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Economic Factors


Hi, everyone. Welcome to the course of International Business. So, in the last few
classes, we have been talking about the factors affecting international business and we
discussed about factors like you know culture, politics and legal, right. So, today we will
be talking about the Economic Factors and how they affect international business right.
So, basically we all understand that economy from which this word is derived is
economy is basically the optimum utilization of resources and resources are always
limited. So, in any country for that right so, there is a the factors of production are
always limited. So, how one would utilize it if you are looking at the conditions of its
people and it is you know stakeholders. So, that becomes very important.
So, when a new firm enters into an international market they need to understand the
economy behind this you know and the different economic factors that impact that can
impact its business, right. And, I am very proud to say when I am talking about economy
I am proud to say that one of the Indians has been awarded you know the Nobel prize for
economics this year. so, congratulations to him.
And, let us see what are economic factors and how do they affect.
(Refer Slide Time: 01:44)
So, economic factors are the factors that affect the economy and includes things like
interest rates, tax rates, law, policies, wages, inflation rate, demand and supply, exchange
rates and governmental activities. So, all these things are you know made to run the
economy in a better way, right. So, these are the factors which are connected to the
economy. These factors are not in direct relation with business maybe, but it influences
the investment value in the future, right.
So, if the tax rates changes suppose for example, for certain products luxury products the
tax rates are increased or for essential commodities for example, the government wants
to reduce the tax rate. So, what kind of an influence it will have and what kind of
influence it will have then on the you know connected in connecting industries right, the
industries who are make those products. So, these are some of the things that are very
very important right and as an student of management or international business or
economics one needs to be very clear with it.
The example who would forget the crisis that has happened in the past; for example, the
great recession that had happened in the early 1900 right 1930s and 20 – 30s, then we
came about the you know 2008 crisis which we happen the subprime crisis. So, these
were issues that shake the nation right then we had 1999 the Southeast Asian crisis, right.
So, in 2008, for example, the worst case of inflation affected the central African nation,
Zimbabwe one of the examples taken. So, although it shook the world, but we are talking
about Zimbabwe how Zimbabwe was affected and I still remember that Zimbabwe’s
economy had crashed and they had they were you know producing very large valued
currencies for example, of very high value right so, which is not a very good sign. This
proved very disastrous for its economy leading to country adopting a foreign currency as
a way of solving the crisis. So, to solve this crisis they had to depend on some foreign
currency.
Recently the Indian it automobile industry in fact, the Indian industry has been hit hard
last year and this year, but especially the automobile industry it has been hit hard due to
the slowdown caused by several factors like high GST rates. It was first of all we can say
high GST rates and again the GST was not very clear to many of the players the farm
distress that has happened stagnant wages and liquidity constraints right.
So, liquidity constraints stagnant wages all these things taken together has affected the
demand side. So, the demand has been affected largely and you know I would take this
point to explain that presently the Indian government has used strategy to you know
uplift the economy for example, to buy they have slashed the corporate rate. But, to me it
is not a very wise decision because you see what happens is when you reduce the
corporate rate the money stays with the corporate and it is expected they would pass it on
the customers, but that it is not necessarily true right.
So, what happens is you have helped the supply side, but the problem lies in the demand.
So, when demand is not growing and demand is has not grown who would buy these
products right. So, giving a slash in the corporate rate it is good enough maybe, but then
the demand does not change. So, until unless the demand changes, the economy would
not get a facelift. So, these are very important things which the government also has to
take into account.
So, according to the society of Indian automobile manufacturers passenger vehicle sales
dropped to 223,317 units in September 2019 from 292,660 right a year while passenger
car sales dropped by 33 percent 33.4 percent. And you know the low demand in the
recent months has led to a massive slowdown in the auto sector of the country which is a
fourth largest in the world.
Now, this is not all this is not only the automobile sector. There has been a slowdown in
the even the fast moving consumer goods sectors, many companies have cut down their
workers. So, there has been lot of worker been fired and all. So, on totality in fact, to
correct this, the government has changed its policies, tried to support, but things have not
seen much of a change at the moment right.
