Economic and Socioeconomic Forces

McGraw-Hill/IrwinInternational Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter eight

8-3

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

8-4

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

8-5

International Economic Analyses (Table 8.1)

Economic AnalysisWhen a firm enters overseas markets,

economic analyses become more complex

8-6

International Economic Analysis

Sources for Economic InformationThe Commercial officers in embassies

The World Bank

The United Nations

The International Monetary Fund

The Organization for Economic Cooperation and Development

8-7

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 middle-

income economies such as Brazil, Mexico, Malaysia, Chile, and Thailand

8-9

Dimensions of the Economy

Important Economic IndicatorsGross National Income (GNI)GNI/capita Income DistributionPrivate consumptionUnit labor costsExchange rates Inflation rates Interest rates

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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

8-12

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

8-13

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 BankIncome 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 ConsumptionDisposable 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

8-16

Dimensions of the Economy

Unit labor costsTotal direct labor costs divided by units

produced

Countries with slower-rising unit labor costs attract management’s attention

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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

8-18

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

8-19

Major International Debtors

8-20

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

8-21

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

8-22

Population Growth

8-23

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

8-24

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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Socioeconomic Dimensions

• Population Density– A measure of the number of inhabitants

per area unit– product distribution and

communications simpler and cheaper in densely populated countries

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Socioeconomic Dimensions

• Population Distribution– A measure of how the inhabitants are

distributed over a nation’s area– Changing population distribution: rural-

to-urban shift

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Rural-to-Urban Shift(Table 8.8)

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Socioeconomic Dimensions

• Increase in the number of working women– May require marketers to alter

promotional mix

– Results in larger family incomes

– Results in a greater market for convenience goods

8-30

Population Distribution