Econ 310, Week 3 notes
Econ 310, Week 3 notes Eco 310
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This 16 page Class Notes was uploaded by Tori Notetaker on Tuesday February 9, 2016. The Class Notes belongs to Eco 310 at Murray State University taught by Mary Reed in Spring 2016. Since its upload, it has received 67 views. For similar materials see Issues in the Global Economy in Economcs at Murray State University.
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Date Created: 02/09/16
Week 3, Chapters 3 and 4 Chapter 3 Key Terms Gross National Income Yardstick for measuring economic activity for a country, this measures the total annual income of a nations residents Purchasing Power Parity Adjustments in gross domestic product per capita to reflect differences in the cost of living Human Development Index Attempt by the United Nations to assess the impact of a number of factors on the quality of human life in a country Innovation Development of new products, processes, organizations, management practices, and strategies Entrepreneurs Those who first commercialize innovations Deregulation Removal of government restrictions concerning the conduct of a business FirstMover Advantages Advantages that accrue to early entrants into a market LastMover Disadvantages Handicaps experienced by being a late entrant into a market Political Risks the likelihood that political forces will cause drastic changes in a country’s business environment that will adversely affect the profit and other goals of a particular business enterprise Economic Risk Likelihood that events, including economic mismanagement, will cause drastic changes in a countries business environment that will adversely affect the profit and other goals of a particular business enterprise Legal Risk Likelihood that a training partner will opportunistically break a contract or expropriate intellectual property rights Key Concepts (From text and lecture) Explain what determines the level of economic development of a nation. Differences in Economic Development o GNI does not consider the differences in cost of living and can be misleading Can be adjusted with purchasing power to account for such differences (PPP) o Economic Data for select countries (see chart 3.1 on page 64) Large amounts of activity may be from unrecorded cash or bartered transactions These transactions make up the Black (or shadow) economy o Not an illegal form of economy, it’s just not formal and is therefore not recorded o India’s Shadow economy makes up about 50% of GNI o 10% in the UK and France o Broader Conceptions of Development: Amartya Sen Development should be assessed less by material output measures (GNI) and more by what people actually enjoy Such as specific freedoms a community practices Development, according to Sen, requires the removal of: Poverty, tyranny, poor economic opportunities, systematic social deprivation, and neglect of public facilities Political success requires democratization Basic health care as well as education for children and women are a necessity for developing higher income levels HDI is based on three measurements: Life expectancy at birth, educational attainment (adult literacy and enrollment in an education system), and whether average incomes meet basic needs Political Economy and Economic Progress o Innovation and Entrepreneurship are engines of growth Innovation and entrepreneurial activity help to increase economic activity by creating new products and markets that did not exist Increasing productivity of labor and capital→ Boosting economic growth in turn “If a country’s economy is to sustain longrun economic growth, the business environment must be conducive to the consistent production of product and process innovations and to entrepreneurial activity” p.68 o Innovation and Entrepreneurship Require a Market Economy Offer greater incentives for Innovation and Entrepreneurship than in a planned or mixed economy The individual is free to make money out of an idea by starting a business o Existing businesses are free to improve their operations through innovation In a planned economy the state owns all means of production Leaves few economic Incentives when all gains go to the state rather than the individual With the lack of economic freedom and incentives for innovation this typically leads to stagnation More economic freedom = more economic growth o Innovation and Entrepreneurship Require Strong Property Rights Without them, ideas are “stolen” and incentive for growth is tarnished Hernando de Soto argues: the developing world will fail to reap the benefits of capitalism until property rights are defined and protected o The key problem isn’t risk of expropriation, but the inability to establish a legal title of their property o Limiting human freedom suppresses human development o The required Political System Democracy is argued to be the best political system, but five undemocratic countries have the fastest growing economies of the last 30 years “I do not believe that democracy necessarily leads to development. I believe that a country needs to develop discipline more than democracy. The exuberance of democracy leads to undisciplined and disorderly conduct which is inimical to development” – Lee Kuan Yew o Economic Progress Begets Democracy The fastest growing Asian economies adopted a more democratic based government over the past three decades May not be the cause of economic progress, but is a common factor