Chapter-3

International Business

 Elements of Economic Environment:

GNI: Gross National Income (GNI) is the broadest measure of a country’s economic
performance. It has four components: personal consumption, business investments, government
spending, and net exports of goods and services. It measures the value of all production in the
domestic economy together with the income that the country receives from other countries (in
the forms of profits, interest, and dividends), less the same sorts of payments that it has made to
other countries. For example, the value of a Samsung TV built in South Korea as well as the
value of a Samsung TV made in Japan using Samsung’s resources is counted in South Korea’s
GNI. Similarly, the value of a Sony TV built in South Korea using Sony’s resources counts in
the GNI of Japan. Too, if Samsung’s Japanese subsidiary repatriates profits to headquarters in
Seoul, it increases South Korea’s GNI.
GDP: Gross Domestic Product (GDP) is the total market value of all output produced within a
nation’s borders, no matter whether it is generated by a domestic or foreign-owned enterprise,
over a fixed period of time. It estimates the output from a sample of businesses in every part of a
nation’s economy, from agriculture to social media. Each sector’s weight reflects its relative
importance in the national economy. As such, GDP measures the total value of finished goods
and services that have been produced for consumers, businesses, and governments in that nation.
Measuring the flow of economic activity in terms of producing goods and services, not simply its
stock of productive assets, indicates if an economy is expanding or contracting. Presently, GDP
is the most commonly used estimator of economic performance, serving as a universal
benchmark of productivity and prosperity. Technically, GDP plus the income generated from
exports, imports, and the international activities of a nation’s companies equal its GNI. For
instance, a smartphone made by Samsung and Sony in South Korea contributes to South Korea’s
GDP.

 Features of an Economy:
Inflation, unemployment, debt, income distribution, poverty, and balance of payments are
essential features that collectively describe the economic health and functioning of a country.
Each of these factors influences how the economy grows, stabilizes, or faces challenges. Here’s
how each one works as a feature of an economy:
1. Inflation:
o Definition: Inflation is the rate at which the general price level of goods and
services increases, eroding the purchasing power of money.
o How it works: Inflation affects consumers and businesses. Moderate inflation is
often a sign of a growing economy, but high inflation can create uncertainty,
decrease savings, and lead to a cost-of-living crisis. Central banks manage
inflation through monetary policy, adjusting interest rates to control demand.
2. Unemployment:
 o Definition: Unemployment is the percentage of the labor force that is actively
seeking but unable to find work.
o How it works: High unemployment is typically a sign of economic distress or
inefficiency in the labor market, while low unemployment suggests a healthy
economy. However, extremely low unemployment could lead to inflationary
pressure if businesses struggle to find workers. Governments may intervene
through fiscal policies (like stimulus programs) to reduce unemployment.
3. Debt:
o Definition: Debt refers to the amount of money that an economy, government,
businesses, or individuals owe to external or internal lenders.
o How it works: Debt allows governments or businesses to finance large projects,
stimulate economic activity, or smooth out economic fluctuations. However,
excessive debt, particularly public debt, can lead to financial instability or higher
borrowing costs if the debt load becomes unsustainable. Countries manage debt
through fiscal policies and may adjust taxes or spending to ensure debt remains at
manageable levels.
4. Income Distribution:
o Definition: Income distribution refers to how evenly or unevenly income is
shared among the population.
o How it works: Unequal income distribution can result in social inequality,
creating gaps between the wealthy and the poor. It can affect economic stability
by limiting the purchasing power of lower-income groups, reducing overall
demand in the economy. Governments may use progressive taxation or welfare
programs to address imbalances and promote more equitable growth.
5. Poverty:
o Definition: Poverty is the condition where individuals or households are unable to
meet basic needs such as food, shelter, and healthcare.
o How it works: Poverty is often a consequence of unequal income distribution,
limited economic opportunities, and lack of access to education or healthcare.
High poverty levels can lead to social unrest, lower productivity, and higher social
spending for governments. Reducing poverty is a key goal of economic policies
aimed at improving the quality of life for all citizens.
6. Balance of Payments:
o Definition: The balance of payments is a record of a country’s financial
transactions with the rest of the world, including trade (exports and imports),
investments, and loans.
o How it works: A country’s balance of payments reflects its economic
relationships with other countries. A surplus means the country is exporting more
than it is importing, while a deficit can indicate reliance on foreign borrowing or
trade imbalances. A persistent deficit might lead to depreciation of the national
currency, while a surplus can strengthen the economy by boosting foreign
reserves.
Interconnections among the features:
  These features are interrelated and can influence one another. For example:
o High unemployment can lead to higher poverty levels, which could worsen
income inequality.
o Inflation affects real wages and the purchasing power of households, especially
those in poverty.
o Government debt is often used to finance social programs, which may impact
income distribution and poverty.
o A country with a trade deficit might increase its debt levels or face currency
depreciation, affecting inflation and employment.
Together, these economic features help policymakers assess the health and stability of an
economy, determine appropriate policies, and measure progress toward sustainable growth and
social welfare.
 Types of Economic system:
An economic system is a mechanism that deals with the production, distribution, and
consumption of goods and services. Presently, we see variations of three types of economic
systems, namely, the market, mixed, and command economies.
Major differences exist between these ideas in terms of their implications for economic matters,
such as the ownership and control of factors of production and the freedom of price to balance
supply and demand. Basically, there are 2 dimensions of any economy. They are-
1) Capitalism: It a free market system built on private ownership and control. This philosophy
holds that owners of capital have inalienable property rights that give them the right to earn a
profit in return for their effort, investment, and risk.
2) Communism: It is a centrally planned system built on state ownership of all economic factors
of production and control of all economic activity.

