the Economic
Environment
updated 2010 Feb 22
see also  witiger.com/internationalbusiness/4xCdnDollarissues.htm
see also  witiger.com/internationalbusiness/economicenvironment-BigMacs.htm
 
INTRODUCTION "Understanding the economic environments of foreign countries and markets can help managers predict how trends and events in those environments might effect their companies' future performance there." Daniels

The purpose of discussing the Economic Environment is to give the student an understanding of some of the ways you can understand changes in the environment and how these changes influence your decisions - ie. the dollar going up or down effects how much you can afford to import a component part from a particular country.

A part of the economic environment is the changes in the value of a country's currency. We have a special unit on the Canadian dollar exchange rate at
 www.witiger.com/internationalbusiness/4xCdnDollarissues.htm

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The domestic economic environment in each country is highly integrated with, and influenced by the economic environment in other countries.

Example: China's stock market drops - Canada's TSX drops.

It was explained in The Star (Sept 1st, 2009) that the Toronto stock market dropped due to declining commodity prices, which is a big part of our exports to China.

Why have the manufacturers in China reduced imports of commodities? - because they are reducing their exports to Europe and North America as a consequence of declining consumer demand - for example WalMart USA has less people buying "stuff" because so many Americans have lost their jobs and have less income.
- based on a 2009 Sept 01 press story by CP
 
 

GDP/GNP - Gross Domestic Product / Gross National Product
GNP/capita - a useful, or not useful measurement -
"The World Bank uses GNP/capita as a basis for its lending policies"

The purpose of economic analysis -
"The purpose of economic analysis is first to appraise the overall outlook of the economy and then assess the impact of economic changes on the firm"
 
 
economic analysis in a management context The purpose, or reason, for developing an economic analysis of a region or specific country, is directly related to the ability to subsequently make managements decisions about whether to do, or not do certain business things in that country or with that country.

So when you are gathering information, according to the headings on the list below, it is important to keep in mind that you don't just collect any information, you collect information which is useful in the context of allowing you to make a decision - otherwise it is useless information and simply costs you time and money.
 

Terms used to describe economic circumstances for measuring business potential

economic analysis in a management context When you gather information, according to the above headings, keep in mind, the
"So what" factor,*
meaning

So what if 71% of the people have cell phones, 
- how does knowing this help me make a decision about my company's product colour, shape, pricing, promotional mix, distribution etc.

* attributed to Prof. Michael Jalland, Rotman (as recalled by Prof. James Davidson of Seneca College)

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economic 
indicators

Income
Distribution

This chart from 
 globalpolicy.igc.org

data from UNDP 1992, p. 34; 1994 p. 35

from  http://globalpolicy.igc.org/socecon/inequal/inctab.htm
 
(photo - Sudan, 1993)
Pulitzer winner Kevin Carter

Reasons we should be concerned about inequitable distribution of income

  • effect on consumption trends
  • increased risk of violence and terrorism on a national and int'l scale
  • compassion:- in some religions and cultures it is simply wrong for a few people to be very rich and a lot of people to be very poor
WTGR
..
economic 
indicators

GOLD

Q1 2010

http://www.galmarley.com/
(if you click on this screen capture you will go to the galmarley.com page with the current gold prices)
student Tushar C. in MGTC44 at UTSC in mid-Feb 2010 provided this update of the gold prices for early 2010.

As you can see, it is hovering over $1,000 oz

The reason why gold rises and falls in value is extremely complicated and some analysts run very complicated mathematical modules to try and predict the movements which might allow people to make money on the precious metals market - the bottom line is people still think it is a valuable thing to possess and the movement of the price of gold per ounce remains an important economic indicator for many regions around the globe.
WTGR
..
economic 
indicators

GOLD

2007

..
http://www.galmarley.com/
(if you click on this screen capture you will go to the galmarley.com page with the current gold prices)
This little chart from  www.galmarley.com shows how gold has steadily risen from the $250 level in the first year of the millenium to over $700 an ounce in mid 2007 
..
economic 
indicators

GOLD's

perceived 

value

It used to be said that when people are fearful, either from threat of war or natural disasters, the price of gold goes up as people loss confidence in the structures of our civilization such as banks, and want to have their wealth in a more tangible form that is 
portable - meaning they can carry it with them if they are a refugee to another country, and 
convertable - meaning they can use it to buy something if the currency of their own country no longer has value.

Portability and covertability have become important for many regions of the world in the early years of the new millenium where there is civil war, nature disasters such as eathquakes and tidal waves and weather extremes such as hurricanes.

WTGR

,
economic 
indicators

Birth
rates
- family sizes


source: U.N. World Population Prospects 2004 as quoted in "Booms, Busts, and Echoes" by David E. Bloom and David Canning on the IMF website 
 www.imf.org/external/pubs/ft/fandd/2006/09/bloom.htm
qs
economic 
indicators

Birth
rates
- family sizes

"The developing world has seen significant reductions in infant and child mortality over the past 50 years. These gains are primarily the result of improved nutrition, public health interventions related to water and sanitation, and medical advances, such as the use of vaccines and antibiotics."
Bloom and Canning

Consequences of birth rates being higher in less developed regions

  • poorer people increase in number, proportionate to richer people 
    • poor/ rich divide gets worse
  • if "children per woman" drops in poor regions - many positive and negative consequences WTGR
qw
economic 
indicators

Birth
rates
- aging population


source: U.N. World Population Prospects 2004 as quoted in "Booms, Busts, and Echoes" by David E. Bloom and David Canning on the IMF website 
 www.imf.org/external/pubs/ft/fandd/2006/09/bloom.htm

consequences

  • a labour shortage among the young generation could hurt poor countries who have an aging population but no young workers to do important tasks, nor money for technology to replace workers
q
economic indicators:

education
literacy rates

 

Why do you want poorer countries to have a higher level of literacy?
Isn't it better to have a "supply" of uneducated people for cheap labour intensive tasks?

There are over 860 million illiterate people in the world, of whom:

  • 61% come from Bangladesh, China *, India and Pakistan
  • 66% are women
In OECD countries, the proportion of adults with tertiary education qualifications (read college or university) rose from 22% to 45.6% between 1975 and 2002

source:  www.globaleducation.edna.edu.au/globaled/go/pid/27 
source:  www.unesco.org 

China * but, according to UNESCO stats for 2007 leads the world now in the absolute number of university graduates

see http://stats.uis.unesco.org/unesco/TableViewer/document.aspx?ReportId=143&IF_Language=eng

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economic indicators:
The 
TRADE SUPLUS
For a country like Canada, that depends so heavily on people buying products we export - products made from our resources, it has been the case for decades that we have an international balance of trade surplus - meaning simply we export more stuff than we import.

What matters to economists, and the people who watch our currency exchange rate changes with other countries, is how the trade surplus continues - meaning does it grow slightly, or contract.

You might think it is a good thing if the trade surplus grows, but one of the concerns is that this may cause inflation

Journalist Greg Quinn of the Bloomberh News was quoted in June 2007 saying
"Widening of Trade Surplus raises fears over inflation"

Quinn says "The Bank of Canada may raise interest rates as soon as July, after government reports showed a wider trade surplus, a fourth month of 33-year-low unemployment, and higher-than-expected home starts."

At the same time the trade surplus is developing larger, you have a situation in Canada in June 2007 where the dollar is reaching a high ratio to the U.S. dollar making it possible for Canadian exporters to receive more money from their exports, at the same time that it is cheaper for importers to bring things in to Canada.

WTGR

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