MGMT 1101 - Week 6 Lecture Notes: Analyzing the Economic Environment

This document contains lecture notes for MGMT 1101, focusing on the economic environment. The notes cover key concepts such as Gross Domestic Product (GDP), including real vs. nominal GDP, and its components (consumption, investment, government purchases, and net exports). The material explores the limitations of GDP and discusses market size, national income (GNI/GNP), and purchasing power parity (PPP). Economic development is defined, differentiating it from economic growth, and examining factors like basic needs and standards of living. The notes also address economic risks, including economic stability, growth rates, inflation, unemployment, and the role of government, fiscal and monetary policy, and the international economic relations. Finally, it outlines strategies for dealing with economic risks and opportunities, such as adjusting investment levels, marketing strategies, and operational rationalization.

MGMT 1101 – Week 6 Lecture Notes
The Economic Environment
Learning objectives:
- To understand the relevance of demand factor conditions to
international business
- To assess the economic development of countries
- To analyse and compare national economies in terms of
risks/attractiveness

Gross Domestic Product
GDP is the market value of all final goods and services produced within a
country in a given period of time
- Market value = market prices people are willing to pay
o Prices of G+S
- Comprehensive and includes everything produced and sold in the
economy, but excludes things that do not enter the ‘legal’ market
- Intermediate goods vs. final goods  the price of final goods include
the value of intermediate goods, unless intermediate goods are
added to inventory
- Currently produced = used car sales do not count…
- Within a country (boundary)
- Given period: usually in a year or quarter
Components of GDP
i) Consumption
- Spending on G+S by households with the exception of purchases of
new housing
- Spending on education is all seen as consumption, not investment
ii) Investment
- Purchase of goods to be used in the future production of goods and
services
iii) Government purchases
- Include things like salaries for government employees
- But transfer payment not part of government purchases
iv) Net exports
- Total exports minus total imports
GDP = Consumption + Investment + Government Purchases + Net
Exports
Real vs. Nominal Gross Domestic Product
- One of the objectives of economic development is to facilitate a rise
in GDP at a high rate
- 2 reasons for the rise in GDP
o 1. Producing more output of G+S
o 2. Higher prices
- Real GDP – the production of G+S valued at constant prices (that is,
holding prices constant at some base year)

- GDP deflator (Nominal GDP/Real GDP *100) measures the change in
nominal GDP that cannot be explained by a change in real GDP
What is GDP good for?
What are the problems associated with GDP?
GDP does not measure:
 Quality of life
- Leisure or how much do citizens work
- Happiness
- Health
 Things that take place outside markets
- Produced at home
- Child care by parents at home
- Volunteer work
 Quality of the environment
- GDP excludes the damage to society
- Productive, economic activities that are not environmentally
sustainable
 Distribution of income
- Inequality
- Fairness and justice
GDP is good as a measure of economic well-being and volume of
economic activities, but there are limitations, particularly with regards to
human well-being and sustainability

Market Size and National Income
Population size/growth/age distribution
Economic size/growth
- GDP – all G+S produced within a country
- GNI or GNP = all G+S produced by national firms
o No distinction for location
- GNI defined by residents and GDP defined by location
Market size – estimating potential sales
Income/purchasing power (GDP per capita, PPP)
- Rank or relative performance of national economies by
standardising by population
- Purchasing power parity (PPP) = ow many units of a local currency
you would need to buy a basket of G+S in the local markets that
one US$ can buy in the US
o The ability to purchase products or spending power
Income distribution
- Income inequality between the rich and the poor
- Distribution of income in a population
- Ranges from 0 to 1
- The lower, the less unequal or more equal distribution

Economic development:
- Economic development is not the same as economic growth
- Providing life-sustaining basic needs
- Raising general standards of living
- Expending the range of economic opportunities and political choices
- Attaining sustainable development

Economic risks:
 The likelihood that economic mismanagement will cause drastic
changes in a country’s business environment that adversely affect
the operations of a firm in a country
 In a globalised world – risk of contagion
 Economic risk analysis involves assessing the economic indicators
for strengths and weaknesses
Assessing economic risks/attractiveness: what to look for?
- Economic stability
o Economic growth rate
o Business cycle
o Inflation (CPI)
o Unemployment
o Productive
o Gross domestic investment
o Business/consumer confidence
- Role of government
o Fiscal policy
o Monetary policy
o Institutional framework
- International economic relations
o Balance of payments: current and capital accounts

Dealing with economic risks + opportunities:
- Change investment level/timing
- Change marketing strategies
o Products
o Prices
o Target market/group
- Rationalise operations
o Reduce number of employees
- Exit market
- Expand/bargain hunt