International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 7
07-1
Module 7: Economic and Socioeconomic Forces
YOUR CONTENT
Summary
Learning Objectives
Key Terms and Definitions
Content Outline
ENGAGEMENT & APPLICATION
Boxed Text Discussion Questions with Suggested Answers
End of Module Exercises
Critical Thinking Questions
GlobalEEDGE Research Task
MiniCase
Bonus Activities
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Connect Content Matrix
Connect Activities
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Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 7
07-2
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
LEARNING OBJECTIVES
LO 7-1 Explain the purpose of economic analyses.
LO 7-3 Outline the dimensions used to describe the economy and their indicators.
KEY TERMS AND DEFINITIONS
Atlas conversion factor (p.
192)
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. 188)
A classification for high-income industrialized nations, which
have high living standards and the most technically advanced
developed infrastructure
developing economies (p.
188)
A classification for the world’s lower-income nations, which
have less technically developed infrastructures and lower
living standards
International Business
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Instructor Guide to Module 7
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Instructor Guide to Module 7
07-3
discretionary income (p. 197)
The amount of income left after paying taxes and making
essential purchases
disposable income (p. 197)
After-tax personal income
emerging market economies
(p. 189)
Economies with per-capita incomes in the low to middle range
that are in a transition toward developed status
foreign environment (p. 186)
All the uncontrollable forces originating outside the home
country that surround and influence the firm
GINI index (p. 196)
A measure of the degree to which family income within a
country is distributed equally
gross domestic product (GDP)
(p. 187)
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. 188)
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. 196)
A measure of how a nation’s income is apportioned among its
people
international environment
(p. 187)
Interaction between domestic and foreign environmental
forces or between sets of foreign environmental forces
population density (p. 207)
A measure of the number of inhabitants per area unit
(inhabitants per square kilometer or square mile)
population distribution (p.
207)
A measure of how the inhabitants are distributed over a
nation’s area
purchasing power parity (PPP)
(p. 191)
A means of adjusting the exchange rates for two currencies so
the currencies have equivalent purchasing power
rural-to-urban shift (p. 207)
The movement of a nation’s population from rural areas to
cities
underground economy (p.
192)
The part of a nation’s income that, because of unreporting or
underreporting, is not measured by official statistics
International Business
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Instructor Guide to Module 7
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Instructor Guide to Module 7
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unit labor costs (p. 199)
Total direct labor costs divided by units produced
vertical integration (p. 202)
The production by a firm of inputs for its own manufacturing
processes
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 7
CONTENT OUTLINE
The following section provides the flow of information using the LEARNING OBJECTIVES as a
guide, KEY TERMS learners will need to take away from the course, and LECTURE NOTES to drive
home teaching points.
LO 7-1
Key Terms:
• foreign environment
• international
environment
I. Introduction: In this module, the critical economic and socioeconomic forces that shape
business opportunities around the world are examined.
II. International Economic Analyses
A. 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.
B. Management requires economic data and socioeconomic data.
1. Analysts use data from governmental and international organizations (e.g.,
World Bank, International Monetary Fund) and private economic consultants
(e.g., Business International, Economist Intelligence Unit) and industry
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.
3. Figure 7.1 illustrates how a change in a single economic factor can affect all
because managers operate in two new environments: foreign and international.
a. Foreign environment includes all uncontrollable forces originating
foreign environmental forces, or between sets of foreign environmental
forces when an affiliate in one country does business with customers in
another.
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Instructor Guide to Module 7
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Instructor Guide to Module 7
6. Besides monitoring foreign environments, analysts must stay informed of
actions taken by trading blocs (e.g., Mercosur, ASEAN, European Union).
7. International economic analyses should provide economic data on both actual
and prospective markets.
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 studies of their
markets.
c. Data from areas where 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 domestic
product (GDP)
• gross national income
(GNI)
• developing economies
• developed economies
• emerging market
economies
III. Levels of Economic Development
A. A nation’s level of economic development affects all aspects of business conducted there.
B. 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 $12,056 or more.
2. Middle-income economies: GNI/capita of over $995 but less than $12,056.
International Business
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Instructor Guide to Module 7
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3. Low-income economies: GNI per capita of $995 or less
4. Figure 7.2 shows the nations of the world based on GNI/capita
C. Another classification of economic development distinguishes developed from developing
economies, with low- and middle-income economies referred to as developing economies,
but there is no universally agreed-upon criterion for distinguishing between developed and
developing.
