The National Economic

Environment

Chapter 4

International Business: Challenges in a Changing World

 Economic Environment
• National economies are changing along with changes in the
global economy – globalisation
• Liberalisation is opening more and more economies to outside
investors
• National economies are showing considerable exuberance in
embracing markets, both at home and outside their borders
• Interdependence is linking national economies in webs of
relations with other countries – regional integration
• Different types of economy create quite different
environments

International Business: Challenges in a Changing World

 Circular flows of income in the economy

International Business: Challenges in a Changing World

 National economic systems

International Business: Challenges in a Changing World

 Understanding the National Economy
National economies are analysed both in overall terms
• Macroeconomics – the study of national economies
• Microeconomics – the study of economic activity at the level of
individuals and firms

Size and income comparisons on annual basis

• Gross National Income (GNI) – total income from all final
products and services produced by a national economy
• Gross Domestic Product (GDP) – total annual economic activity
within a country
• If calculated with population: GNI per capita or GDP per capita
The broadest measurement used globally and by World Bank and
IMF

International Business: Challenges in a Changing World

 Malaysia National Household Income

International Business: Challenges in a Changing World

International Business: Challenges in a Changing World
 Comparison
High Income(GNI per Middle Income(GNI Low Income(GNI per
capita of $10,066 or per capita of $826- capita of $825 or
more) 10,065) lesss)
Australia,Bahrain,Denmark Argentina,Belarus, Afghanistan,Angola,
France,Germany,Italy, Bolivia,Brazil,Bulgaria, Bangladesh,Cambodia,
Japan,S Korea,New Chile,China,Croatia, Congo,Ethiopia,Ghana,In
Zealand,Norway,Slovenia, Czech Republic,Eqypt, dia, Kenya,N
Spain,Sweden,Switzerland Estonia,Indonesia,Iran, Korea,Nigeria,Pakistan,
UAE,UK,US Jordan,Kazakhstan, Somalia,Sudan,Tanzania,
Malaysia,Mexico,Poland Uganda,Vietnam, Zambia
Russian Federation,
Saudi Arabia,
Thailand,Venezuela
39 countries 91 countries 61 countries
High income countries: Their economies reflecting the shift from manufacturing to more high
value service sector
Developing countries: To progress from agriculture to industrial production
Resource rich countries: Exploiting natural resources and related activities

International Business: Challenges in a Changing World

 Example of Comparison
France 2004 China 2004
• Population 60 million • Population 1.2 billion
• GNI $1,400 billion • GNI $1,400 billion
• GNI per capita $22,400 • GNI per capita $1,000
• GDP per capita $29,410 • GDP per capita $1,100
Comparison can be misleading: $1,000 in China can purchase far
more things than the same sum in France. Need to adjust to
purchasing power parity (PPP) or ‘real income’ – US as benchmark

GDP per capita $27,600 GDP per capita $5,000

International Business: Challenges in a Changing World

 Economic Development & Growth
• Economic development : Process of change in economic
activities and organisations of a country
– E.g Shifting from agriculture to industrial production
– E.g Shifting from agriculture to service based economies
– E.g Exploiting natural resources with aid of FDI

• Economic growth : An economy’s increase in total income

over time, usually shown as an annual percentage change
– A measure of growth in the economy – GDP or GNI growth
– Need sustainable growth – create jobs, wealth and prosperity
– Every economy has ups and downs with business cycles
– Diversified economies are more able to weather downturn

International Business: Challenges in a Changing World

 Inflation
• Inflation – continuing general rise in prices;
expressed as annual %, based on consumer price
index (CPI)
– Hyperinflation : inflation out of control (cause of financial
crisis)
– Deflation : persistent fall in prices e.g. Japan in 1990s,
stagnant economy
– General rule : inflation rises if demand is tending to exceed
supply
– Inflationary pressures : rising prices of energy, metal, food,
– Global inflationary pressures as economies are more
integrated

International Business: Challenges in a Changing World

 Employment and Productivity
• Proportion of people in work and work hours – business
environment
– US workers work longer hours than European workers
– Working long hours does not make a nation’s workers more
productive
• Labour productivity : Calculation which divides output by the
hours worked per person
– Raising labour productivity is a factor in raising economic growth
– 2002-2006 : Labour productivity has risen in the US and
Germany but declined in the UK, Japan and France
– Low productivity : Technology not up to date? Effective
management?

International Business: Challenges in a Changing World

 Unemployment
• Unemployment – section of the population willing to work but
unable to find employment
– Rising unemployment is a sign of weakness in the economy and
can undermine social cohesion
– ILO’s definition
• Those without a job, but who have actively sought work in the last
four weeks and can start work in the next two weeks
• Those who are out of work, but have found a job and will be
starting it in the next two weeks
– Structural unemployment : loss in jobs due to changes in
technology or shifting of operations to another location
• What government can do – encourage start-ups, invest in domestic
industries, improve education/skills

International Business: Challenges in a Changing World

 Balance of Payment
• BOP – The total credit and debit transactions between a
country’s residents and those of other countries over a given
time
– Reflects the competitiveness of its business in exporting goods
and services, as well as the demand from its consumers for
imported goods
– Exports more than imports : account surplus or trade surplus
– Imports more than export : account deficit or trade deficit
– MNEs – shift in exporting oriented manufacturing to low-cost
location e.g. China – enjoys trade surplus, US – trade deficit
– Protectionist policies to control – e.g. import tariffs or quotas

