Chapter Seven
Economic and
Socioeconomic Forces
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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


Understand the purpose of economic analysis
Identify the categories used to describe levels of
economic development
Recognize the economic and socioeconomic
dimensions of the economy
Discuss the importance of a nation’s consumption
patterns and the significance of purchasing power
parity
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Learning Objectives



Explain the degree to which labor costs can vary from
country to country
Discuss the significance for businesspeople of the
large foreign debts of some nations
Discuss the new definition of economic development
which includes more than economic growth
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Impact of Economic Forecast
on Firm’s Functional Areas
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Economic Forces
are Uncontrollable




Most significant forces for managers
Firms assess and forecast economic conditions
 National and international level
Data published by governments and international
organizations
 World Bank, IMF, UN, OECD
 CIA, US DOC
Private economic consultants
 The Economist Intelligence Unit
 Business International
 Chase Econometrics
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Purpose of Economic Analysis



Appraise the overall economic outlook
Assess the impact of possible changes on the
firm
Foreign market entry makes economic analyses
more complex
 Foreign environment: many national
economies
 International environment: national economies’
interaction
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Annual Rates of Inflation in
Consumer Prices for Selected Countries
Country% Change
Angola
Congo, Dem.
Republic of
Zimbabwe
Turkey
Belarus
Georgia
Russia
Turkmeni stan
Ukraine
Brazil
Ecuador
Uruguay
Myanmar
1995
2000
2008
2,672
325
9
542
550
9
23
94
709
163
197
1,005
376
66
23
42
29
56
55
169
4
21
8
28
7
96
5
-2
138,000
5
10
8
8
9
11
4
2
7
28
1995 data from International Monetary Fund, World Economic Outlook, October 2000,
www.imf.org/external/pubs/ft/weo/2000/02/index.htm (June 17, 2008). 2000 and estimated 2008 data from
International Monetary Fund, World Economic Outlook 2007,
http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/tblPartA.pdf (June 17, 2008).
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Levels of Economic Development



Developed
 All industrialized nations
 Most technically developed
Developing
 Lower income nations
 Less technically developed
 NIE: Taiwan, HK, Singapore, S. Korea
 NIC: NIE and Brazil, Mexico, Malaysia, Chile,
Thailand
Emerging Markets BRIC: Brazil, Russia, India, China
 Most watched by businesses
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Important Economic Indicators
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Gross National Income (GNI)
GNI/capita
Income Distribution
Private consumption
Unit labor costs
Exchange rates
Inflation rates
Interest rates
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Dimensions of the Economy



Gross National Income (GNI)
 The measure of the income generated by a nation’s
residents from international and domestic activity
 Preferred over GDP which measures income from
domestic activity from residents and non-residents
GNI/Capita
 Compares countries with respect to the well-being of
their citizens
 Used to assess market or investment potential
Underground economy: a nation’s income not measured by
official statistics
 Non-reporting
 underreporting
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Underground Economies in
Selected Nations-% of GNP
Economy
Bolivia
Zimbabwe
Nigeria
Thailand
Russian Fed.
Brazil
Turkey
Mexico
South Africa
Poland
South Korea
Greece
Taiwan
Italy
India
Spain
%
Underground
68.3
63.2
59.4
54.1
48.7
42.3
34.3
33.2
29.5
28.9
28.8
28.2
27.7
25.7
25.6
22.0
%
Underground
Chile
20.9
Czech Rep.
20.1
Sweden
18.3
Vietnam
17.9
Germany
16.8
China
15.6
Canada
15.2
France
14.5
Singapore
13.7
Australia
13.5
Netherlands
12.6
UK
12.2
Austria
10.9
Japan
10.8
Switzerland
9.4
USA
8.4
Economy
Source: Friedrich Schneider, ŅThe Size of the Shadow Economies of 145 Countries All Ove r the
World: First Results Ove r the Period 1999 to 2003,Ó(December 2004). IZA Discussion Paper No.
1431, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=636661 (June 17, 2008).
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Socioeconomic Dimensions


