Case Analysis
bora
Session9-FinancialEnvironments-Outline.pdf
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Financial Environments
Economic Analysis pManagers should also consider nInflation nUnemployment nDebt nIncome distribution nPoverty nBalance of payments
Inflation pInflation na measure of the increase in the cost of living
pDeflation nwhen prices for products go down not up
Unemployment •Unemployment rate
•share of unemployed workers seeking employment for pay relative to the total civilian labor force
•Misery index •the sum of a country’s inflation and unemployment rates
Debt •Debt
•the total of a government’s financial obligations •internal debt •external debt
•Growing public debt signals •tax increases •reduced growth •rising inflation •increasing austerity
Income Distribution pIncome distribution nestimates the proportion of the population that earns various levels of income
pGini coefficient nmeasures the extent to which the distribution of resources deviates from a perfectly equal distribution
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•reduced growth •rising inflation •increasing austerity
Income Distribution pIncome distribution nestimates the proportion of the population that earns various levels of income
pGini coefficient nmeasures the extent to which the distribution of resources deviates from a perfectly equal distribution
p p
Poverty pPoverty the state of having little or no money and few or no material possessions nextreme poverty pless than $1.25 per day
nmoderate poverty pless than $2.00 per day
pToday the world population is 80% poor, 10% middle income, and 10% rich pBase of the Pyramid nFrugal engineering nhttps://www.youtube.com/watch?v=YRPOsxxk15I n
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Balance of Payments •Balance of payments
•reports a country’s trade and financial transactions with the rest of the world
•Current account •tracks merchandise trade
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Economic Growth: Good or Bad? •Pros
•Moral stability •Poverty reduction •Business dividend •Fiscal dividend •Peace dividend •Environmental benefits •Quest to excel •Life •Progress or decline
Economic Growth: Good or Bad?
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•Pros •Moral stability •Poverty reduction •Business dividend •Fiscal dividend •Peace dividend •Environmental benefits •Quest to excel •Life •Progress or decline
Economic Growth: Good or Bad? •Cons
•Growth privileges few •Growth is misleading •Growth threatens life •Growth destroys individuality •Current growth is unsustainable •Change the game
The BRICs •Brazil, Russia, India, China •Embody the accelerating success of the emerging economies •“Hot spots” for IB
The BRICs: KPIs •Just 30 years ago, these economies were devastated
•Hyperinflation in Brazil •Russia behind the Iron Curtain •Aggressive socialism in India expelled MNEs •China coming out of Cultural Revolution
•Now, catching up to the world’s top economies •Catch-up accelerated due to the slow-down of the developed economies during the financial crisis
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The BRICs: KPIs •Changes in consumer demand
•Growing middle class •GNI per capita crossing the threshold of $3,000 at which spending takes off
•Increased demand for brand and luxury goods •E.g., car ownership expected to increase 5- to 25-fold
The BRICs: Skeptics •Recency bias
•The delusion that current trends will continue indefinitely •Economic growth rates will slow •Low-cost labor and capital will become more expensive •Income will be distributed unequally and poverty will persist
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•Growing middle class •GNI per capita crossing the threshold of $3,000 at which spending takes off
•Increased demand for brand and luxury goods •E.g., car ownership expected to increase 5- to 25-fold
The BRICs: Skeptics •Recency bias
•The delusion that current trends will continue indefinitely •Economic growth rates will slow •Low-cost labor and capital will become more expensive •Income will be distributed unequally and poverty will persist •Unpredictable and game changing “black swan” events could occur
The BRICs: Moving Forward •Four pre-conditions to sustained macro growth
•Sound macroeconomic policies •Political institutions committed to transparency, fairness, and the rule of law
•Openness to trade and capital •Strong education systems
•BRICs generally meet these, though no one country meets all
The new BRICs •Other important emerging economies: MIST
•Mexico •Indonesia •South Korea •Turkey
Three Choices: Hard Peg, Soft Peg, or Floating pThe IMF classifies currencies into three categories pHard peg nvalue is locked into something and does not change ndollarization ncurrency boards
pSoft peg nmore flexible than hard peg nChinese Yuan is an example
pFloating nfloating or free floating nchange according to market forces
Determining Exchange Rates •Currency in a floating rate world
•Determined by supply and demand without government intervention •Demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets
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ncurrency boards pSoft peg nmore flexible than hard peg nChinese Yuan is an example
pFloating nfloating or free floating nchange according to market forces
Determining Exchange Rates •Currency in a floating rate world
•Determined by supply and demand without government intervention •Demand for a country’s currency is a function of the demand for that country’s goods and services and financial assets
Determining Exchange Rates •Currency in a fixed rate or managed floating rate world
•Do not automatically change in value according to supply and demand
•Regulated by central banks •Maintain reserve assets mainly in foreign exchange •Use these assets to intervene in markets •Buying and selling currency to influence its price •
Exchange Rates and Purchasing Power Parity pPurchasing power parity (PPP) na change in relative inflation between two countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar
pThe Big Mac Index p
Business Implications of Exchange Rate Changes •Marketing Decisions
•when the value of a country’s currency rises, exporting becomes more difficult as the product becomes more expensive in foreign markets
• •Production Decisions
•might locate production in a weak currency country because the initial investment is cheap and it will make a good base for exports
The Future: The Dollar, The Euro, The Yuan pEurope nthe euro should take market share away from the dollar as the prime reserve asset assuming the problems in Greece and other countries are controlled
pAsia nChina is moving forward to establish the yuan as a major world currency
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•Production Decisions •might locate production in a weak currency country because the initial investment is cheap and it will make a good base for exports
The Future: The Dollar, The Euro, The Yuan pEurope nthe euro should take market share away from the dollar as the prime reserve asset assuming the problems in Greece and other countries are controlled
pAsia nChina is moving forward to establish the yuan as a major world currency
pLatin America nemerging market currencies should strengthen as commodity prices recover
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