Based on these 2 concepts the economic system is categorized into 3 areas. They are-
1) Market economy: An economic system whereby individuals, rather than the government,
make most decisions. It is anchored in the doctrine of capitalism and its thesis that private
ownership confers inalienable property rights that legitimize the profits earned by one’s
initiative, investment, and risk. Optimal resource allocation follows from consumers exercising
their freedom of choice and producers responding accordingly. Market economies are commonly
found in developed economies, such as Australia, Canada, Hong Kong, Singapore, Switzerland,
and the United States. Each grants its citizens wide-ranging freedom to decide where to work,
what to do and for how long, how to spend or save money, and whether to consume now or later.
The market economy champions the “invisible hand” of economically free, self-interested
consumers as the driver of productive efficiency. Consumers, through their interactions with
producers, shape aggregate growth, thereby optimally determining the relationships among price,
quantity, supply, and demand. A market economy pushes producers, spurred by the profit
motive, to make products that consumers, spurred by their quest to maximize utility, buy.
Consequently, by virtue of what they buy—and, for that matter, do not—consumers direct the
efficient allocation of resources and the optimal valuation of assets.
2) Command economy: A command economy is also known as a centrally planned economy. It
describes an economic system whereby the government own and controls all resources. Hence
the government command the authority to decide what goods and services a country will
produce, the quantity in which they are produced and the price at which they are sold. In a
command economy, the visible hand of the government, with little regard for price, orders state-
owned manufacturers to produce them. Making the invisible hand explicitly visible means that
government officials, not private consumers, determine the prices of goods and services and,
hence, the allocation of resources. Consequently, product quality is often erratic and, absent
profit-maximizing incentives, typically deteriorates. Products are usually in short supply and
there are few substitutes. State-owned enterprises, typically large-scale, inefficient, and
unprofitable, have few resources to upgrade or incentives to innovate. Command economies have
included the Soviet Union (which, at its peak, was the world’s second-largest economy), China
during its Great Leap Forward era beginning in 1958, India prior to its economic reforms in
1991, and Afghanistan during the rule by Soviet occupation and the Taliban. Today, we see few
pure examples, most notably North Korea and, to a diminishing degree, Cuba.
3) Mixed economies: A mixed economic system combines elements of the market and
command economic systems; both government and private enterprise influence production,
consumption, investment, and savings. The mixed economy blends elements of the command
and market systems. On one hand, the state intermingles ownership of some resources,
centralizes certain planning functions, and regulates market systems. On the other hand, the state
authorizes a range of economic freedoms to individuals and companies. Fundamentally, the
interaction of supply and demand signaled to producers through the choices that consumers
make, rather than public dictate, organizes production.
Democracy promotes a market economy. Communism promotes a command economy.
Similarly, socialism promotes a mixed economy. The notion of “mix” follows from the state
letting the market allocate resources, as does capitalism, but directly channeling their use given
political goals, as does communism.
  What are the dimensions of the economic freedom index?

Economic freedom measures the absence of government coercion or constraint on the

production, distribution, or consumption of goods and services beyond the extent necessary for
citizens to protect and maintain liberty.

Formally, economic freedom is the “absolute right of property ownership, fully realized
freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or
constraint of economic liberty beyond the extent necessary for citizens to protect and maintain
liberty itself.”42 The greater the degree of economic freedom in an economic environment, the
greater the freedom an individual has to decide how to work, produce, consume, save, invest, and
innovate. Furthermore, the greater the degree of economic freedom, the greater an individual’s
confidence in the legitimacy of property rights, liberty to use factors of production, flexibility to
organize goods and services, and protection from undue political interference. Economic
freedom creates opportunities and boosts productivity, functioning as the critical link between
ambition and actions. Economically free countries support activities that create income and
generate wealth. Successful entrepreneurs map paths that others follow to build better lives.
Economic freedom does not signify the absence of government. Ultimately, freedom requires
protection. Think of, for example, the police force that protects property rights, market regulators
that ensure fair competition, monetary authorities that monitor a sound currency, or an impartial
judiciary that enforces business contracts. Each, as an agent of the state, safeguards economic
freedom. Hence, protecting economic freedom requires government regulation, but, ideally, only
to the degree needed to transparently protect and legitimately sustain it. Excessive regulation, by
substituting political judgment in place of individual choice, constrains entrepreneurialism and
reduces market efficiency.