Global Business Environment
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Chapter 3 : Economic Environment
Classification of Economies
Classification based on ownership of the means of production
Classification based on Levels of Economic Development
Economic
indicators
GDP and GNP, Income Distribution, Inflation and Index
Numbers, Interest Rates, Unemployment, Foreign Exchange Reserves,
Foreign Exchange Reserves
Economic integration
Levels of Economic
Integration
Chapter Summary
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Economies of countries can be classified based on parameters
such as ownership of means of production and levels of economic development.
Based on the ownership of the means of production, economies can be classified
into capitalist economy, socialist economy, and mixed economy. Capitalism is an
economic system characterized by private ownership of productive goods and
services.
Socialism is an economic and political system in which private property is
abolished and the means of production (i.e., capital and land) are collectively
owned and operated by the state. In a mixed economy, some of the means of
production are owned by the government while some is held by private
individuals. Based on their level of development countries can be classified
into “developing countries” and “developed countries.” |
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The World Bank relies on income levels to classify countries into these two
categories. GDP is the value of the total final output of all goods and
services produced in a single year within a country’s boundaries. GNP is GDP
plus incomes received by residents from abroad minus incomes claimed by
nonresidents. Inflation is a general price rise in prices across the
economy.
It is different from the rise in price of a particular good or service. WPI
is an index of the prices of products and services consumers buy. The amount
of inflation in the economy depends on the level of monetary demand in the
economy, and amount of demand in the economy relative to available supply of
goods and services. The interest rate is the rate charged or paid for the
use of money, normally expressed as a percentage.
The unemployment rate is the number of unemployed people as a percentage of
the total labor force. The amount of foreign currency held by a nation's
banking system as a reserve base, or financial backup, for its international
transactions and payments is referred as foreign exchange reserves. Regional
trade agreements (RTAs) are usually entered into by two or more countries
from the same region. The most visible objective behind these agreements is
to reduce trade barriers among member countries.
Based on the level and nature of integration, RTAs can be classified into
four categories: free trade area, customs union, common market, and economic
union. A free trade area is a cooperative arrangement among two or more
nations, whereby trade barriers are removed among the members. A customs
union is formed when two or more countries agree to remove all barriers to
free trade with each other, while establishing a common external tariff
against other nations.
A common market is a regional grouping of countries that levies common
external duties on imports from nonmember countries, but which eliminates
tariffs, quotas, and other miscellaneous government restrictions on trade
among member countries. An economic union is an agreement between two or
more countries that allows the free movement of capital, labor, all goods
and services, and involves the harmonization and unification of social,
fiscal, and monetary policies.
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Short Case Studies / Caselets