Session 07
Transcript of Session 07
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Page 1Powerpoint Templates
The EconomicEnvironments Facing
BusinessesSe s s i o n 0 7
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Todays agenda
Chapter 4
Homework
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Chapter 4Learning objectives
1. Communicate the importance of economic
analysis
2. Discuss the idea of economic freedom
3. Profile the characteristics of the types of
economic systems
4. Introduce the notion of state capitalism
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Chapter 4Learning objectives
5. Profile leading indicators of economic
development, performance, and potential
6. Profile the benefits and drawbacks of
economic growth
7. Profile leading global indices of economic
performance
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Chapter 4
1. Economic analysis
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Chapter 4The importance of economic analysis
Managers assess a country
s economicenvironment knowing:
Countries differ in different ways
Economic and political changes alter market
circumstances
It is important to understand connections,
change, and consequences
The challenges of the comeback
Choices of citizens, policymakers, and
institutions
What should managers know?
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Chapter 4The importance of economic analysis
Universal assessment of economicenvironments is difficult because of:
System Complexity
Identifying proper indicators is difficult
Market Dynamism
New economic circumstances
Market Interdependence
Markets influence each other (butterfly effect)
Data Overload
Complicates decision-making
Why is it difficult?
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Chapter 4The importance of economic analysis
Do you remember graphic from page 6?
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Chapter 4
2. Economic Freedom
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Chapter 4Economic freedom
Definition: people have the right to work,produce, consume, save, and invest the waythey prefer
10 dimensions of EF:
Business freedom,
Monetary freedom,
Fiscal freedom,
Investment freedom,
Freedom from corruption,
What is Economic Freedom?
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Chapter 4Economic freedom
Definition: people have the right to work,
produce, consume, save, and invest the waythey prefer
10 dimensions of EF:
Property rights,
Trade freedom,
Government size,
Financial freedom,
And labor freedom
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Chapter 4Economic freedom
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Chapter 4Economic freedom
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Chapter 4Global distribution of economic freedom
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Chapter 4Value of economic freedom
Economic freedom affects
Growth rates
Productivity
Income levels
Inflation
Employment
Life expectancy
Literacy
Political openness
Environmental sustainability
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Chapter 4Trends in economic freedom
The trend toward increased economic freedom is
no longer certain
Questions about the legitimacy of free
markets (2009 financial crisis)
The benefits of more state control
Do you believe in economic freedom?
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Chapter 4Economic freedom: Standard of living
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Chapter 4
3. Types ofeconomic systems
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Chapter 4Types of economic systems
Definition: an economic system refers to the
mechanism that deals with the production,
distribution, and consumption of goods and
services
3 types of economic systems:
1. Market economy
2. Command economy
3. Mixed economy
What is an economic system?
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Chapter 4Types of economic systems
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Chapter 4Market economy
In a market economy individuals rather than
governments make most economic decisions
Capitalism
private ownership of capital
Laissez-faire
governmental noninterference in
economic affairs
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Chapter 4Market economy
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Chapter 4Market economy
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Chapter 4Property rights example
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Chapter 4Command economy
In a command economy the visible hand of
the state supersedes the invisible hand of
individuals
Government
owns and controls resources
determines prices
Communism
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Chapter 4Mixed economy
Most economies are mixed economies
Fall between market and command economies
Socialism
regulate economic activity with a focus
on social equality and a fair distribution
of wealth
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Chapter 4
4. State capitalism
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Chapter 4State capitalism
State capitalism refers to a system in which the
government explicitly manipulates market
outcomes for political purposes
promote certain industries to encourage
economic development
develop national companies into global
leaders
foreign companies restricted from strategic
industries
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Chapter 4State capitalism example
The government of Norway has ownership
stakes in many companies:
37% of the Oslo stock exchange
67% of Statoil, world's 11th largest oil andgas company (by Forbes / 36 countries)
100% of Statkraft, the 3rd largest energy
producer in the Nordic region, and the
largest energy producer based on
renewable energy sources in Europe
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Chapter 4
5. Economic Development,Performance, and Potential
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Chapter 4Economic Development,
Performance, and Potential
Broad classes of countries include:
developing countries largest number of countries
low per capita income
emerging economies fast growing, relatively prosperous
BRICs Brazil, Russia, India, and China
developed countries
high per capita income and standardof living
like the U.S., Japan, France, Australia
In which class of countries is Mexico?
