Chapter 9: Political and Economic Factors Affecting International Business
9.3 Economic Factors Related to International Business
Page 284 – 292
Economic Systems
An economic system is what allows a country to decide what to produce, how to
produce, and for whom to produce. These systems include natural resources,
labor, capital, management and standards for creating products.
Market Economies
In market economies, i) ownership of private property is encouraged, ii)
businesses are encouraged to produce better products, iii) competition is
encouraged because it can create better quality and lower prices, iv) the
Government has little direct involvement with the business itself, and v) selfsufficiency is not seen as an economic goal.
Supply and demand control market economies. The “law” of supply states that
as the price of a product increases, producers will be willing to make more of that
product. The “law” of demand states that as the price of a product increases
consumers will demand less of that product. Producers must find the equilibrium
point which is the point at which the consumers are willing to pay the asking price
and the company still makes a profit.
Centrally Planned Economies
In centrally planned economies the government controls the ownership of private
property. By having more government control the profit motive is not the main
goal of the business.
There are fewer pure centrally planned economies following the collapse of
communism in the former Soviet Union.
Mixed Economies
A mixed economy includes government involvement and private ownership of
businesses. In some countries, the government owns the transportation and
communication businesses. In socialist mixed economies, most of the main
industries are government controlled, but citizens are free to work in other
industries.
Canada has a mixed economy. Because Canada has a large, land mass and a
relatively small population, the Canadian government has to play a major role in
our important industries. Sweden, Italy, and Australia have also adopted mixed
economy systems.
Governments privatize state owned enterprises. Privatization may occur when a
country moves from a centrally planned to a market economy, it can also happen
in mixed economies.
As a countries economic system matures, it tends to move towards a market
system. When a centrally planned economy shifts to a market economy, the
price of some products rise, there is more competition, and there may be greater
unemployment.
Global Economic Systems
Since no nation can be completely self sufficient, they must trade with others
(interdependence). Economic growth increases economic stability and brings
the nation confidence as well as the ability to invest in the future.
The global economy reflects the total amount of interdependent economic activity
around the globe. In the past, the government would set rules on economic
policies, but now the world is becoming one big market and trade barriers are
beginning to slack.
Global economy provides countries with more jobs and a higher standard of
living. Countries use different strategies such as clustering (joining together in
their industries) to get into the new economic order.
Business Cycles
Business cycles are patterned movements in the economy measured by the
growth of production and industries. There are 4 phases*: 1) Depression
(slowest economy), 2) Recovery (improving economy), 3) Prosperity (good
economy), and 4) Recession (economy begins to slow) *See pg 288 for full
explanations
The World Economic Freedom Index
Businesses must be aware of the economic freedom rating (A measure of
prosperity that relates to economic growth, per capita income, and material
wealth, calculated according to the level of market and trade freedoms a country
has)
“The Economic Freedom of the World” measures the following factors:
-size of government
-international exchange
-Monetary policy and price stability
-economy structure & use of markets
-freedom to use alternative currencies -freedom of exchange in capital &
financial markets
-legal structure and property rights
*See pg 289 for current and past global economic freedom ratings
Canada’s Global Entrepreneurs
In 2000, 1 in 16 Canadian adults tried to start a business (In this year Canada
was ranked 6th of 21 countries for entrepreneurial activity). In most of Europe,
employers provide good benefits. It makes people not want to risk
entrepreneurial activity. Encouraging new business ventures also requires an
environment with minimal paper work and applications.
Around-the-Clock World Markets
Stock exchanges are discussing the creation of a global market. Ordinary
investors will be able to buy and trade stocks without being restricted by hours
and listings of their home market.
This new market is referred to as the global equity market. Equity is something
that has worth, such as a home or stocks. Ten exchanges in three time zones
are considering the set up:
-Toronto, New York, Mexico, and Sao Paolo, Brazil in the Americas
-Australia, Tokyo, and Hong Kong in the Asia-Pacific region
-Euronext, the combined Paris, Amsterdam, and, Brussels exchange in Europe
(one of the issues to be resolved is that not all stocks are listed on each of these
markets).
Even without around-the-clock trading, financial markets and national economies
are interdependent. Uncertainty in any of the world stock exchanges
reverberates through other economies.
Common Currency
The Euro attempts to balance each economy with greater price stability,
harmonized long-term interest rates, more stable national currencies, and a
commitment to control national budget deficits and public debt.
The benefit of the Euro is that it simplifies transactions, reduces exchange risks,
and strengthens European companies’ trading within and outside the EU.
Some people have suggested a common currency between the USA and
Canada; referred to as dollarization. Some effects would be a closer link
between the two economies. Canada has already adopted the US dollar as a
second currency. More and more Canadian companies have listed themselves
in the US stock exchange.
A single currency might ultimately hand Canada’s monetary policy to the US. It
will take time to decide if a common currency would provide easier trade and
travel.