International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
1 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
Module 7: Economic and Socioeconomic Forces
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
2 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
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YOUR CONTENT
SUMMARY
This module provides an overview of economic and socioeconomic forces in the international business
environment. The assessment and forecasting of economic conditions is a regular activity for most firms.
When a firm enters foreign markets, the task is more complex because of the number of economies
involved.
Managers of all the functional areas in the firm are interested in the size and rate of change of various
economic and socioeconomic factors. Some of the economic dimensions are GNI (which has replaced
GNP for most organizations), GNI/capita, purchasing power parity (PPP), the size of the underground
economy, economic growth rate, income distribution, personal consumption expenditures, and unit labor
costs. The principal socioeconomic dimensions are total population, age distribution, and population
density and distribution. Publications and websites of the international agencies, governments, and
banks, as well as business publications are all sources of this kind of information.
LEARNING OBJECTIVES
LO 7-1 Explain the purpose of economic analyses.
LO 7-2 Compare different categories of countries, based on levels of national economic
Atlas conversion factor (p. 188)
The arithmetic mean of the current exchange rate and the exchange
rates in the two preceding years, adjusted by the ratio of domestic
inflation to the combined inflation rates of the euro zone, Japan, the
United Kingdom, and the United States.
Developed economies (p. 184)
A classification for high-income industrialized nations, which have
high living standards and the most technically advanced developed
infrastructure.
Developing economies (p. 184)
A classification for the world’s lower–income nations, which have less
technically developed infrastructures and lower living standards.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
3 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Discretionary income (p. 193)
The amount of income left after paying taxes and making essential
purchases.
Disposable income (p. 193)
After-tax personal income.
Emerging market economies (p.
185)
Economies with per-capita incomes in the low to middle range that
are in a transition toward developed status.
Foreign environment (p. 182)
All the uncontrollable forces originating outside the home country
that surround and influence the firm.
Gini index (p. 191)
A measure of the degree to which family income within a country is
distributed equally.
Gross domestic product (GDP)
(p. 186)
A measure of an economy’s size based on the market value of goods
and services produced within a nation in a year.
Gross national income (GNI)
(p. 183)
The total value of all income generated by the residents of a nation,
including both the domestic production of goods and services and
income from abroad.
Income distribution (p. 191)
A measure of how a nation’s income is apportioned among its
people.
International environment
(p. 182)
Interaction between domestic and foreign environmental forces or
between sets of foreign environmental forces.
Population density (p. 203)
A measure of the number of inhabitants per area unit (inhabitants
per square kilometer or square mile).
Population distribution (p. 203)
A measure of how the inhabitants are distributed over a nation’s
area.
Purchasing power parity (PPP)
(p. 187)
A means of adjusting the exchange rates for two currencies so the
currencies have equivalent purchasing power.
Rural-to-urban shift (p. 203)
The movement of a nation’s population from rural areas to cities.
Underground economy (p. 188)
The part of a nation’s income that, because of unreporting or
underreporting, is not measured by official statistics.
Unit labor costs (p. 195)
Total direct labor costs divided by units produced.
Vertical integration (p. 198)
The production by a firm of inputs for its own manufacturing
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
4 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
processes.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
5 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
LO 7-1
Explain the purpose of economic analyses
• Introduction
• International Economic Analyses
Key Terms:
• Foreign environment
• International
environment
Lecture Outline and Notes:
I. Introduction: In this module, the critical economic and socioeconomic forces that shape
business opportunities around the world are examined.
II. Economic analyses for multinationals are more complex than those for a purely domestic firm
because there are many economies to consider instead of just one, there are interactions
between them, and values are highly divergent.
associations.
2. The purpose of economic analyses is to assess the overall outlook for the
economy and the impact of economic changes on the firm
finance, production, and so forth.
4. Firms entering overseas markets have more complex economic analyses because
managers operate in two new environments: foreign and international
b. International environment includes interactions between domestic and
foreign environmental forces, or between sets of foreign environmental
forces when an affiliate in one country does business with customers in
another.
7. International economic analyses should provide economic data on both actual
and prospective markets
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
a. As part of the competitive forces assessment, many companies monitor
the economic conditions of nations in which major competitors are
located, because changing conditions can strengthen or weaken
competitors’ ability to compete in world markets.
b. Collection of data and preparation of reports are usually the
responsibility of the home office, but foreign subsidiaries and field
representatives are expected to contribute heavily to sudies of their
markets.
c. Data from areas wehere the firm has no local representation can usually
be less detailed and are generally available from national and
international agencies.
LO 7-2
Compare different categories of countries, based on levels of
national economic development
• Levels of economic development
Key Terms:
• Gross national income
(GNI)
• Developing economies
• Developed economies
• Emerging market
economies
Lecture Outline and Notes:
I. Levels of economic development.
B. A nation’s level of economic development affects all aspects of business conducted there
C. A common basis for assessing economic development is gross national income (GNI), the
total value of all income generated by the residents of a nation, including both the
domestic production of goods and services and income from abroad. The World Bank
categories countries based on level of GNI/capita, using the following for fiscal 2015:
1. High-income economies: GNI/capita of $12,746 or more
2. Middle-income economies: GNI/capita of over $1,045 but less than $12,746
e. Lower-middle-income economies have GNI/capita of over $1,045 up to
$4,125
3. Low-income economies: GNI per capita of $1,045 or less
4. Figure 7.2 shows the nations of the world based on GNI/capita
but there is no universally agreed-upon criterion for distinguishing between developed and
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
infrastructures and high income/capita that supports a high living standard.
