the global economic environment

Chapter 2 -- summary

The economic environment is a major determinant of global market potential and opportunity. In today's global economy, capital movements are the key driving force, production has become uncoupled from employment, and capitalism has vanquished communism. Based on patterns of resource allocation and ownership, the world's national economies can be categorized as market capitalism, centrally planned capitalism, centrally planned socialism, and market socialism. The final years of the 20th century were marked by a transition toward market capitalism in many countries that had been centrally controlled. However, there still exists a great disparity among the nations of the world in terms of economic freedom.

Countries can be categorized in terms of their stage of economic development: low income, lower -- middle income, upper -- middle income, and high income. Countries in the first two categories are sometimes known as less developed countries (LDCs). Upper middle income countries with high growth rates are often called newly industrializing economies (NIEs). Several of the world's economies are notable for their fast growth; the big emerging markets (BEMs) include China and India (low income), Poland, Turkey, and Indonesia (lower middle income), Argentina, Brazil, Mexico, and South Africa (upper middle income), and South Korea (high income). The group of seven (G7) and Organization for Economic Cooperation and Development (OECD) represent two initiatives by high income nations to promote democratic ideals and free-market policies throughout the rest of the world. Most of the world's income is located in the Triad, which is comprised of Japan, the United States, and Western Europe. Companies with global aspirations generally have operations in all three areas. Market potential for a product can be evaluated by determining product saturation levels in light of income levels.

A countries balance of payments is a record of its economic transactions with the rest of the world; this record shows whether a country has a trade surplus (value of exports exceeded by you of imports) or a trade deficit (by you of imports exceeds value of exports). Trade figures can be further divided into merchandise trade and services trade accounts; a country can run a surplus in both accounts, a deficit in both accounts, or a combination of the two. The US merchandise trade deficit was 549 billion in 2003. However, the US enjoys an annual service trade surplus. Overall, the United States is a debtor; Japan enjoys an overall trade surplus and serves as a creditor nation.

Foreign exchange provides a means for settling accounts in different currencies. The dynamics of international finance can have a significant impact on the nation's economy as well as the fortunes of individual companies. Currencies can be subject to evaluation as a result of actions taken by a countries central banker. Currency trading by international speculators can also lead to evaluation.

When a country's economy is strong or when demand for its goods is high, its currency tends to appreciate in value. When currency bodies fluctuate, firms face various types of economic exposure. These include transaction exposure and operating exposure. Firms can manage exchange-rate exposure by hedging, for example, by buying and selling currencies and the forward market.