IB 300 exam 2

international economic analysis

assesses the overall outlook for the economy and the impact of economic changes on the firm using data published by the government and private consultants

**home office does the analysis by collecting data and writing the reports

GDP-LOCATION

gross domestic product; total value of all goods and services produced within a nation (within a country’s borders) in a year

GNI- ownership of income

Gross national income; the total value of all income generated by the RESIDENTS of a nation

developing economies

the classification of the lower income nations (including both low and middle income) which have less developed infrastructure and lower living standards

developed economies

a classification for high income industrialized nations, which have high living standards and the most technically developed infrastructures

high income economies

GNI per captia (per person) of $14,006 or more

Upper Middle income economies

GNI= $4,516 to $14,005

lower middle income economies

GNI= $1,145 to $4,515

low income

GNI= $1,145 or less

emerging market economies

economies with per capita incomes int he low to middle range that are in a transition toward develop status

BRICS

Brasil, Russia, India, China, South Africa, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Indonesia, and Iran

international organizations measure…

using GNI over GDP to measure the value produced in an economy

GNI per capita

average income per person; indicated how advanced economy is but should be use with caution

purchasing power parity (PPP)

adjusting the exchange rates for two currencies so the currencies have equivalent purchasing power

atlas conversion factors

developed to reduce the impact of exchange rate fluctuations

• incomes measures by the atlas conversion factor are generally more stable over time

world bank adopted…

atlas conversion factor when converting GNI from local currency to U.S dollars

underground economy

the part of a nations income that is not reported or under reported

larger underground economy

in countries with higher taxation and more oppressive

importance of economic growth rate

to marketers it is important because it can predict the spending power, identify opportunities and choose the right pricing

GINI index

the measure of the degree to which family income within a country is distributed equally

* Lower GINI score means more equal distribution; income is more evenly distributed in richer nations

disposal income

after tax personal income

discretionary income

the amount of income left after paying taxes and making essential purchases

ex. rent, food, mortgage etc.

3 factors that affect labor cost

compensation: higher wages —> higher unit labor cost

productivity: high productivity—> low unit labor cost

exchange rates: strong currency —> higher labor cost but varies internationally

implications for large international debt

it can limit a countries access to the foreign currency, disrupt imports, forces governments to cut spending and creates economically instability

common socioeconomic factors

population size, age, population density and distribution, working women, divorce rates and ethic group composition

fertility rate

average number of children born per women

age distribution in developed countries

they have older population (low fertility)

age distribution in developing counties

they have younger populations (high fertility)

population density

how many people are in an area

population distribution

where people live

rural to urban shift

people moving from countryside to cities

G7 countries

• Canada

• France

• Germany

• Italy

• Japan

• United Kingdom

• United States

• European Union (non enumerated member)

BRICS Countries

• Brazil

• Russia

• India

• China

• South Africa

• Saudi Arabia

• Egypt

• United Arab Emirates

• Ethiopia

• Indonesia

• Iran

G20

Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States, and the European Union.

gold standard

Currency value fixed to a specific amount of gold

gold standard problem

the government doesn’t have monetary flexibility (cannot adjust money supply during crises)

Bretton woods system

fixed exchange rate system (1945-1981)

where currencies were tied to the US dollar; dollar= $35 per-oz of gold

SDR - special drawing rights

virtual currency based on the basket of 5 currencies (USD, EUR, GBP, JPY, RMB).

Triffin Paradox

holding large amounts of U.S dollars eventually means they will lose value

central reserve

assets held by a central bank to help back up a country when needed to trade and intervene in currency markets

floating exchange rates

currency values determined by supply and demand

Jamaica Agreement

established flexible exchange rates among IMF members and demonetized gold which was abandoned as a reserved currency

8 types of currency exchange arrangements

• no separate legal tender

• currency board

• conventional fixed peg

• stabilized arrangements

• crawling peg

• crawling band

• managed float

• free float

no separate legal tender

one country adopts the currency of another or a group of counties adopt a common currency

currency board arrangement

a system where a country promises to keep 100% of foreign reserves of another currency and exchange its own currency at a fixed rate

conventional fixed peg

allows a currency exchange rates with one or a basket of currencies to fluctuate around fixed rate with narrow band of less than 1 percent

stablized arrangement

pegged exchanges rate within a horizontal band

crawling peg

a currency is readjusted periodically at a fixed, preannounced rate or in response to changes indicators such as inflation

crawling band

readjust the country’s currency to maintain fluctuation margins around a central rate