1. Developing economies are frequently characterized as industrialized or post-
industrial, service based nations that are economically advanced, with
established 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
o Measuring the Size of an Economy
• Gross National Income (GNI)
• GNI per Capita
• Converting GNI to a Common Currency
and Purchasing Power Parity
• Modifying GNI with the Atlas Conversion
Factor
• Accounting for the Underground or
Key Terms:
• purchasing power
parity (PPP)
• Atlas conversion
factor
• underground
economy
• income distribution
• GINI index
• disposable income
• discretionary income
International Business
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Instructor Guide to Module 7
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Instructor Guide to Module 7
07-8
I. 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,
and the economic dimensions tell us whether they have purchasing power.
IV. Measuring the Size of an Economy
generated from abroad, mainly through dividends and interest payments, minus
similar payments made to other countries.
2. Most international organizations prefer GNI to gross domestic product (GDP) for
measuring the value produced in an economy because GDP only measures the
market value of goods and services produced in a nation in a particular year.
1. A country’s GNI divided by its population.
2. A higher value is usually linked to a more advanced economy, though growth
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.
3. Purchasing Power Parity (PPP) is a means of adjusting exchange rates for 2
currencies so the currencies have equivalent purchasing power.
GNI/Capita at nominal and PPP based rates for selected countries.
5. The IB in Practice box assesses PPP using the Big Mac Index.
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 U.S.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
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Instructor Guide to Module 7
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Education.
3. Incomes measured by Atlas conversion factor are generally more stable over
time.
E. Accounting for the Underground or Informal Economy
1. Some national income is not measured by official statistics because it is under-
or unreported.
2. This underground economy includes undeclared production of legal and illegal
goods and services, their corresponding activities (e.g., money laundering), and
concealed income in kind (barter).
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, and more than twice as fast
from 2014 through 2019.
3. Rapid and rising economic growth rates suggest consumer demand, and
likelihood of increased trade and foreign direct investment.
G. Income Distribution
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.
a. Income is generally more evenly distributed in richer nations.
b. Income redistribution proceeds very slowly, so older data are still useful.
in later stages.
d. Both relatively even and relatively uneven income distribution can
suggest market opportunities.
International Business
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Instructor Guide to Module 7
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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).
4. Unit Labor Costs
a. Total direct labor costs/units produced.
b. Low or slowly rising unit labor costs may indicate opportunity to lower
production costs and may indicate locations of new competition in world
markets.
c. Changes in wage rates may cause companies to change their international
than wages because of differences in fringe benefits.
ii. Productivity – gains in productivity may reduce the impact of
higher compensation.
iii. Exchange rates.
e. Figure 7.4 shows selected nations’ hourly compensation costs, 2000–2016.
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
Key Terms:
International Business
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Instructor Guide to Module 7
International Business, 2e
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Instructor Guide to Module 7
o Age Distribution
o Population Density and Distribution
o Other Socioeconomic Dimensions
• rural-to-urban shift
V. 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.
1. Because few products are purchased by everyone, marketers must identify
segments of the population more apt to buy their goods.
2. Distribution of age groups within populations varies widely, but developing
countries generally have younger populations than do industrial countries, due
to higher birthrates.
3. Developing countries represent over three-quarters of the world’s total
population.
4. Many forces are responsible for reduction in birthrates, but declining birthrates
countries, for 2018 and projected for 2035 and 2050.
square mile.
a. Densely populated areas tend to make product distribution and
communications simpler and less costly.
b. Should know how populations are distributed (e.g., urban versus rural;
impact of geographic features such as mountains and waterways).
2. Especially in developing countries, there is an evident rural-to-urban shift as
International Business
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Instructor Guide to Module 7
International Business, 2e
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Instructor Guide to Module 7
Education.
a. In 2008, for the first time half of the world’s population was living in
cities; this is expected to increase to 60 percent by 2030.
b. Table 7.8 indicates that the greatest urban shifts are occurring in low-
and middle-income countries.
D. Other Socioeconomic Dimensions
1. Increase in the number of working women may produce a larger labor supply,
and also result in larger family incomes, a greater market for convenience
goods, a need to alter promotional methods, and perhaps changes in
production processes, employee facilities, and human resource policies.
