Chapter 2

The Global Economic

Environment
PowerPoint
by
Kristopher Blanchard
North Central University

© 2005 Prentice Hall 2-1

 Introduction to Chapter
Market definition – People or organizations
with needs and wants; both have the
willingness and ability to buy or sell
The global economic environment plays a
large role in the development of new
markets for organizations

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 The World Economy – An Overview

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

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 The World Economy – An Overview

The new realities continued:

– 75-year struggle between capitalism and
socialism has almost ended
– E-Commerce diminishes the importance of
national barriers and forces companies to re-
evaluate business models

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 Economic Systems
4 main types of economic systems
– Market Capitalism
– Centrally planned socialism
– Centrally planned capitalism
– Market socialism

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 Market Capitalism
Individuals and firms allocate resources
Production resources are privately owned
Driven by consumers
Government should promote competition
among firms and ensure consumer
protection

Return

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 Centrally Planned Socialism
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 on what is available
Government owns entire industries
Demand typically exceeds supply
Little reliance on product differentiation,
advertising, pricing strategy
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 Centrally-Planned Capitalism
Economic system in which command
resource allocation is used extensively in an
environment of private resource ownership
Examples:
– Sweden
– Japan

Return

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 Market Socialism
Economic system in which market
allocation policies are permitted within an
overall environment of state ownership
Examples:
– China
– India

Return
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 Economic Systems
Resource Allocation
Market Command

Centrally
Private Market Planned
Capitalism Capitalism
Resource
Ownership
Centrally
Market Planned
State Socialism Socialism

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 Economic Freedom
Rankings of economic freedom among countries
– Ranges from “free” to “repressed”
Variables considered include such things as:
– Trade policy
– Taxation policy
– Banking policy
– Wage and price controls
– Property rights

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 Economic Freedom
Free
Repressed
– Bosnia
Hong Kong
– Vietnam
Singapore
– Laos
Ireland
– Iran
New Zealand
– Cuba
United States
– Iraq
United Kingdom
– Libya
Netherlands
– North
Australia
Korea
– Congo
Switzerland
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 Stages of Market Development

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 Big Emerging Markets
China
India
Indonesia
South Korea
Brazil
Mexico
Argentina
South Africa
Poland
Turkey

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 Stages of Market Development
World Bank has defined four categories of
development
– High-income countries
– Upper-middle income countries
– Lower-middle income countries
– Low-income countries
Based upon Gross National Product (GNP)

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 Low-Income Countries
GNP per capita of $785 or less
Characteristics
– Limited industrialization
– High percentage of population involved in farming
– High birth rates
– Low literacy rates
– Heavy reliance on foreign aid
– Political instability and unrest
Of these, only China and India are BEMs
Return

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 Lower-Middle-Income Countries
GNP per capita between $786 and $3,125
Sometimes called less-developed countries
(LDCs)
Characteristics
– Early stages of industrialization
– Cheap labor markets
– Factories supply items such as clothing, tires, building
materials, and packaged foods
3 BEMs: Poland, Turkey, Indonesia

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 Upper-Middle-Income Countries
GNP per capita between $3,126 to $9,655
Characteristics
– Rapidly industrializing
– Rising wages
– High rates of literacy and advanced education
– Lower wage costs than advanced countries
Sometimes called newly industrializing economies (NIEs)
3 BEMs: Argentina, Brazil, Mexico, South Africa

Return

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 High-Income Countries
GNP per capita above $9,656
Sometimes referred to as post-industrial countries
Characteristics
– Importance of service sector, information processing
and exchange, and intellectual technology
– Knowledge as key strategic resource
– Orientation toward the future

Return

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 Influencing the World Economy
Group of Seven (G-7)
Organization for Economic Cooperation an
d Development
The Triad

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 Group of Seven (G-7)
Leaders from these high income countries work to
establish prosperity and ensure monetary stability
– United States
– Japan
– Germany
– France
– Britain
– Canada
– Italy

Return

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 Organization for Economic
Cooperation and Development

30 nations each with market-allocation

economic systems
Mission: to enable its members to achieve
the highest sustainable economic growth
and improve the economic and social well-
being of their populations
www.oecd.org
Return

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 The Triad
Dominant economic centers of the world
– Japan
– Western Europe
– United States
Expanded Triad
– Pacific Region
– North America
– European Union

Return

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 Marketing Implications of the
Stages of Development
Product Saturation
Levels
– The percentage of
potential buyers or
households that own a
particular product
– Graph shows that in
India a private phone is
owned by 1% of the
population

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 Balance of Payments
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, private gifts, and
public aid between countries
• trade deficit
• trade surplus
– Capital account – record of all long-term direct
investment, portfolio investment, and capital
flows

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 Balance of Payments

U.S. balance of payments statistics for the period

1999 to 2003

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 Overview of International Finance
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
Increases the risk to organizations that are
involved in global marketing

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 Managed Dirty Float?
Definitions
– Float refers to the system of fluctuating
exchange rates
– Managed refers to the specific use of fiscal and
monetary policy by governments to influence
exchange rates
• Devaluation is a reduction in the value of the local
currency against other currencies

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 Managed Dirty Float?
Definitions
– Dirty refers to the fact that central banks, as
well as currency traders, buy and sell currency
to influence exchange rates

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 Foreign Exchange Market Dynamics

Supply and Demand interaction

– Country sells more goods/services than it buys
– There is a greater demand for the currency
– The currency will appreciate in value

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 Purchasing Power Parity (PPP) –
The Big Mac Index

Is a certain currency over/under- valued compared

to another?
Assumption is that the Big Mac in any country
should equal the price of the Big Mac in the US
after being converted to a dollar price
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 Managing Economic Exposure
Economic exposure refers to the impact of
currency fluctuations on the present value
of the company’s future cash flows
– Transaction exposure is from sales/purchases
– Real operating exposure arises when currency
fluctuations, together with price changes, alter a
company’s future revenues and costs

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 Managing Economic Exposure
Numerous techniques and strategies have
been developed to reduce exchange rate risk
– Hedging involves balancing the risk of loss in
one currency with a corresponding gain in
another currency
– Forward Contracts set the price of the exchange
rate at some point in the future to eliminate
some risk

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