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Chapter 4Emerging Market Index
Is it better to be a developed or an emerging economy?
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Chapter 4Developed Vs Emerging economies
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Chapter 4Developed Vs Emerging economies
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Chapter 4A global vision of long term growth
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Chapter 4Gross national income (GNI)
Gross national income (GNI)
measures the income generated bothby total domestic production plus theinternational production activities ofnational firms,
It is the market value of all finalgoods and services newly producedby a countrys domestically-owned
firms plus the net flows of factorincome (i.e., rents, profits, andlabor income) in a given year.
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Chapter 4Gross national product (GNP)
Gross national product (GNP)
It is the value of all final goods andservices produced within a nation ina given year, plus the incomeearned by its citizens abroad, minusincome earned by foreigners.Although GNI and GNP areconceptually equal, they are often
calculated differently
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Chapter 4Gross domestic product (GDP)
Gross domestic product (GDP)
It measures the value of goods andservices generated by bothdomestic and foreign-owned firmswithin a nations borders in a givenperiod, usually a year.
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Chapter 4Improving analysis
GNI data should be adjusted for
the growth rate of the economy
the number of people in a country
the local cost of living (PPP)
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Chapter 4Only GNI
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Chapter 4A divided world
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Chapter 4GNI per capita
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Chapter 4GNI per capita adjusted for purchasing parity
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Chapter 4Improving analysis
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Chapter 4Improving Broader Conceptionsof Performance and Potential
Green economics
gauge economic performance interms of the effect of currentchoices on long-term sustainability
Sustainable development
meet the needs of the presentwithout compromising the ability offuture generations to meet theirown needs
Happynomicsimportance of emotional prosperity
in addition to financial prosperity
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Chapter 4Economic analysis
Managers should also consider
Inflation
Unemployment
Debt
Income distribution
Poverty
Balance of payments
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Chapter 4Inflation
Inflation
a measure of the increase in thecost of living
Deflation
when prices for products go downnot up
Reflationincrease the money supply and
reduce taxes to accelerateeconomic activity
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Chapter 4Unemployment
Unemployment rate
share of unemployed workers
seeking employment for pay relative
to the total civilian labor force
Misery index
the sum of a country
s inflation and
unemployment rates
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Chapter 4Debt Debt
the total of a governmentsfinancial obligations
internal debt
external debt
Growing public debt signals
tax increases
reduced growth
rising inflation
increasing austerity
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Chapter 4Income distribution
Income distribution
estimates the proportion of thepopulation that earns various levels
of income
Gini coefficient
measures the extent to which the
distribution of resources deviates
from a perfectly equal distribution
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Chapter 4Poverty
Poverty the state of having little or nomoney and few or no material
possessionsextreme poverty
less than $1.25 per day
moderate poverty
less than $2.00 per day
Today the world population is 80% poor,
10% middle income, and 10% rich Base of the Pyramid
Frugal engineering
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Chapter 4Example of frugal engineering
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Chapter 4
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Chapter 4Balance of Payments (BOP)
Balance of payments
reports a countrys trade andfinancial transactions with the restof the world
Current account
tracks merchandise trade
Capital account
tracks loans given to foreigners andloans received by citizens
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Chapter 4Components of a Country
s BOP
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Chapter 4Current Account Balances:The Top and Bottom Five
Ch
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Chapter 4Why do managers use BOP?
BOP and Economic Stability
Managers use the BOP to assess acountrys economic stability.
By measuring a countrystransactions with the rest of theworld, the BOP estimates acountrys financial stability.
BOP and Company Strategy
Monitoring trends in BOP givesmanagers more data in order tochart strategic choices.
Ch t 4
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Chapter 4Why do managers use BOP?
BOP and Economic Stability
Managers use the BOP to assess acountrys economic stability.
By measuring a countrystransactions with the rest of theworld, the BOP estimates acountrys financial stability.
BOP and Company Strategy
Monitoring trends in BOP givesmanagers more data in order tochart strategic choices.
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Questions
Do you haveany questions?
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Homework
Upload BOP exercise on BB
And prepare the
Quiz 2 on Chapter 4!
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Thank you for
your attention