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Economic andEconomic andSocioeconomic ForcesSocioeconomic Forces

International Businessby Ball, McCulloch, Frantz,

Geringer, and Minor McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

This chapter covers:

•The purpose of economic analysis

•Economic and socio-economic dimensions

•Consumption patterns and purchasing power

•Labor costs

•The significance of foreign debt

•Birthrate trends and its implications

•Indicative plans

Chapter ObjectivesChapter Objectives

Understand the purpose of economic analysisRecognize the economic and socioeconomic

dimensions of the economyUnderstand the importance of a nation’s

consumption patterns and the significance of purchasing power parity

Understand the degree to which labor costs can vary from country to country

Understand the significance for businesspeople of the large foreign debts of some nations

Ascertain the reasons for the worldwide downward trend in birthrates and its implications for businesspeople

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International Economic AnalysesInternational Economic Analyses

Economic Analysis When a firm enters

overseas markets, economic analyses become more complex

Should provide data on both actual and prospective markets

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International Economic International Economic AnalysisAnalysis

Sources for Economic Information Reports from central or international

banks American chambers of commerce Commercial officers in U.S. embassies The United Nations and the World Bank The International Monetary Fund The Organization for Economic

Cooperation and Development

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Dimensions of the EconomyDimensions of the Economy

Important Economic IndicatorsGross National

ProductDistribution of incomePrivate consumption

expendituresPersonal ownership of

goodsPrivate investmentUnit labor costs Exchange rates Inflation rates Interest rates

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Dimensions of the EconomyDimensions of the Economy

Gross Domestic Product (GDP) Or Gross National Income (GNI)

The total of all goods and services produced in a country in a given year, including production by foreign firms within a country’s borders

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In order to compare the purchasing power of nations managers need to know among how many people GDP is divided

GDP Or GNI/Capita Generally the higher

the value, the more advanced the economy.

Dimensions of the EconomyDimensions of the Economy

Income DistributionA measure of how a nation’s income is

apportioned among its peopleData gathered by the World BankPublished yearly in the World Development

Indicators Income is more evenly distributed in richer

nations Income redistribution proceeds very slowly Income inequality increases in early stages of

development but reverses in later stages

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Dimensions of the EconomyDimensions of the Economy

Private Consumption Disposable income

After-tax personal income

Discretionary income Disposable

income less essential purchases

Data available from UN and World Bank

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Dimensions of the EconomyDimensions 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.

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Reasons for relative changes in labor costs Compensation Productivity Exchange rates

International firms must keep a close watch on labor rates around the world

Dimensions of the EconomyDimensions of the Economy

Example of how large foreign debts affect an international firm

If a large part of the foreign exchange a nation earns cannot be used to import components used in local products, then

Local industries must manufacture the part or companies that import the part must stop production in the home country

Socioeconomic DimensionsSocioeconomic Dimensions

Total Population Most general

indicator of potential market size

First characteristic of the population that analysts examine

Population size, used alone, is not a good indicator of economic strength and market potential

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Socioeconomic DimensionsSocioeconomic Dimensions

Total Population and GNP Where GNP increases faster than the

population Probably an expanding market.

Where population increases faster than GNP Possible market contraction. This situation may suggest a potential

area of political unrest may be present. Example is Egypt

Socioeconomic DimensionsSocioeconomic Dimensions

Age Distribution Generally, because of high birth and

fertility rates Developing countries have more youthful

populations than do industrial countries Birthrates are decreasing worldwide Population of developing countries account

for over three-quarters of the world’s population

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Population GrowthPopulation Growth

Figure 8.3

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Forces Reducing BirthratesForces Reducing Birthrates

Government supported family planning programs

Improved levels of health, education and status for women

More even distribution of income

Greater degree of urbanization

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Socioeconomic DimensionsSocioeconomic Dimensions

Concern in Developed Nations Declining birthrates are causing concern

in the governments of industrialized nations. An increasing number of young

Europeans are not marrying. Those who are marrying, do so later

and are having fewer children. By the year 2025, the present 9

percent unemployment rate in the EU will be replaced by a shortage of workers.

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Socioeconomic DimensionsSocioeconomic Dimensions

Concern in Developed Nations (Japan) By 2025, Japan’s

population age 65 and older will make up 26.8 percent of its total population.

This proportion compares to 18.5 percent of this age group in the U.S. By the year 2025,

Japan will have twice as many old people as it has children.

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Socioeconomic DimensionsSocioeconomic Dimensions Population Density

A measure of the number of inhabitants per area unit.

Densely populated countries tend to make product distribution and communications simpler. Less costly than

less densely populated countries

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Population Distribution A measure of how

the inhabitants are distributed over a nation’s area.

Changing population distribution Rural-to-urban

shift as people move to cities in search of higher wages and more conveniences.

Rural-to-Urban ShiftRural-to-Urban Shift

Table 8.6

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Socioeconomic DimensionsSocioeconomic Dimensions

Increase in the number of working women May require

marketers to alter the promotional mix.

Results in larger family incomes.

Results in a greater market for convenience goods.

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United States R&D % of GDPUnited States R&D % of GDP

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Consumption Groups in HungaryConsumption Groups in Hungary

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Georgia State Average Annual PayGeorgia State Average Annual Pay

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1.10

1.10

1.10

1.00

1.14

1.16

1.15

1.15

1.15

1.14

Czech Republic

Armenia

Ukraine

Spain

Russian Federation

Slovenia

Macao SpecialAdminstrative Region

Bulgaria

Latvia

Hong Kong SpecialAdministrative Region

10 Places With the Lowest Birth Rates 10 Places With the Lowest Birth Rates WorldwideWorldwide

Average number of children per woman, 2000-2005

Source: United Nations, World Population Prospects: The 2002 Revision (medium scenario), 2003.

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