This chapter covers:
8
•The purpose of
economic analysis
•Economic and socioeconomic dimensions
Economic and
Socioeconomic Forces
•Consumption
patterns and
purchasing power
•Labor costs
•The significance of
foreign debt
•Birthrate trends and
its implications
•Indicative plans
International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor
McGraw-Hill/Irwin
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
 Understand the purpose of economic analysis
 Recognize the economic and socioeconomic dimensions of the
economy
 Understand the importance of a nation’s consumption patterns
and the significance of purchasing power parity
 Understand the degree to which labor costs can vary from
country to country
 Understand the significance for businesspeople of the large
foreign debts of some nations
 Ascertain the reasons for the worldwide downward trend in
birthrates and its implications for businesspeople
8-2
International Economic Analyses
 Economic Analysis
 When a firm enters
overseas markets,
economic analyses
become more
complex
 Should provide data
on both actual and
prospective markets
8-3
International Economic
Analysis
 Sources for Economic Information
 Reports from central or international banks
 American chambers of commerce
 Commercial officers in U.S. embassies
 The United Nations and the World Bank
 The International Monetary Fund
 The Organization for Economic Cooperation and
Development
8-4
Dimensions of the Economy
 Important Economic
Indicators
 Gross National Product
 Distribution of income
 Private consumption
expenditures
 Personal ownership of
goods
 Private investment
 Unit labor costs
 Exchange rates
 Inflation rates
 Interest rates
8-5
Dimensions of the Economy

Gross Domestic Product (GDP)
Or Gross National Income
(GNI)

8-6
The total of all goods and
services produced in a
country in a given year,
including production by
foreign firms within a
country’s borders

In order to compare the
purchasing power of nations
managers need to know
among how many people
GDP is divided

GDP Or GNI/Capita
 Generally the higher the
value, the more advanced
the economy.
Dimensions of the Economy
 Income Distribution
 A measure of how a nation’s income is apportioned among
its people
 Data gathered by the World Bank
 Published yearly in the World Development Indicators
 Income is more evenly distributed in richer nations
 Income redistribution proceeds very slowly
 Income inequality increases in early stages of
development but reverses in later stages
8-7
Dimensions of the Economy
 Private Consumption
 Disposable income
 After-tax personal
income
 Discretionary income
 Disposable income
less essential
purchases
 Data available from
UN and World Bank
8-8
Dimensions of the Economy
 Unit labor costs
 Total direct labor
costs divided by
units produced.
 Countries with
slower-rising unit
labor costs attract
management’s
attention.
8-9

Reasons for relative
changes in labor costs
 Compensation
 Productivity
 Exchange rates

International firms
must keep a close watch
on labor rates around
the world
Dimensions of the Economy

Example of how large foreign debts affect an
international firm

If a large part of the foreign exchange a nation
earns cannot be used to import components used
in local products, then

Local industries must manufacture the part or
companies that import the part must stop
production in the home country
Socioeconomic Dimensions

Total Population
 Most general indicator of
potential market size
 First characteristic of the
population that analysts
examine
 Population size, used
alone, is not a good
indicator of economic
strength and market
potential
8-11
Socioeconomic Dimensions

Total Population and GNP
 Where GNP increases faster than the population
 Probably an expanding market.
 Where population increases faster than GNP
 Possible market contraction.
 This situation may suggest a potential area of
political unrest may be present.
 Example is Egypt
Socioeconomic Dimensions

Age Distribution
 Generally, because of high birth and fertility
rates
 Developing countries have more youthful
populations than do industrial countries
 Birthrates are decreasing worldwide
 Population of developing countries account for
over three-quarters of the world’s population
8-13
Population Growth
Figure 8.3
8-14
Forces Reducing Birthrates
Government supported
family planning
programs
 Improved levels of
health, education and
status for women
 More even distribution
of income
 Greater degree of
urbanization

8-15
Socioeconomic Dimensions

Concern in Developed Nations
 Declining birthrates are causing concern in the
governments of industrialized nations.
 An increasing number of young Europeans are
not marrying.
 Those who are marrying, do so later and are
having fewer children.
 By the year 2025, the present 9 percent
unemployment rate in the EU will be replaced
by a shortage of workers.
8-16
Socioeconomic Dimensions

Concern in Developed
Nations (Japan)

By 2025, Japan’s population
age 65 and older will make
up 26.8 percent of its total
population.

This proportion compares
to 18.5 percent of this age
group in the U.S.

8-17
By the year 2025, Japan
will have twice as many
old people as it has
children.
Socioeconomic Dimensions

Population Density
 A measure of the number
of inhabitants per area
unit.
 Densely populated
countries tend to make
product distribution and
communications simpler.
 Less costly than less
densely populated
countries
8-18

Population Distribution
 A measure of how the
inhabitants are
distributed over a
nation’s area.
 Changing population
distribution
 Rural-to-urban shift as
people move to cities
in search of higher
wages and more
conveniences.
Rural-to-Urban Shift
Table 8.6
8-19
Socioeconomic Dimensions

8-20
Increase in the number
of working women
 May require
marketers to alter the
promotional mix.
 Results in larger
family incomes.
 Results in a greater
market for
convenience goods.
United States R&D % of GDP
8-23
Consumption Groups in Hungary
8-24
Georgia State Average Annual Pay
8-25
10 Places With the Lowest Birth Rates
Worldwide
Average number of children per woman, 2000-2005
Hong Kong Special
Administrative Region
1.00
Latvia
1.10
Bulgaria
1.10
Macao Special
Adminstrative Region
1.10
Slovenia
1.14
Russian Federation
1.14
1.15
Spain
Ukraine
1.15
Armenia
1.15
Czech Republic
Source: United Nations, World Population Prospects: The 2002 Revision (medium scenario), 2003.
8-26
1.16