managed float

the currency fluctuates and the country’s monetary authority

free float exchange rates

exchanges rates rely on the market

vehicle currency

used as a vehicle for international trade or investment, such as diamond market uses U.S dollar

intervention currency

used to intervene in the foreign currency exchange markets

ex. buying up domestic currency to reduce its supply in the market, to strengthen it

reciprocal currency

is a currency pair quoted as U.S dollars per unit of currency instead of in units of currency per U.S dollars

ex EUR/ USD

spot rate

is the exchange rate between two currencies for delivery within two business days

forward rate

exchange rate between 2 currencies for delivery in the future'; 30,60,90, and 180 days in the future

bid price

is the highest priced buy order currently in the market

• the rate the dealer is willing to PAY for a currency

ask price

is the lowest priced sell order currently in the market

• the rate the dealer is willing to SELL a currency

law of one price

concept says that in an efficient market, like products will have like process

arbitrage

is the process of buying and selling instantaneously to make profit with no risk

fisher affect

shows relationship between real and nominal interest rates

• real interest= nominal interest - inflation

international fisher affect

interest rate differences predict exchange rate changes

4 approaches to exchange rate forecasting

• efficient market approach

• random walk hypothesis

• fundamental approach

• technical analysis

efficient market approach

assumption that current market prices fully reflect all available relevant information

• also suggest that forward exchange rates are the best possible predictor of future spot rates

random walk hypothesis

assumption that the unpredictability of factors suggest that the best predictor of tomorrows prices is todays prices

fundamental approach

is based on econometric models that attempt to capture the variables and their correct relationships

technical analysis

analyzes date for trends and then projects these trends forward

• think waves and trends

convertible currencies (hard currencies )

can be exchanged for other currencies without restrictions

non convertible currencies

government fixed typically a rate higher than its value in the free market and government imposes exchange controls

government exercise current exchange control

to manage foreign reserves , common in countries with weak currencies and low reserves

three types of taxes

• income tax

• value added tax (VAT)

• withholding tax

2 strategies to minimize taxes

• profit shifting

• tax inversion

profit shifting

moving profits to locations with lower tax rates

tax inversion

buying a foreign company in a lower taxed location and then using that company as the legal location for the corporation

inflation

is a sustained increase in prices

issues with inflation for businesses

raises cost, weakens currency, reduces global competitiveness

Balance of payments (BOP)

records of a country’s transactions with eh world

BOP accounts

• current accounts

• capital account

• official reserves account

current account

tracks net changes in exports and imports of goods and services and unilateral transfers

capital account

tracks net changes in a nations internation financial assets and liabilities

official reserves account

reflect gold imports and exports, foreign exchange, and liabilities to foreign central banks

how to convert currency (bid/ask)

selling base currency —> multiply by bid

buying base currency —> divide by ask

approximate exchange rates

• GBP/USD = 1.30

• EUR/USD = 1.12

• USD/JYP =114

• USD/CNY= 6.7

• USD/ INR = 96.76

• USD/ MXN = 18

international strategy

a plan the guides the way firms make choices about developing and deploying scarce resources to achieve their international objectives

competitive advantage

the ability of a company to maintain a unique and valuable competitive position nationally and globally to generate higher profits

sustainable competitive advantage

requires competencies that

• create customer value

• are rare

• hard to imitate or substitute

• fully exploited by the organization

strategic planning

the process an organization determines its future direction, how to get there and how to measure success

7 steps for strategic planning

• analyze external environments

• analyze internal environments

• define mission/vision/ values

• set corporate objectives

• quantify goals

• formulate strategies

• make tactical plans

value chain

the set of interlinked activities that add value to the finish product or service

value chain analysis

identifies where and how much value was added to the final product

knowledge management

identifying, creating, acquiring, sharing, and exploiting (using) valuable knowledge

tactic knowledge

hard to express through words pictures or formulas and difficulty to transmit to others

ex. cultural practices

explicit knowledge

easy to communicate using different means

mission statement

purpose and scope of an organization

vision statement

desired future position

value statement

values, beliefs, and expected priorities ; the standard for how they should treat each other and their partners

competitive strategies

action plans that help organizations reach their goals

• swot analysis (strength, weakness, opportunity, and threats)

two opposing goals in international markets

• reductions of costs through low-cost facilites (standardization, centralization)

• adaptation to local markets leading to rising cost (customization, decentralization )

5 international strategies

• home replication

• multidomestic

• global

• transnational

• regional

home replication

(low-cost pressure, low local adaptation)

centralizes product development functions in home country and transfer them to foreign markets to capture additional value

• Is appropriate when there is weak local responsiveness and no cost reduction

  • home country controls marketing; high operating cost