2. Developing economies are lower-income nations, less technically developed, and
with more diversity among them than among developed nations (see Table 7.1)
3. Most people live in middle–income countries, sometimes referred to as emerging
market economies. They have per capita income in the low to middle range, and
are in a transition toward developed status (e.g., China, India)
LO 7-3
Outline the dimensions used to describe the economy and
their indicators
• Dimensions that describe the economy and their
relevance for international business
• Measuring the size of an economy
o Gross national income (GNI)
o GNI per capita
o Converting GNI to a common currency
and purchasing power parity
o Modifying GNI with the Atlas
Conversion Factor
o Accounting for the underground or
informal economy
• Economic growth rate
• Income distribution
• Private consumption
• Unit labor costs
• Other economic dimensions
Key Terms:
• Gross domestic
product (GDP)
• Purchasing power
parity (PPP)
• Atlas conversion
factor
• Underground
economy
• Income distribution
• Gini index
• Disposable income
• Discretionary income
• Unit labor costs
• Vertical integration
Lecture Outline and Notes:
Dimensions that Describe the Economy and Their Relevance for International Business
To estimate market potentials and provide input to the other functional areas of the firm,
managers require data on the sizes and rates of change of a number of economic and
socioeconomic factors. Socioeconomic data provide information about the number of people,
2. Most international organizations prefer GNI to gross domestic product (GDP) for
measuring the value produced in an economy because GDP only measures the
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
8 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
B. GNI per Capita
1. A country’s GNI divided by its population.
2. A higher value is usually linked to a more advanced economy, though growth
rate may be more important to marketers because a high growth rate indicates a
fast-growing market.
3. Need to use this figure with some caution, since government economies must
impute monetary values for goods and services not sold in the marketplace, such
as food grown for personal consumption and items bartered.
1. To compare GNI requires conversion to a common currency, using an exchange
rate.
currencies so the currencies have equivalent purchasing power.
4. The example on page 187 illustrates how this is done, and Table 7.2 provides
GNI/Capita at nominal and PPP based rates for selected countries.
5. The IB in Practice box assesses PPP using the Big Mac Index.
D. Modifying GNI with the Atlas Conversion Factor.
1. A technique developed to reduce the impact of exchange rate fluctuations.
2. The arithmetic average of the current exchange rate and the exchange rate in
the two preceding years, adjusted by the ratio of domestic inflation to the
combined inflation rates of the euro zone, Japan, the U.K. and the USA.
3. Incomes measured by Atlas conversion factor are generally more stable over
time.
E. Accounting for the Underground or Informal Economy
unreported.
2. This underground economy includes undeclared production of legal and illegal
concealed income in kind (barter)
3. Higher income tax levels and increased government red tape tends to create a
bigger underground economy.
4. Figure 7.3 shows estimated underground economies of various nations.
1. Seasoned managers supplement measures of an economy’s absolute size with
measures of economic growth rates.
2. Table 7.3 shows emerging and developing countries grew three times faster than
did developed countries in 2012 and 2013.
3. Rapid and rising economic growth rates suggest consumer demand, and
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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
likelihood of increased trade and foreign direct investment.
G. Income distribution
1. Wealth is not usually evenly spread, so there is need to know how national
income is distributed among a nation’s people, called income distribution.
2. The Gini index, an additional measure, measures the degree to which family
income is distributed equally, with a lower score indicating more equal
distribution.
3. Analysis of income distribution data show that:
a. Income is generally more evenly distributed in richer nations
b. Income redistribution proceeds very slowly, so older data are still useful.
H. Both relatively even and relatively uneven income distribution can suggest market
opportunities.
c. Table 7.5 shows private consumption expenditures for 5 high-income
and 5 low-income economies, using PPP equivalents.
d. Knowledge of personal consumption is enhanced by measures such as
the ownership of goods (e.g., automobiles, cell phones) and the
consumption of key materials (e.g., energy)
world markets.
c. Changes in wage rates may cause companies to change their
international sources of supply.
d. Three reasons for changes in labor costs
i. Compensation – hourly compensation tends to vary more widely
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
10 Instructor’s Manual – Module 7 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This
document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3. Other Economic Dimensions
a. Large and growing international debts of middle- and low-income
nations cause problems for their governments and for multinational
firms (Table 7.7 shows some major international debtors among
developing nations).
b. Large foreign debts may hinder access to foreign currency to pay for
imports billed in foreign currency, if such currency is being used to pay
foreign debt, hindering access to raw materials, spare parts, and other
inputs.
c. High debt may cause governments to impose price controls, cut
government spending, and impose wage controls, sometimes
encouraging political crises.
d. Scarcity of foreign exchange may hinder companies trying to export
products to such nations, as indebted governments may impose import
restrictions to conserve their foreign exchange for repayment of debt.
LO 7-4
Discuss the socioeconomic dimensions of economies and the
indicators used to assess them
• Socioeconomic dimensions of the economy and
their relevance for international business
o Total population
o Age distribution
o Population density and distribution
o Other socioeconomic dimensions
Key Terms:
• Population density
• Population
distribution
• Rural-to-urban shift
Lecture Outline and Notes:
II. Socioeconomic Dimensions of the Economy and Their Relevance for International Business
Socioeconomic data provide information about the number of people in a country or market.
A. Total Population
1. Most general indicator of potential market size.
2. Figure 7.5 shows 10 countries with largest projected populations in 2050 and
current population.
3. Population size alone is a poor indicator of market potential, except for a few
low-priced products
4. Where GNI increases faster than population, probably an expanding market.
B. Age Distribution
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