International Business-Chapter 3

Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

Measures the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period

• GDP= Consumption + Government Spending + Investment +Exports - Imports

Broader Conceptions of Development by Amartya Sen

Economic development should be assessed by the capabilities and opportunities people enjoy

• Human dignity matters

• Development requires removing major impediments to freedom: poverty, tyranny, poor economic opportunities, systematic social deprivation, neglect of public facilities

Innovation

New products along with new processes, new organizations, new management practices, and new strategies

Entrepreneurs

first to commercialize innovative products and processes; provides much of the dynamism in an economy

Innovation & Entrepreneurs require a market economy

• in market economies, any individual is free to try out an innovative idea by starting a business, and existing business are free to improve their operations through innovation

• requires strong property rights-could have their innovations and profits stolen

The spread of market based systems

• a shift from centrally planned economies to market-based economies (more than 30 countries)

• command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries

The Spread of Democracy

• Many totalitarian regimes failed to deliver economic progress to the bulk of their populations

• New information and communication technologies

• Economic advances have led to a prosperous middle-class

The shift toward a market-based system involves:

• Deregulation

• Privatization

• A legal system to safeguard property rights

Deregulation

• removing legal restricts to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate

• relaxing trade barriers and restrictions on FDI

Privatization

Transfers ownership of state property to private individuals, must be paired with a general deregulation and opening of the economy

Countries are most likely to have higher sustained rates of economics growth with

• democratic regimes

• market-based economic policies

• strong property rights protection

Benefits of doing business internationally

• based on size of the market, as well as current and future purchasing power of its consumers

• First-mover advantages enjoyed by early entrants

• Late-mover disadvantages suffered by late entrants

• a country’s economic system, property rights regime, and education system are good predictors of economic prospects

Costs of doing business internationally

• Political system: is it necessary to pay bribes to get market access?

• Economic Level: are the necessary supporting businesses and infrastructure in place

• Legal system: how do local laws and regulations affect business decisions?" Are there well-established contract laws

Risks of doing business internationally

• Political risk: the likelihood that political forces will cause drastic changes in a country’s business environment that will adversely affect a business’s profit and other goals

• Economic risk: the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affect a business’s profit and other goals

• Legal risk: likelihood that a trading partner will opportunistically break a contract or expropriate property rights

GUIDES

G: GDP

U: Unemployment & Utilization

I: Inflation and Interest Rates

D; Debt and Deficits

E: External Balances and Exchange Rates

S: Savings and Investments

Nominal GDP

the total value of all goods produced at current market prices

Real GDP

the sum of all goods and services produced at constant prices (useful for comparing a country’s current output against its own past output by adjusting nominal GDP changes for inflation/deflation)

Purchasing Power Parity (PPP)

the rates of currency conversion that try to equalize the purchasing power of different currencies, by eliminating the differences in price levels between countries

What drives growth?

• Capital accumulation (through investment)

• Increase in labor (usually due to the entrance of immigrants or domestic groups into the workforce)

TFP (total factor productivity)

compares total output relative to the total inputs used in production of the output

• a measure of productive efficiency in that it measures how much output can be produced from a certain amount of inputs

Unemployment Rate

the percentage of those individuals looking for work who cannot find it

• the definition captures the imbalance between the supply of and demand for workers

Capacity utilization

measures how much of the productive ability of the installed capital base in a country is being used

• indicates how much of this capital based is going unused

Why is the capacity utilization important?

a key leading indicator of overall economic activity

Inflation

an increase in the level of prices of the goods and services that households buy (measured as the rate of changes of prices)

Consumer Price Index (CPI)

the most well-known and widely used indicator of inflation

• measures the percentage change in the price of a basket of goods and services consumed by households in the US

• Thus, changes in CPI roughly reflect changes in the cost of living in the country

• Closely watched by policymakers and financial markets

Interest Rates

the amount you are charged for borrowing money-a percentage of teh total amount of the loan

Nominal interest rate

the percentage increase in money you pay the lender for the use of the money you borrowed

Real interest rate

the percentage increase in purchasing power the lender receives when the borrower repays the loan with interest (real interest rate=nominal rate adjusted for inflation/deflation)

Government Debt

how much a country’s government owes to its domestic or foreign lenders

Government budget deficit

the amount by which government spending exceeds its revenue in a given time period, usually a year

Current Account (CA)

an economy’s net proceeds from trade in godos, services, and payments for the factors of production with the rest of the world

Capital Account

records sales of “non-produced” assets, including natural resources or capital transfers without payment, such as debt forgiveness

Portfolio Investments

investments by foreigners in domestic securities that do not exceed a threshold of ownership in the domestic company

External balances

when the money a country brings in from exports is roughly equal to the money it spends on imports-capital movement

Nominal exchange rate

the price of one currency in terms of anotherR

Real exchange rate

the price of goods and services in one country in terms of goods and services in another

National saving

an economy’s total domestic saving

• public saving: the government’s budget surplus

• private saving: individuals and businesses