The International Economic Environment

Chapter - 3
 Scope of the chapter
This chapter will discuss:
 The structural changes that have taken place in
the major economies of the world
 The move towards growing international
integration
 The changes that have occurred in the
macroeconomic environment
 The development of trading blocks.
 The role and evolution of international capital
flows
 Growth, the coordination of macroeconomic
policy and changing power structures of the
major economies
 Macroeconomic accounts

Definition of GDP:
Gross domestic product (GDP) is the market value of all
officially recognized final goods and services produced
within a country in a given period.

GDP per capita is often considered an indicator of a

country's standard of living

GDP per capita is not a measure of personal income

Under economic theory, GDP per capita exactly equals the
gross domestic income (GDI) per capita
 GDP measurement techniques

GDP can be determined in three ways, all of

which should, in principle, give the same
result. They are the product (or output)
approach, the income approach, and the
expenditure approach.
Example: the expenditure method:
GDP = private consumption +
gross investment + government spending + (
exports − imports), or
GDP= C+I+G+(X-M)
 Production approach

Market value of all final goods and services

calculated during 1 year . "
The production approach is also called as Net
Product or Value added method. This method
consists of three stages:
1. Estimating the Gross Value of domestic Output in
various economic activities;
2. GDP=Total Production within a country-Cost of
goods of the output.
2. Determining the intermediate
consumption, i.e., the cost of material,
supplies and services used to produce
final goods or services; and finally
3. Deducting intermediate
consumption from Gross Value to
obtain the Net Value of Domestic
Output.
 Income approach
" sum total of incomes of individuals living in a country during
1 year .“
National Income and Expenditure Accounts" divide incomes
into five categories:
•Wages, salaries, and supplementary labor income
•Corporate profits
•Interest and miscellaneous investment income
•Farmers’ income
•Income from non-farm unincorporated businesses
GDP=R+I+P+SA+W
R=Revenue; I=Investment; P=Profit; SA=Statistical
Adjustments; W=Wages.
 Expenditure approach

" All expenditure incurred by individuals

during 1 year . “
In economics, most things produced are
produced for sale, and sold. Therefore,
measuring the total expenditure of money
used to buy things is a way of measuring
production. This is known as the expenditure
method of calculating GDP.
Factors to be considered in comparing
inter- country GDP figures
•Larger countries tend to have higher
total GDPs, therefore a better
comparison is GDP per head or GDP
per capita
•GDP needs to be considered in real
terms rather than nominal terms
•GDP needs to be converted into a
common currency – American
dollars
•GDP figures can only include
factors on which there is information
•GDP figures do not make reference
to the distribution of income
between countries
•GDP figures make no reference to
the social costs of production
 GDP VS GNP
Factor GDP GNP
Stands for Gross Domestic Product Gross National Product

Definition: An estimated value of the An estimated value of the

total worth of a country’s total worth of production
production and services, on and services, by citizens of
its land, by its nationals and a country, on its land or on
foreigners, calculated over foreign land, calculated
the course on one year over the course on one year

Formula GDP = consumption + GNP = GDP + NR (Net

for investment + (government income inflow from assets
Calculatio spending) + (exports − abroad or Net Income
n imports) Receipts) - NP (Net
payment outflow to foreign
assets)
Uses: Business, Economic Business, Economic Forecasting
Forecasting
Application To see the strength of a To see how the nationals of a
country’s local economy country are doing economically

Layman Total value of products & Total value of Goods and Services
Usage: Services produced within produced by all nationals of a
the territorial boundary of a country (whether within or outside
country the country)

Country Qatar ($98,948) Qatar ($87030)

with Highest Bangladesh ($1909) Bangladesh ($ 840)
Per Capita
(US$):
 Macroeconomic goals
•A high level of economic growth
•A strong balance of payments
•A low level of inflation
•A low level of unemployment
•Stimulation of domestic economy:
•Reducing taxes
•Increasing the amount of money
•Erecting trade barriers
•.low interest rate
•Subsidy
•Low export tax
 The circular flow
Savings Leakages Taxation
Imports
Households

Payments
Goods Factor
for goods Factor
and income
and service
services service

Firms GOVT.
Govt.
Expenditure
Expenditure &
Investment Exports
Injections Exports
 Structural changes in major economies

By structural change we mean how the sectors in an economy

have changed. It is useful to give some broad definitions of these
sectors:
1. The primary sector includes activities directly related to
natural resources, for example farming, mining, and oil
extraction
2. The secondary sector covers production industries in the
economy such as manufacturing, the processing of materials
produced in the primary sector and construction
3. The tertiary sector includes all private sector services, for
example banking, finance, computing services and tourism as
well as public sector services such as health and defense
 Inflationary pressures
Inflation may be defined as a persistent increase in
prices over time- in other words, the rate of
inflation measured the changes in the purchasing
power of money.
One method of measuring inflation is the changes
in the Retail Price Index (RPI).
 The causes of inflation

•Increases in costs of labor that are not linked to

increases in labor productivity
•Increases in the costs of raw materials which
could come about different stages of the
economic cycle , where the demand for raw
materials may outstrip supply in the short term
•A deterioration in exchange rates which tends to
cause import prices to rise
 Economic cycle

Long economic cycle

Short economic cycle
Business cycle
Political cycle
 International trade
•Two of the oldest theories of international trade are:
1. Absolute advantage
2. Comparative advantage
•One driving force of international trade is mutual benefit
•Variations in the costs of production constitute another incentive for
international trade
•Local production factor is another reason of international trade
which consists of:
1. Favorable labor costs
2. Labor skills
3. Tax situations
 The role of state in the economy

The role of government in the economy:

 Controlling inflation
 Stable economic growth
 Reducing unemployment
 A favorable balance of payments.
 Stable exchange rate
 Control of government borrowing
 The role of state in the economy
Government are big consumers, spending
around one third of the total that all households
spend on goods and services.
Interest payments on these debts is an important
problem for countries.
During election years the budget tends to
deteriorate relative to the previous year, and that
the growth rate of the economy is relatively
higher.
 Unemployment
Full employment: If everyone who want a job and is
capable of doing a job is able to find one, then this is
called full employment . However, in most democratic
countries the ideal of full employment is a thing of the
past.
Reason behind increase of unemployment level:
 Benefit for the unemployed are more extensive.
 Labor costs consist of more than wage. (Tax)
 Unemployment
 As technology advances further there is an increasing
problem of labor being replaced by new technology – a
concept known as Technological unemployment.
 Increased unemployment also leads to a decrease in the
demand for goods and services causing further increases
in unemployment and still further reduction in demand.
Economists refer to this type of unemployment as cyclical
unemployment.
 Industries such as mining, ship building, agriculture and
so on, where demand for such products may well be met
by imports from other countries with businesses capable
of maintaining lower production costs caused Reason
behind increase of unemployment structural
unemployment.
 International Trade

 Benefit international trade:

 Specialization (Comparative advantage)
 It led the domestic firms achieving economies
of scale.
 Wide are of product choice.
 International Trade

 Recent trends:
 There has been growth in trade.
 Trade has become increasingly focused on
particular trading blocs.
 There should be specialization through trade.
 Some countries may lose from trade as their
particular historic advantage are eroded.
 International Trade

 Reaction:

 Subsidies on products produced in the

domestic market to reduce their prices down
to world competitive levels.
 Tariffs to push up the price of imports.
 Quotas to limit the supply of imports into the
domestic market.
 Voluntary export restraints to prevent the free
flow of goods between countries and enhance
their own goods and services.
 International Trade

 Affect to the firm for trade blocks:

 Internal
 External
Questions and Answers
THANKS