(Refer Slide Time: 06:22)
What is the importance? So, from and looking at the examples that we have talk taken
we can understand that economic environment is very very vital right. So, managers
should assess a country’s economic environment knowing the different countries have
different level of economic, development, performance and potential. Economic
development is an improvement in factors such as health, education, literacy rates and a
decline in poverty levels. Economic development directly impacts the citizens, managers,
companies, policymakers and institutions right.
The dynamic nature of political and economic events. So, there is a strong correlation
between political and economy politics and economy right. If I draw you know
correlation I would see it would be very very high because the change in policies the
political situation changes, the economic situation can also change right because with the
political you know ideologies the ideas the economy also gets affected right.
For example, we have seen in the past that we are taken the case of Myanmar; how
Myanmar changed its governance and in 2011 and then, from there they started doing
better and in the past they were having a very very bad time.
A country’s economic policies are a leading indicator of the government’s goals and its
planned use of its economic tools and the market reforms. Now, when it comes to
economic policies there are lots of policies right, for example, the bank purchase rate the
repo rate for example, the bank constantly been working on it to reduce the interest rates
right. They have been the Indian government has been trying to infuse more of you know
liquidity, but then still things will not work till we do not attack on the or we do not
foster the demand side right. We have been trying working hard on the supply but
demand is the one where it is to be worked out.
The government of India announced some changes to it is existing foreign direct
investment on 30th August, 2019 which is very recent. These include new norms for
single-brand retail, coal mining, contract manufacturing, and digital media. These are
some of the good things that the government of India has done.
(Refer Slide Time: 08:33)
So, let us see what it has done. So, to make it make India a very attractive destination for
foreign investments and boosting employment and economic growth, you see as we will
understand the till employment does not grow. The economic growth cannot happen
right; a product that is made by any company is just an inventory. So, the inventory till
does not get a value if people do not consume it, if they do not use it. So, till that time it
is of no use. So, how do you boost the employment, how do you pay them right, that is
very important?
Anyway, so, in terms of the single brand retail sourcing norms were eased right. So,
now, what is the expectation the more foreign retail brands may set up physical stores in
India and established their online presence too right. 100 percent FDI allowed in contract
manufacturing. So, electronic, pharma firms are likely to set up manufacturing facilities
in India this is the hope right.
100 percent FDI in coal mining through automatic route, right. So, automatic is the
government route right. So, monopoly of Coal India likely to end. Move will help create
an efficient energy market. This then the 26 percent FDI limit extended to the digital
media. This again brings in a hope that new services on par with print would be and
allows would grow up and it would be valued separately.
So, these are some of the changes the government has tried to do thinking hoping that it
would help in boosting the you know domestic market, helping more the you know
investors to come in and start their business and finally, boost up the employment and do
good for the economy as a whole right.
(Refer Slide Time: 10:23)
Some key terms that we need to understand when we talk about economy for example,
GDP. What is GDP? Is a total market value of all final goods and services currently
produced within the domestic territory of a country in a particular year; so, all goods and
services right currently produced are comes under the GDP right.
Now, what is GNP? Is the market value of all final goods and services produced in a year
right; it includes net worth income from abroad. Now, this if you see what it was saying
here in GDP case if you go back, so, it says it includes only final goods and services. It
includes the value of goods and service produced within the domestic territory. So,
anything you know done outside was not there, but here we are including the income
from abroad.
Net National Product at market price is the market value of all final goods and services
after allowing for or factoring for the depreciation, the wear and tear right. National
income is another term which is important which will be using frequently is the sum of
the wages, rent, interest and profits paid to the factors for their contribution; factors are
like land, labor and capital to the production of the goods and services right.
Finally, personal income is the sum of all incomes earned by an individual or
individuals’ households during a given year. Certain incomes are received, but not
earned as old age pension etcetera right. So, these are some of the terms that we will be
using frequently and maybe we will look at it more in detail.
(Refer Slide Time: 11:59)
So, international economic analysis, so, what are the factors? What conditions impact let
us see? Some conditions that hamper the development of a universal scheme to assess
the performance and potential of a country’s economic environment: the first one says
difficulty in stipulating a definitive set of indicators to estimate the performance and
potential of a country’s economy. Now, let us see with an example.
