International bussiness the challenge of global competition 11e chapter 08

chapter eight
Economic and Socioeconomic
Forces

McGraw-Hill/Irwin
International Business, 11/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.


Learning Objectives
 State the purpose of economic analysis
 Identify different categories based on levels of national

economic development and the common characteristics
of developing nations

 Recognize the economic and socioeconomic

dimensions of the economy and different indicators
used to assess them

 Discuss the importance of a nation’s consumption

patterns and the significance of purchasing power parity
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Learning Objectives

 Discuss the new definition of economic

development, which includes more than economic
growth

 Explain the degree to which labor costs can vary
from country to country

 Discuss the significance for businesspeople of the
large foreign debts of some nations

8-4


International Economic Analyses
(Table 8.1)

 Economic Analysis

 When a firm enters overseas markets,

economic analyses become more complex

8-5


International Economic
Analysis

 Sources for Economic Information

 The Commercial officers in embassies
 The World Bank
 The United Nations
 The International Monetary Fund
 The Organization for Economic
Cooperation and Development

8-6


Levels of Economic Development
• Developed
– A classification for all industrialized
nations, which are the most technically
developed

• Developing
– A classification for lower income nations,
which are less technically developed

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Levels of Economic Development
• Newly industrialized economies (NIEs)
– The fast-growing upper-middle-income
and high income economies of South
Korea, Taiwan, Hong Kong, and Singapore

• Newly industrializing countries (NICs)

– The four Asian Tigers and the middleincome economies such as Brazil, Mexico,
Malaysia, Chile, and Thailand

8-8


Dimensions of the Economy

 Important Economic Indicators
 Gross National Income (GNI)
 GNI/capita
 Income Distribution
 Private consumption
 Unit labor costs
 Exchange rates
 Inflation rates
 Interest rates

8-9


Dimensions of the Economy
• Gross National Income (GNI)
– The measure of the income generated by a
nation’s residents from international and
domestic activity
– Preferred over GDP

• GNI/Capita
– Used to compare countries with respect to

the well-being of their citizens and to
assess market or investment potential
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Underground economy

• Underground economy
– That part of a nation’s income not
measured by official statistics
• unreporting
• underreporting

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Purchasing Power Parity

• Purchasing Power Parity
– The number of units of a currency
required to buy the same amount of goods
and services in a domestic market that
$1.00 would buy in the U.S.
– Helps to make comparisons possible
across economies

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Dimensions of the Economy

 Income Distribution

 A measure of how a nation’s income is

apportioned among its people
 Reported as the percentage of income
received by population quintiles
 Data gathered by World Bank
 Income more evenly distributed in richer
nations
 Income redistribution proceeds slowly
 Income inequality increases in early stages
of development but reverses in later stages
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Dimensions of the Economy

 Private Consumption

Disposable income
after-tax personal income
Discretionary income
income left after paying taxes

and making essential purchases
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Private Consumption Based on
Purchasing Power Parity

8-15


Dimensions of the Economy

 Unit labor costs

 Total direct labor costs divided by units
produced
 Countries with slower-rising unit labor
costs attract management’s attention

8-16


Dimensions of the Economy
• Reasons for relative changes in
labor costs
– Compensation
– Productivity
– Exchange rates

• International firms must keep close
watch on labor rates around the
world
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Dimensions of the Economy
• Large international debts of middle- and
low-income nations affect multinational
firms
– When foreign exchange must be used for loan
repayment, import of components used in
local production is reduced
– Local industries must manufacture these
components or production must stop

8-18


Major International Debtors

8-19


Socioeconomic Dimensions

• Total Population
– Most general indicator of potential market
size
– Population size, used alone, is not good
indicator of economic strength and market
potential

8-20

Socioeconomic Dimensions

• Age Distribution
– Developing countries have more youthful
populations than do industrial countries
– Birthrates decreasing worldwide
– Population of developing countries
accounts for over three-quarters of
world’s population

8-21


Population Growth

8-22


Forces Reducing Birthrates
• Government supported family planning
programs
• Improved levels of health, education along
with enhanced status for women
• More even distribution of income
• Greater degree of urbanization
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Concern: Birthrate Decline

• Concern in Developed Nations: Europe
• An increasing number of young
Europeans not marrying
• Marriages are later, with fewer children
• By 2025, the present 9 percent
unemployment rate in the EU will be
replaced by a shortage of workers

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Concern: Birthrate Decline

• Concern in Developed Nations: Japan
– By 2025, Japan’s population aged 65 and
older will make up 26.8 percent of total
population
– By 2025, Japan will have twice as many
old people as children

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