2. Data on a country’s divorce rate may indicate formation of single-parent
families and single-person households.
3. In many nations, important ethnic groups may require special consideration by
both marketing and human resource managers.
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 7
International Business, 2e
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Instructor Guide to Module 7
07–13
ENGAGEMENT & APPLICATION
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
IB IN PRACTICE: Using the Big Mac Index to Assess PPP
The Economist magazine presents an interesting application of PPP theory through its “Big Mac
Index,” which substitutes a Big Mac for the basket of goods economists have traditionally used.
The index calculates the exchange rate at which a Big Mac in other countries costs what it does
1. Under what conditions might an index based on the pricing of Big Mac sandwiches be most
useful in understanding whether a particular currency is overvalued or undervalued? When
might such an index perform poorly?
Answers here might vary, but some students might suggest that this would be most appropriate
when comparing countries that are relatively similar to the U.S. in income and level of
development. In contrast, there may be students who argue there are countries where cultural
International Business
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Instructor Guide to Module 7
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Instructor Guide to Module 7
07–14
2. UBS Wealth Management Research has used the Big Mac index as a basis for assessing the
purchasing power of an average worker in a particular country. In this regard, they identify
the amount of time an average worker in a nation would have to work in order to earn
enough money to buy a Big Mac. How might information such as this be of value to
businesspeople?
Again, answers may vary on this question. Some students might find this to be a very
interesting and useful measure, indicating relative levels of disposable income within a society
GLOBAL DEBATE: What Is the Best Way to Measure a Nation’s Development: Income or
Quality of Life?
This Global Debate provides an overview of different perspectives on how to assess the extent
of a nation’s development, contrasting traditional measures of economic development with
1. Which approach to measuring development do you think would be most useful for
international managers to follow in assessing a potential market’s level of development?
International Business
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Instructor Guide to Module 7
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Education.
of the natural environment, restriction on religious or social freedoms, exposure to pathogens
or carcinogens that may reduce the length or quality of life, and other factors. Students might
suggest that material wealth of a nation is of limited value if it compromises the quality of life
of the people living there, and that measures such as the length and quality of citizens’ lives,
education and the opportunities it provides, and access to healthy food, clean air and water,
adequate medical care, and other resources associated with a decent standard of living. A lively
debate can be generated, especially if the class evidences variation in terms of nationalities,
ideologies, and similar variables.
2. Do you agree or disagree with former U.S. attorney and presidential candidate Robert F.
Kennedy’s assertions that an approach to understanding development that relies on market
data is not really what we need to know to understand our development as people (and
markets)? Defend your answer.
This question raises an issue that almost always generates strong opinions and a variety of
perspectives. Some students may feel that. Some students may also argue that economic
development generates the resources (e.g., income) that can be expended on the various
3. If you were the manager of a subsidiary of an international company and you were asked
by the host-country government to justify your proposed investment in a production plant
based on human development needs, what arguments could you provide to help support
your position?
International Business
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Instructor Guide to Module 7
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Instructor Guide to Module 7
07–16
Copyright © 2020 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
perceived international competitiveness of a country, perhaps encouraging further foreign
direct investment into or exports out of the country, which may also enhance the nation’s
overall standard of development. Students might also argue that the plant will generate
benefits such as tax dollars for investment in roads, schools, hospitals and other valuable
infrastructure. It might also be argued that the managerial practices that the company brings to
its production plant will be of a high level and help to establish a benchmark for other
companies, local and foreign funded, to strive for. These and similar comments may be
expected from students, and it can be useful to hear “what ifs” from other students. Indeed, it
might be useful to either assign or to identify one or several individuals in the class who can
take the role of devil’s advocate, questioning the assumptions underlying the presumed
benefits associated with the plant.
GET THAT JOB! FROM BACKPACK TO BRIEFCASE: Jason Jack Peters: Understand New Cultures
through Immersion
Jason Peters discusses his experiences in learning about new cultures and some of the
techniques that students can use in order to gain a deeper understanding of the culture and
1. How would you evaluate Jason Peters’ efforts to understand and integrate effectively
within Korean, Chinese, and Brazilian cultures? How can such efforts help him to achieve his
objective of immersing within and understanding other cultures?
Students will have various answers to this question, depending on their experience with other
cultures as well as their own self-awareness and self-confidence. Jason Peters has chosen to
study and work in three different countries, each of which is quite different from his home