Total Population
 Most general indicator of potential market size
 Population size not a good indicator of economic
strength and market potential
Age Distribution
 Developing countries have younger populations
than industrial countries
 Birthrates decreasing worldwide
 Developing countries account for over 3/4 of the
world population
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Population Growth of the World’s
10 Most Populated Countries by 2050
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Forces Reducing Birthrates
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Government supported family planning programs
Improved levels of health, education along with
enhanced status for women
More even distribution of income
Greater degree of urbanization
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Concern in Developed Nations:
Birthrate Decline


Europe
 An increasing number of Europeans not
marrying
 Marriages are later, with fewer children
 By 2025, the present 9 percent unemployment
rate in the EU will be replaced by a shortage of
workers
Japan
 By 2025, Japan’s population aged 65 and older
will make up 26.8 percent of total population
 By 2025, Japan will have twice as many old
people as children
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Socioeconomic Dimensions
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
Population Density
 Number of inhabitants per area unit
 Product distribution and communications
simpler and cheaper in densely populated
countries
Population Distribution
 How inhabitants are distributed across a nation
 Rural-to-urban shift
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Socioeconomic Dimensions

Increase in the number of working women
 May require marketers to alter
promotional mix
 Results in larger family incomes
 Results in a greater market for
convenience goods
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Purchasing Power Parity

Purchasing Power Parity
 The number of units of a currency required
to buy the same amount of goods and
services in a domestic market that $1.00
would buy in the U.S.
 Helps to make comparisons possible across
economies
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Purchasing Power Parity
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
In Thailand 1,235 Baht buys what $107.85 buys in the U.S.
1,235 Baht / $107.85 = 11.45
PPP rate is $1 = 11.45 Baht
Goods
Soap (bar)
Rice (lb.)
Shoes (pair)
Dress
Socks (pair)
Total
Thailand (Baht)
40
25
495
580
95
1,235
US ($)
0.50
0.35
60.00
45.00
2.00
107.85
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Dimensions of the Economy
Income Distribution


Income distribution is a measure of how a nation’s
income is apportioned among its people
 Reported as the percentage of income received
by population quintiles
Data gathered by World Bank shows that
 income is more evenly distributed in richer
nations
 income redistribution proceeds slowly
 income inequality increases in early stages of
development but reverses in later stages
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Dimensions of the Economy
Private Consumption
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
Disposable income
 after-tax personal income
Discretionary income
 income left after paying taxes and
making essential purchases
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Private Consumption Based on
Purchasing Power Parity
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Dimensions of the Economy
Unit Labor Costs
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
Unit labor costs
 Total direct labor costs divided by units
produced
 Countries with slower-rising unit labor costs
attract management’s attention
Reasons for relative changes in labor costs
 Compensation levels
 Productivity
 Exchange rates
International firms must monitor labor rates
around the world
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Dimensions of the Economy

Large international debts of middle- and
low-income nations affect multinational
firms
 When foreign exchange must be used
for loan repayment, import of
components used in local production is
reduced
 Local industries must manufacture
these components or production must
stop
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Major International Debtors
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Human Development Index
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

Economic growth is not synonymous with economic
development
The human needs approach defines economic
development as the reduction of poverty,
unemployment, and inequality in the distribution of
income
HDI (UN index) measures
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Long and healthy life - life expectancy
Ability to acquire knowledge - adult literacy
Access to resources needed for a decent standard of living GDP/capita
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HDI Index Highlights
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Top five:
Iceland, Norway, Australia, Canada, Ireland
Second five:
Sweden, Switzerland, Japan, Netherlands, France
Third five:
Finland, U.S., Spain, Denmark, Austria
Penultimate five:
Congo (DR), Ethiopia, Chad, Central African Rep.,
Mozambique
Last five:
Mali, Niger, Guinea-Bissau, Burkina Faso, Sierra
Leone
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Economic Development



No accepted theory
 Due to inclusion of noneconomic variables
 Development economists examine
 Population growth
 Income distribution
 Unemployment
 Transfer of technology
 Role of government
 Investment in human vs physical capital
Investment in human capital: education, training
Import substitution versus export promotion
 Focus on export of manufactured goods, not only primary
products
 Instead of imports for rest, focus on domestic production
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