Suppose there are two countries and these two countries the national income is
increasing at the same rate, but in country A population has doubled whereas, population
remains the same in the country B. So, what has happened, national income has been
increasing in the same rate but, here the population has doubled and it is same here.
In that case the per capita in the income in the country B will reduce to half as compared
to country A. The national income measure will put both the countries the same
economic level, but per capita income would indicate country B as more important than
country A right. Therefore, we are required to know both these measures to assess the
economic development effectively or accurately right.
So, what is the right indicator? So, that is very important to do an economic analysis.
(Refer Slide Time: 13:23)
Another thing is that set of perfect measures may prove imperfect tomorrow. So, what is
today a perfect measure in a particular condition, might not be a perfect measure
tomorrow, right. So, a new measure has to be checked in a different condition. Then
interdependencies complicate the interpreting the relationship among elements.
So, a relationship interrelationship between GDP, GNI, PPP and HDI right, human
development index also creates a confusion and finally, the data overload complicates
the decision making for the managers right. Now, look at this case again gross national
income per person figures can be misleading, why? Because, they do not they do not
consider differences in the cost of living right.
So, for example, although the 2018 GNI per capita of Switzerland at this much dollars
acceded to that of the US which was this much, the higher cost of living in Switzerland
meant that US citizens could afford almost as many goods as the average Swiss citizen.
So, although you had a higher GNI in Switzerland, but because of the higher cost of
living in Switzerland, the Americans were at the same parity right as Swiss people.
(Refer Slide Time: 14:43)
So, the elements or indicators as I said we will be explaining. So, the gross domestic
product what it says the total value of all goods and services produced within a nations
borders over one year, no matter whether the domestic or foreign owned companies
make the product, who makes it is immaterial. Anything that is made within the
boundary of the country comes under the GDP right.
But, interestingly I will tell you so, let us see for example, U.S remains the top economy
with a GDP of 20.5 trillion in 2018 right. India has been pushed to the seventh place in
the global GDP ranking in 2018. So, you can see here India is here, US is 2 point 20.5.
So, India is only a 2.7 trillion right, but we have grown with time, but then it is not
sufficient.
But, interestingly there are some controversies with GDP also. Some economists think
that GDP and I too agree to that the GDP may not be a very strong indicator. GDP does
not account it to things like the value, for example. Let us say we cut a tree right and we
sell the wood right.
Now, when we sell the wood if the price of the wood maybe becomes a part of the GDP,
but what happens to the loss that happens because of the kind of oxygen that was being
provided by the tree to us, the shade that was being provided by the tree to us and other
kind of you know benefits that was being provided right.
So, all these benefits where have they gone? Right. So, that has been not valued that has
been not monetarily valued, but then had they been monetarily valued maybe the GDP
score would look different for any country right. GDP is especially useful for assessing
countries in which the output of the multinational sector is a significant share of activity.
For example, almost 90 percent of the Iris export are made by foreign owned firms and
not the local ones right ok.
(Refer Slide Time: 16:39)
Next is GNI: The income generated both by total domestic production as well as the
international production activities right. So, GNI is the value of all production in the
domestic economy, plus the net flows of factor income from abroad during a one-year
period.
So, look at it the per capita income at current prices during 18 – 19 of India is estimated
to have attained a level of rupees 126,406 crores right or this much monthly as compared
to the estimated for the year 2017 – 18 of rupees 114,958 right. Showing a rise of 10
percent right according to the annual national income and GDP data released by the
Ministry of Statistics and Programme Implementation.
The gross national income at current prices is estimated at rupees this much during 18 –
19 right, as compared to 169.1 lakh crore during 18. So, this is again a rise of 11.3, 13
percent. India’s gross domestic product is estimated to have slowed to a 5 year low of 5
percent in march 2018 – 19 mainly due to poor show in the farm and the manufacturing
sectors.
