Topic 2 - Economic Environment Flashcards
Define economics
The study of how society manages its resources.
Define microeconomics
The study of how households and firms make decisions and how they interact in markets.
Define macroeconomics
The study of economy-wide phenomena, including inflation, unemployment and economic growth.
Name six economic factors affecting business
Inflation, labour market conditions, debt, income distribution, balance of payments, human development
Define factor conditions and provide examples
A nation’s resources e.g. labour, natural resources, capital, technology, entrepreneurship and advanced workforce skills
Define demand conditions and what influences demand conditions?
The nature of home-market demand for specific products and services. Demand conditions are influenced by composition, size, growth and internationalisation.
Name four elements of an economic environment
Factor and demand conditions, growth, humans development and economic factors affecting business
Name two indicators of market potential
Gross national income (GNI) and gross domestic product (GDP)
What is gross national income?
GNI is the total income received by the country from its residents and businesses regardless of whether they are located in the country or abroad. GNI includes money received from overseas sources such as foreign direct investment and economic development aid.
What is gross domestic product?
GDP is the total market value of all finished goods and services produced within a country in a set time period.
What indicates a recession?
Two quarters of negative growth.
What is horizontal and what is comparative analysis?
Horizontal analysis – analysing one thing in one country over time
Comparative analysis – comparing different countries
How is economic growth measured?
Economic growth is measured as a percentage change in GPD and GNI. Change in GDP is the usual measure for growth and change in GNI is a measure of growth potential,.
What is the foreign exchange effect?
Economic indicators are usually calculated in USD and exchange rate fluctuations can distort calculations. Purchasing power parity is used to correct distortions.
What is purchasing power parity?
The notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services.
What is the last of one price?
o Identical goods will have the same price in different markets assuming no transaction costs
o Purchasing power of different currencies is equalised for a given basket of goods
Describe the economic factor of inflation
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is measured by CPI.
What is the relationship between inflation and interest rates?
Inflation influences interest rates. Interest rates are usually slightly higher than inflation (CPI).
Name four aspects of labour market conditions
Unemployment rates, labour laws, working conditions, skill levels
What is the difference between internal and external debt?
Internal - held by domestic residents
External - held by foreign creditors
Define balance of payments
The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time.
What is the difference between current account and capital account?
Current account - country’s net income over a period of time (exports less imports)
Capital account - net change of assets and liabilities during a particular year
How does human development affect the economy?
Increases in human development ultimately increase consumption and economic activity.
What three things does the UN Index measure?
Longevity – life expectancy
Knowledge – literacy
Standard of living – PPP per capita
What is the difference between nationalisation and privatisation?
Nationalisation: private to state owned ownership
Privatisation: state ownership to private ownership
What is a market economy?
o Resources owned & controlled by private sector
o Consumer sovereignty - right of consumers to decide what to buy
o Prices determined by supply & demand, not government
What is a command economy?
o Economic activity determined by central government plan
o Government owns and controls all resources
o Prices & production determined by government
What is a mixed economy?
Some degree of government ownership & control
How do markets transition from a command economy to a market economy?
o Liberalising economic activity, prices, market operations, reallocation of resources, privatisation of property
o Establishing legal & institutional infrastructure
o Developing instruments for macroeconomic stabilisation & budget constraint
How can transitioning to a market economy be advantage to international business?
- Access to new markets
- Offloading old technology OR
- Leap-frogging old technology
- Market for skills
- Considerable cultural and political risks
