sep 9 economic environ

8/2/2019 Sep 9 Economic Environ

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Economic Environment

Not only is it difficult to specify a definitive set ofeconomic indicators, but it is often difficult to

understand the systematic relationship of one

variable to another. However, by reducing theeconomic environment to its fundamental

components, it is possible to begin to determine (i)

how they shape the market and (ii) how they

subsequently interact with one another. Key

elements in economic environment include income,

purchasing power, market size, market type, and

economic freedom.


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ELEMENTS OF THE ECONOMIC

ENVIRONMENT

Gross National Income :

Gross national income (GNI) measures the

income generated both by total domesticproduction plus the international production

activities of national firms, i.e., it is the market

value of all final goods and services newly

produced by a countrys domestically-ownedfirms plus the net flows of factor income (i.e.,

rents, profits, and labor income) in a given

year.


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ENVIRONMENT

Gross Domestic Product. Gross

domestic product (GDP) measures the

value of production generated by both

domestic and foreign-owned firms withina nations borders in a given year.

Improving the Power of GNI. Managers

improve the usefulness of GNI by adjustingit for the population of a country, its growth

rate, economic sustainability, and the local

cost of living.


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ENVIRONMENT

Per Capita Conversion. GNI per capita is thevalue of all goods and services produced in the

economy divided by the population. In 2005 high-

income countries accounted for less than 15 percentof the worlds population but nearly 75 percent of

the worlds GNI.

b. Rate of Change. Generally, the GNI growth

rate provides a broad indicator of economic

potential; if GNI grows at a higher (or lower) rate

than the population, standards of living are said to

be rising (or falling).


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ENVIRONMENT

Purchasing Power Parity. While exchange rates

define the number of units of one currency that arerequired to purchase one unit of another currency, they

do not determine what a unit of currency can buy in its

home country, i.e., exchange rates do not incorporate

differences in the cost of living. Purchasing powerparity(PPP) represents the number of units of a

countrys currency required to buy the same amount

of goods and services in the domestic market that one

unit of income would buy in another country. PPP isestimated by calculating the value of a universal

basket of goods that can be purchased with one unit

of a countrys currency.


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ENVIRONMENT

Degree of Human Development. The

Human Development Index (HDI)

measures longevity, knowledge (primarily

the adult literacy rate), and standard of

living and is designed to capture long-termprogress rather than short-term changes.

(Note: the UN also reports a development

index that adjusts for gender-relatedinequalities, gender empowerment, and

poverty.)


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FEATURES OF AN ECONOMY

Inflation

Unemployment

Debt

Income Distribution

Poverty

Labor Costs

Productivity


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The Balance of Payments : The balance of payments(BOP), officially known as the Statement of Inter- nationalTransactions, records a countrys international transactions

among companies, governments, and/or

individuals. It reports the total of all money flowing into acountry less all money flowing out of that country to any

other country during a given period.

Current and Capital Accounts. The two primary

accounts are: (a) the current account, which tracks alltrade activity in merchandise and services, and (b) the

capital account, which tracks both loans given to

foreigners and loans received by citizens.


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Also included in the current account are income

and compensation receipts and payments as well

as unilateral transfers, which reflect both

government and private relief grants and income

transferred abroad. Whereas a trade surplusindicates that the value of exports exceeds the

value of imports, a trade deficit indicates that the

value of imports exceeds the value of exports.The statistical discrepancy reflects the difference

between the sums of the credits and debits.


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BOP and Economic Stability. Managers use the

BOP to assess a country's economic stability. By

measuring a country's transactions with the rest

of the world, the BOP estimates a country's

financial stability.

BOP and Company Strategy. Monitoring

trends in BOP gives managers more date in order

to chart strategic choices.


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Types of Economic Systems

An economic system is the set of structures

and processes that guides the allocation ofscarce resources and shapes the conduct of

business activities in a nation. The spectrum

of systems is anchored on one end bycapitalism and on the other by communism.

Free-market (capitalistic) economies are

built upon the private ownership and controlof the factors of production.


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Types of Economic Systems Market Economy. A market economy describes the

system where individuals, rather than government, make

the majority of economic decisions. Key factors include

consumer sovereignty, the freedom of market entry and

exit, and the determination of prices according to thelaws of supply and demand. Credited to Adam Smith,

the laissez-faire principle, i.e., nonintervention by

government in a countrys economic activity, states that

producers are driven by the profit motive, whileconsumers determine the relationship between price and

quantity demanded. Thus, scarce resources are allocated

efficiently and effectively.


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Command Economy. Also known as centrally-planned economies, command economies are

built upon the government ownership and control

of the factors of production. Central planning

authorities determine what products will be

produced in what quantities and the prices at

which they will be sold. Most often, the

totalitarian aims of communism gave the highestpriority to industrial investments and military

spending at enormous expense to the consumer

sector.


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Mixed Economy. Mixed economies fallbetween the extremes of market and command

economies. While economic decisions are

largely market-driven and ownership is largely

private, government nonetheless intervenes in

many economic decisions. The extent and

nature of such intervention may take the form of

government ownership of certain factors ofproduction, the granting of subsidies, the

taxation of certain economic activities, and/or

the redistribution of income and wealth.


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