So, what has happened although if you see the national income is this much here at 18 –
19 as compared to 17 – 18 it was 169 which has reason right, but now at this moment
right India’s GDP has slowed down to a 5 year low. Now, this is something that needs
one needs to understand that what is the relationship and how this interrelationship
matters to anybody right to basically and you know business firm and it is for all the in
fact, the you know the critics the business firms and everybody.
So, now this slowdown is something that is very bothering for India right.
(Refer Slide Time: 18:43)
Now, let us look at the gross national income per capita shown for different countries.
So, in terms of ranking if you can see right Switzerland stands at the top right and this is
for the you know gross national income and this is for the purchasing power parity.
India’s ranking is 144 in terms of the gross national income and India’s ranking in terms
of the purchasing power parity it is 126.
So, there are two ways you can understand one is the GNI per capita right which is
measured through the one method called the atlas methodology and the purchasing
power methodology. So, if you look at these two methods and see that India stands at a
very low place. It is at a very bottom right and look at if you look at the purchasing
power parity what it says is basically Qatar is at the number 1 position. So, these are
some of the things that impacts.
So, what it says purchasing power parities; an international dollar has a same purchasing
power over GNI as a US dollar has in the United States. So, basically purchasing power
parity helps you to tell in this with the same amount of dollars in a different place how
much you could have purchased right.
(Refer Slide Time: 20:03)
So, this is some of the and the if you look at the lowest rankings as somewhere for
example, Burundi is at the lowest rank right and Guinea; these are some of the countries
which have a very low rank in terms of the gross GNI right.
(Refer Slide Time: 20:14)
Now, how do you improve the power of GNI? GNI can mislead managers when they
compare countries right it can be misleading because you are adding several factors into
it. Therefore, managers improve the usefulness of gross national income by adjusting it
this is very important for the number of people, the growth rate and cost of living. If you
do not adjusted with these three parameters or these the three factors then it becomes a
misleading data right.
Now, what is per capita conversion? A nation might have a high rank on the basis of
GNI example Germany and France for example, but rank only in the middle on the basis
of GNP right per capita. So, in fact, China which is the world’s second economy second
largest economy according to GNI rank 71 in middle tier of countries according to GNI
per capita.
So, if you take absolute GNI and if you take GNI per capita this figures would be very
very different right. So, so the business firms needs to understand [FL] whether they are
interested for the GDP, the GNI, the GNI per capita, what are they interested in because
that is what matters to them right.
So, the per capita indicators help to explain an economic performance in terms of the
number of people who live in that countries. So, if your per capita income is high; that
means, the people can purchase your products right. So, there is a chance of doing better
in that country.
(Refer Slide Time: 21:48)
Rate of change – interpreting present and predicting future economic performance
requires pinpointing the rate of change right. Generally the GNI growth rate indicates
economic potential if GNI grows at higher rate than the population, standard of living
and are said to be rising or falling right. So, what it says is, it should grow at a higher rate
right. So, if the GNI is growing at a higher rate so, the gross national income right we
will say that the economy is doing better right.
Purchasing Power Parity – the calculation of GNI per capita does not consider the
differences in cost of living from one country to the other. So, managers adjust GNI per
capita for particular country in terms of it is PPP right. So, in comparison of Switzerland
and Qatar, you can see as in the table we had shown, GNI per capita in terms of relative
PPP is higher in Qatar because of the lower cost of living.
(Refer Slide Time: 22:50)
So, again you can see here. So, Qatar has 124,130 and this is purchasing power parity
and this is only 83,580 right. So, these are the things that business managers must
understand deeply and they should also understand how the currencies are fluctuating,
how the local governance the tax rates are changing, how for example, the RBI is trying
to do it in India for example, or the Federal does it in US, right.
(Refer Slide Time: 23:19)
This is the last thing we will talk about today, the degree of human development. Now,
degree of human development also has a great relationship with the economy condition
right. So, what it measures is basically the quality of human life right in terms of both
economic and social. To estimate its current and future economic indicators that enable
managers to more fully measure development in terms of the capability and opportunity
that people enjoy. The HDI combines indicator of real purchasing power, education,
secure livelihood and health right to measure the economic development.
