Theme 2.2 economic analysis

2.2. The economic environment

Class Objective Know the importance of economic analysis

Major dimensions of international economic analysis

Macroeconomic indicators

Types of economic systems

Economic freedom

2.2.1. The importance of economic analysis Every country has its own economic development

From 1975 to 2008, world economic output has tripled

2009: registration of worse economic contraction since WWII

Reduction of 30% of exportation in 2009

2.2.1. The importance of economic analysis Globalization: countries are interrelated to each others

directly or indirectly

World Bank database identifies 208 discrete economic environments

194 countries and 14 others with more than 30 000 inhabitants

Thumb rule: invest in economies with the greatest return and the least risk

Managers have to understand, anticipate and adapt constantly the company to economic environment.

2.2.2. The elements of economic environment GNI: Measure of income generated by both domestic

production as well the production at international level of a national company.

GNP: all goods and services produced + income earned by citizens abroad - income earned by foreigners from domestic production

GDP: Total value of all final goods and services produced within nation’s border whether the company is national or not.

2.2.2. The elements of economic environment GNI, GNP and GDP per capita

Division of production by the number of inhabitants.

Comparison of relative economic performance of countries

Cases of high income countries with few economic activities: KSA, Kuwait, Algeria, etc.

2.2.2. The elements of economic environment GNI rate of change: good indicator on a potential of an

economy measured with the rate of population growth.

GNI and the Purchase power of parity: GNI does not tell the cost of living.

1$ in New-York does not buy the same amount of products in Mumbai

PA x S = PB

The Big Mac index

2.2.2. The elements of economic environment Degree of human development: Alternative to

monetary indicators.

HDI from UN have three main dimensions

Longevity

Knowledge

Standard of living: GNI per capita ajusted with PPP

2.2.2. The elements of economic environment Inflation: Sustained rise of price that is measured

against a standard level of purchasing power. It has a influence on: real interest rate, exchange rate, living costs, general

economic confidence, and political stability

On cost of living: lose of purchase power

Hyperinflation: Difficult to make long term plan of investment. Give no incentives to save and investments instrument become speculative.

Deflation: Opposite of inflation when price variation rate is less than zero. USA and Japan

2.2.2. The elements of economic environment Unemployment

High unemployment rate make a risky business environment.

Long term unemployment depress economic growth, create social pressure and political instability

Indicator for efficiency in human resource management in a country

Careful with underestimation of unemployment…

Variation in public support

The pension problem: Canada, USA, Europe, Japan

2.2.2. The elements of economic environment Debt

Larger is debt the more uncertain is the country

Short term perspective: Money goes to payment of interest and not on more productive use

Long term: preocupation of future generation’s ability to pay

High debt = tax increase, reduced growth, rising inflation

2.2.2. The elements of economic environment Income distribution

Gini coefficient: measure of degree of inequality in the distribution of family income in a country. 0 perfect distribution 1 perfect inequality.

Higher rate indicate an economic and social inefficiency which cause higher crime, corruption, political risk, etc.

Higher rate also limit a potential market that can be consumers.

2.2.2. The elements of economic environment Limit of Gini coefficient and poverty Extreme case of India: has 36.8 and USA has 46.3 but

India has 80% of its population living with less than 2$ per day.

Poverty according to World Bank: 80% poor, 10% middle income, 10% rich.

In extreme poverty market may not existm national infratructure absent, higher criminal behavior, etc.

However, managers see a good potential in poor markets. Ex: Tata car 2100 USD and Tata house 800-15000 USD

2.2.2. The elements of economic environment Labor cost: Cost of labor may be a key element for total

cost of product

The balance of payment: System recording all of a country’s economic transactions with the rest of the world over a one year period.

Used by managers to assess a country’s economic stability and also financial stability.

2.2.2. The elements of economic environment

The components of BP

Current account

Value of export and imports of physical goods

Receipt and payments for services: banking or advertising and other intangible goods (invisible trade)

Private transfers (remittances and other business transfer)

Official transfers like international aid

Capital account

Long term capital flows (investments in foreign firms or profits from selling investments)

Short term capital flows (money invested in foreign currency, funds, etc.)

2.2.3. Integrating Economic Analysis Logically high income markets are the best foreign

markets

1 bilion person = 80% of world wide consumption

However managers see a potencial in emerging markets with teir accelerated growth.

2.2.2. Integrating Economic Analysis Types of economic systems

Market economy: free market

Command economy: centrally planned

Mixed: Most economies today, promote free market but there is a part of government intervention.

Types of interventions government intervention

Influence on private production and consumption decisions

Redistribution of income and wealth

2.2.2. Integrating Economic Analysis The dynamic of economic transitions

Belief in free markets

Economic freedom index (Heritage foundation and WSJ)

Def: The absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.

The index indicates the level of free economic choice and enterprise.

2.2.2. Integrating Economic Analysis

The expanding role of the state

State intervention more present since 2008

USA: Obama fires GM CEO and inject money in banking system

Signals of transition to market or command economy

Privatization or government acquisition

Regulation: restrictions on free operations of markets and business

Property right: protection support a competitive economy

Fiscal and monetary reform:

Anti-trust laws: eliminate monopolistic behavior

Thank you! Questions?