International Business: Challenges in a Changing World

 Inequality
• Inequality - The extent to which the members of a
population do not all enjoy equal shares in the country’s
income
– Gini index – 0 represents perfect equality, 100 represents
perfect inequality
• The proportion of income earned by each fifth of the
population – top 20% versus lowest 20%
– High level of inequality : poverty, social tensions and political
instability
– Degree of inequality vary by countries – distribution of income
and wealth
– Government may design policies – land reform, social welfare
programs

International Business: Challenges in a Changing World

 Government Spending
• National budget – receipts from taxes and other sources
and committed funds for public spending
• National budget balance – the extent to which public
spending exceeds receipts from taxes and other sources
– Budget surplus or budget deficit can be expressed as a
percentage of GDP
– Deficit – national debt – if it grows to a large extent it will pose
problem for government finances
– If economic growth is strong, deficits are not so serious because
receipts are rising
– If receipts fail to reach expectation – budget cuts
– Deficits are a fact of life in many countries

International Business: Challenges in a Changing World

 Budget deficits as a percentage of GDP

International Business: Challenges in a Changing World

Source: OECD statistics at www.oecd.org cited in Morrison 2011
 The business cycle
• Prosperity – the expansive phase, with high
income and low unemployment; period of optimism,
with consumers inclined to spend
• Recession – confidence waning; unemployment
rising; spending slows [6 months of negative
growth]
• Depression – near-total lack of confidence in the
economy; high unemployment
• Recovery – return of confidence; unemployment
declining and consumers resume spending

International Business: Challenges in a Changing World

 Economic Recession
• The NBER defines it as "a significant decline in economic activity spread
across the economy, lasting more than a few months, normally visible in real
GDP, real income, employment, industrial production, and wholesale-retail
sales.“
–  GDP, investment spending, capacity utilization, household income, business
profits, and inflation fall, while bankruptcies and the unemployment rate rise

• Recessions generally occur when there is a widespread drop in spending

(an adverse demand shock) triggered by various events, such as a
– financial crisis, an external trade shock, an adverse supply shock or the bursting of
an economic bubble

• Governments usually respond to recessions by adopting expansionary macro

economic policies,
– increasing money supply, increasing government spending and
decreasing taxation.

International Business: Challenges in a Changing World

International Business: Challenges in a Changing World
 Economic Recession
Shock: US Sub-prime debt crisis Financial crisis Credit crunch

Aggregate demand fell (consumption )

Firms started to reduce investment and cut jobs

Unemployment rate

Output of goods and services began to fall (GDP )

International Business: Challenges in a Changing World

 21st Century Recession
• Early 2000s recession
– Dot-com bubble
– 2000s energy crisis
– Subprime mortgage crisis
– United States housing bubble and United States housing market correction
– 2008–2012 Icelandic financial crisis
– 2008–2010 Irish banking crisis
– Russian financial crisis of 2008–2009
– Automotive industry crisis of 2008–2010
– European sovereign debt crisis
• Greek government-debt crisis
• 2014 Russian financial crisis
• 2015 Chinese stock market crash

International Business: Challenges in a Changing World

 20th Century Recession
• Panic of 1901, a U.S. economic recession - the Northern Pacific Railway
• Panic of 1907, a U.S. economic recession with bank failures
• Depression of 1920-21, a U.S. economic recession following the end of WW1
• Wall Street Crash of 1929 & Great Depression(1929–1939) the worst depression of modern history
• 1970s energy crisis
• OPEC oil price shock(1973)
• Secondary banking crisis of 1973–1975 in the UK
• Early 1980s Recession
• Latin American debt crisis
• Chilean crisis of 1982
• Japanese asset price bubble(1986–2003)
• Bank stock crisis (Israel 1983)
• Black Monday (1987)
• Savings and loan crisis of the 1980s and 1990s in the U.S.
• Early 1990s Recession
• 1991 India economic crisis
• Finnish banking crisis (1990s)
• Swedish banking crisis (1990s)
• 1994 economic crisis in Mexico
• 1997 Asian financial crisis
• 1998 Russian financial crisis
• Argentine economic crisis (1999–2002)

International Business: Challenges in a Changing World

International Business: Challenges in a Changing World
 Economic Recession – one view

• Government need to stabilize the economy – capitalist

economies have a tendency to slip easily into recession;
they are inherently unstable
• Government can stabilize the economy – they have the
requisite fiscal and monetary tools
• Government should therefore stabilize the economy –
there is no case for them not to do so.

— Nobel Prize–winning
International Business economist Franco
: Challenges in aModigliani
Changing World
 The role of government in the
economy
• Fiscal policy – government’s budgetary policies for
balancing spending with taxation . Key benchmark
government debt –to-GDP ratio
• Monetary policy – policies for determining the amount
of money in supply, rates of interest and exchange
rates ( see also Lecture 10)
• Central banks play key role in monetary policy, but in
eurozone states, the European Central Bank controls
monetary policy

International Business: Challenges in a Changing World

 Conclusion
• National economies differ markedly in size and growth rates.
• Changes in the types of economic activity characterize economic
development – industrialized nations have seen a decline in
manufacturing and upsurge in services
• Controlling inflation and unemployment are concerns of modern
governments, keen to achieve sustained economic growth
• Governments are under pressure to spend on public welfare, and
also to lighten the tax burden
• Regional and global economic integration limits governments’ room
for manoeuvre e.g. Members of Eurozone constrained by European
Central Bank both on how it finances public expenditure deficit; monetary
policy determined by ECB

International Business: Challenges in a Changing World