So, what it says HDI is an index that is used to rank countries based on human
development. So, indicators including expectancy, life expectancy how much one would
live. So, the life expectancy has been growing in India with time because of better
medical facilities, better you know opportunities right. The per capita income and
education are used to rank the nations ok.
Nations that rank higher on this index have a higher level of education is generally
higher life span and a higher gross national income per capita right than the nations with
a obviously, lower score.
(Refer Slide Time: 24:36)
So, this is how this is how it looks like.
So, the UNDP right human development report ranks countries on basis of measuring
human development by combining indicators of a long and healthy, life access to
knowledge and a decent standard of living into a composite score right of HDI. The 2018
report classifies 189 countries into four broad segments very high, high, medium and low
right.
So, let us see these ones which are very high development right. So, it starts with like
Norway, so, it ranks between 0 and 1. So, Norway is 0.953, Switzerland 0.94 and Russia
is 0.816. So, these are some of the very high development ones and this is a very recent
data right and in terms of high development it is Iran, Mexico and till Ukraine right.
Medium development comes where you know the score is like 0.6 around 0.6 to 0.5; so,
0.55 and 0.7 in between that. So, Philippines, Egypt, Indonesia, India, Pakistan also lies
at the middle medium development and in low development you have some of the
African countries and you know which have a very poor score right.
So, these are some of the things the components as it says right. So, which I have said
mean years of schooling, expected years of schooling, gross national income per capita,
expected life expectancy at birth all these are the different indicators components.
(Refer Slide Time: 26:13)
So, between 1990 and 2017, India’s HDI value increased from 0.427 to 6, 0.640; this
was a very good sign, an increase of nearly 50 percent and indicator of the country’s
remarkable achievement. So, this is the time if you can remember 1991 when India had
gone for the LPG scheme right – Liberalization Privatization Globalization.
Although there are several criticisms against state or for it, but I am a stand supporter
because at that point of time which India was going through so, at that point of time that
was a great savior for the Indian economy right. Lifting millions of people out of poverty
according to the HDI report released by the UNDP right. Between 2012 and 17 Libya,
the Syrian Arab Republic and Yemen had falling HDI values; because the direct effect of
violent conflict right. So, this is something you can see it from here right.
(Refer Slide Time: 27:12)
So, now this is the one which we are talking about. So, the human development index
how it has been shown – now, 2017 HDI so, this is the number of people. So, very high
human development, high human development, medium and low human development
and the this is the scores right, the height is the score basically. So, as you can see the
height of the slice reflects its HDI value and this is the population right. So, how much
people are there.
So, you can see from here the global population increased from 5 billion to 7.5 billion in
this time period right. The number of people in low human development fell from 3
billion to 926 million or from 60 percent of the global population to 12 percent. So, that
is a very good sign right the number of people in high and very high more, than tripled
from 1.2 billion to 3.8 billion or from 24 percent to 51 percent.
So, you can see that because of the trade because of the international business the more
economic you know achievements are there, the policies are favorable, the countries
open up there is no doubt that the and with education and all. The you know economic
condition the social condition in the countries are growing right.
So, we can say for an instance that international trade, international business has a vital
role to play in the growth of a nation right and countries were still doubting it and trying
to stay in isolation would suffer from it maximum and they would not be able to join the
momentum and gain the advantage take the advantages. Yes, criticisms are always there,
but it has been seen empirically that this has had a tremendous positive achievement and
success on every country.
And, yes the poor have been poor, but they have not become more poorer which is the
criticism that generally done right. They have been poor, yes, they have been not to
exploit the situation in a way as maybe the developed economies have done, but it does
not mean they have become still poorer right. And, so, we can see that these are the
factors that affected and every country should try to take as much as advantage as
possible which India has done.
And, we can see and even when I am again finishing my today’s lecture Abhijit Banerjee
who has been given the Nobel Prize for economics with his wife Duflo has talked about
his study has been on an experimental you know analysis of poverty elevation right. So,
here again they have studied how poverty elevation can be done right with some good
economic policies and rules and regulations right. So, this is all we have for the day.
Thank you very much.