maintain an environment in which enterprises (private or state-owned) can compete, prosper, and create wealth.
- Four main factors: economic performance, government efficiency, business efficiency, and infrastructure
What is the global Innovation Index (GII)?
Assesses nation’s competency in promoting technologies, expanding human capacities, streamlining organizational capabilities, and improving institutional responsiveness to changes in market
What is the Where-To-Be-Born Index (WTBBI)?
Assesses how well a country provides opportunities for a safe, prosperous life