in growth It is believed that once China has a free market system, individual freedom and democracy will follow o Geography, Education, and Economic Development Jeff Sachs argues that favorable geography drives a societies ability to trade and promotes economic growth Adverse geographical conditions (i.e.: poor health, soil, and climate) have a negative impact on development He has tested the impact of geography and found: o Land locked countries grow slower than coastal economies by a growth rate of 0.7% each year o Tropical countries grew at <1.3% each year compared to countries within a temperate zone Nations that invest more in educations will have a higher growth rate An educated population is a productive population Sachs work suggests that the investment in education is the reason tropical south east Asian countries have overcome their geographical disadvantages Technology is also helping countries in the Middle East to reach out to the rest of the world, resulting in economic growth Identify the macro political and macroeconomic changes occurring worldwide. States in Transition o The Spread of Democracy Even with the spread of democracy and the decline of totalitarianism over the past 30 years, less than half of the world still isn’t considered free, according to Freedom House Russia’s democracy has been deemed as “not free” This is a result of concentrated political authority, harassment and intimidation of the media, and the politicizing of the country’s law enforcement system Three main reasons for the spread of Democracy Many totalitarian regimes have failed to deliver economic progress to the vast majority of their populations o Example: the collapse of communism in Eastern Europe due to the perception of wealthy growing economies in the West as compared to the stagnate economies in the East Information and Communication technologies o Reduce a state ability to censor information o Connecting different parts of the world → lessens isolation “Economic advances have led to increasingly prosperous middle and working classes pushing for democratic reforms” o South Korea: Several entrepreneurs and business leaders wanted an accountable government that would protect property rights and enforce contract o The New World Order and Global Terrorism “We may be witnessing the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” Francis Fukuyama Samuel Huntington argues that societies are simply just joining the modern world by adopting westernized products, not cultures Example: the modern world has brought back a resurgence of Islam in traditional Muslim countries to combat the alienation of modernization Terrorism is the effect of culture clash between civilizations o Also notes that illegal drug trade plays part o The Spread of Market Based Systems Transition of planned command economies to market based ones over the last 30 years Command and mixed economies have also failed to sustain economic performance like the command economies 7 of the 10 of Heritage Foundation’s economic freedom indicators 1. Extent to which the government intervenes in the economy 2. Trade policy 3. The degree to which property rights are protected 4. Foreign investment regulations 5. Taxation rules 6. Freedom from corruption 7. Labor freedom o The higher a countries score with these indicators, the more closely its economy represents the pure market model Economic and political freedom do not equate Describe how transition economies are moving toward marketbased systems. The Nature of Economic Transformation o Deregulation Before the collapse of communism, countries in a command economy held a right reign over prices and output Private enterprises couldn’t operate in most sectors of economy o Restricting the direct investment by foreign enterprises Removed price controls, abolished laws regulating establishment and operations of private enterprises, relaxing restrictions on FDI and international trade In mixed economies the state set prices, owned businesses, limited private enterprise, restricted investment by foreigners, and restricted international trade o Privatization Increased greatly with the fall of deregulation Seen as a way to stimulate gains in economic efficiency by giving new private owners a powerful incentive to search for increases in productivity, to enter new markets, and to exit losing ones A privatization movement started in the 1980’s when Margaret Thatcher sold stateowned assets British Telecom This ensures that the privatized entities would face significant competition and thus would have to improve their operating efficiency to survive o Legal Systems As noted before, legal systems that enforce contracts, property rights, etc., play a big role as an incentive for production, efficiency, and innovation amongst enterprises resulting in economic growth Implications of Changing Political Economy o Many critics blame the 20082009 global financial crisis on a lack of regulation o Implications for business that have emerged in the last 50 years The western economy is no longer completely “offlimits” to the Eastern world (and Latin America) Within the next 15years China and the U.S. will most likely become the world’s largest economies o Risks There is no guarantee that democracy will thrive in many of the world’s newer democratic states, particularly if these state have to grapple with severe economic setbacks Totalitarian dictatorships could return Multipolar world (→ will lead to unstable economies) The global shift toward marketbased economic systems would stall Explain the implications for management practice of national difference in political economy. Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally o Benefits “The longrun monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) or consumers in that market, and the likely future wealth of consumers” Low living standards are equal to limited purchasing power and a small market that may not be a great investment unless it’s got better prospects down the road th o South Korea → hopped up to the 15 largest economy in 2011 “early entrants, who invest, into potential future economic stars may be able to reap substantial firstmover advantages, while late entrants may fall victim to latemover disadvantages” Looking at property rights for investment o Respected property rights = good potential investment o Weakly enforced property rights = an easily corrupted market o Costs A company might have to pay off political or economic leaders in order to operate in a country The need to pay bribes will be greater in “totalitarian” states than in democratic ones It would be more costly to invest in primitive or underdeveloped countries that lack infrastructure The firm would have to provide said infrastructure and supporting businesses Legal Cost factors It can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, etc. o Risks Political risks tends to be greater in countries experiencing social unrest and disorder or in countries where the underlying mature of a society increases the likelihood of social unrest Social Unrest can consist of: strikes, demonstrations, terrorism, and so on More common in ethnically diverse countries with economic mismanagement and low standards of living Can cause abrupt changes in government making the politics and economy of the country unstable Economic risks → Inflation Global Financial Crisis The levels of business and government’s debt Lack of property rights o Overall Attractiveness “All other things being equal, the benefitcostrisktradeoff is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector debt. It is least favorable in politically unstable developing nations that operate with a mixed or command economy or in developing nations where speculative financial bubbles lead to excess borrowing.” Chapter 4 Key Terms CrossCultural Literacy Understanding how the culture of a country affects the way business is practiced Culture a system of values and norms that are shared among a group of people and that when taken together constitute a design for living Values abstract ideas about what a society believes to be good, right and desirable Norms Social rules and guidelines that prescribe appropriate behavior in particular situations Society group of people who share a common set of values and norms Folkways Routine conventions of everyday life Mores Norms seen as central to the functioning of a society and to its social life Social Structure the basic social organization of a society Group association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other’s behavior Social Strata Hierarchical social strategies based on family background, occupation, and income Social Mobility the extent to which individuals can move out of the social strata into which they are born Caste System system of social stratification in which social position is determined by the family into which a person is born and change in that position is usually not possible during an individual’s lifetime Class System System of social stratifications in which social status is determined by the family into which a person is born and by subsequent socioeconomic achievements, mobility between classes is possible Religion System of shared beliefs and rituals concerned with the real of the sacred Ethical Systems Coherent collection of beliefs about the right way to behave in a society Power Distance theory of how a society deals with the fact that people are unequal in physical and intellectual capabilities. High power distance cultures are found in countries that let inequalities of power and wealth; low power distance cultures are found in societies that try to play down such inequalities as much as possible Individualism vs Collectivism theory focusing on the relationship between the individual and his/her fellows in individualistic societies, the ties between individuals are loose and individual achievement is highly values; in societies where collectivism is emphasized, the ties between individuals are tight, people are born into collectives, such as extended families, and everyone is supposed to look after the interests of his/her collective Uncertainty Avoidance Extent to which cultures socialize members to accept ambiguous situations and to tolerate uncertainty Masculinity vs Femininity theory of the relationship between gender and work roles. In masculine cultures, sex roles are sharply differentiated and traditional “masculine values” such as achievement and the effective exercise of power determine cultural ideals; in feminine cultures, sex roles are less sharply distinguished and little differentiation is made between men and women in the same job. Longterm vs Shortterm Orientation the theory of the extent to which a culture programs its citizens to accept delayed gratification of the material, social, and emotional needs. It captures attitudes toward time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors Ethnocentrism behavior that is based on the belief in the superiority of one’s own ethnic group or culture; often shows disregard for contempt for the culture of other countries Key Concepts (From text and lecture) Explain what is meant by the culture of a society. What is Culture? o Essentially how people interact based on their values, but there are several different definitions o Values and Norms Values Include a societies attitudes towards concepts of individual freedom, democracy, truth, justice, honesty, loyalty, social obligations, collective responsibility, roles of women, love, sex, marriage, etc. People are emotionally invested in their values and will die for them Norms Folkways → social conventions about dress code, social manners, what utensils to eat with, neighborly behavior, etc. o People aren’t as distressed over them o Business people are expected to be familiar with the folkways of different cultures o Time equals money (western world concept) vs schedules are a guideline of how to spend time (eastern world concept) o Rituals and symbolic behavior Example: A Japanese business man will hand another his business card using both hand while simultaneously bowing. It is expected for the recipient to analyze the card before giving his own in the same fashion. If he doesn’t follow the same procedure it is seen as rude. Mores → have greater moral significance than norms and folkways o Not to be violated o Consist of indictments against theft, adultery, incest, cannibalism o Enacted into the laws in most societies o Culture, Society, and the NationState NationStates are political creations that may have several cultures within their borders However, cultures may also embrace several nations o Example: in the United States of America, one can talk about African American culture, Cajun culture, Chinese American culture, Hispanic culture, Indian culture, southern culture, and so on. Identify the forces that lead to differences in social culture. Social Stratification o Based on four principles: Social Stratification is a trait of society, not a reflection of individual differences Social Stratification carries over a generation to the next Social Stratification is generally universal, but variable Social Stratification involves not just inequality but beliefs too o Social Mobility A caste position is a specific occupation like a shoe maker is one caste and a butcher is another Castes are passed down through generations India still uses that caste system through marital opportunities Class system is open stratification You can work your way from the bottom of the hierarchy to the top and vice versa o British class system is the most rigid to move through and segregation between classes is huge “money still begets money” Religious and Ethical Systems o “Higher religious beliefs stimulate economic growth because they help to sustain aspects of individualism that lead to higher productivity o Christianity Most widely practiced religion in the world Roots in Judaism Mostly practiced in Europe and the Americas o Islam Second largest of the world’s religions More than 40 countries in a contiguous stretch of land through Africa, the middle East, China, and Malaysia in the Far East Roots in both Judaism and Christianity Worldly gain and temporal power are an illusion Major principles include: honoring and respecting parents, respecting the rights of others, being generous but not a squanderer, avoiding killing except for justifiable causes, not committing adultery, dealing justly and equitable with others, being of pure heart and mind, safeguarding the possessions of orphans, and being humble and unpretentious Business meetings may be put on hold in order to participate in prayer Islamic Fundamentalism Witnessed over the past 30 years Media associate Islamic fundamentalism with terrorism, militants, and several violent attacks throughout the world Islam teaches peace, justice and tolerance and is explicitly against violence Has spread as a “cultural anchor” through modernization o Religious studies have increased, women are going back to their roots in traditional garb o Fundamentalists are gaining political power and are trying to make Islamic law the law of the land o Hinduism Mostly in India World’s oldest religion Dharma→ a moral force in society requires the acceptance of certain responsibilities Karma →the moral state of a person’s karma(the progression of their soul) determines the challenges they’ll face in the next life Nirvana → state of complete spiritual perfection that stops reincarnation Achieved by leading a severe ascetic lifestyle of material and physical selfdenial, devoting life to a spiritual rather than material quest o Buddhism Does not support the caste system Is not supportive of extreme ascetic behavior as seen in Hinduism o Confucianism Teaches the importance of obtaining personal salvation through right action Confucianism cannot be characterized as a religion Built around an ethical code that sets guidelines for relationships with others Language o Spoken Language “Because language shapes the way people perceive the world, it also helps define culture.” Countries with more than one language often have more than one culture o For some it causes divide (French speaking Canada vs English speaking Canada), while others are able to find harmony (In Switzerland there are four spoken languages) o Unspoken Language Nonverbal cues Personal space, hand gestures, etc. Education o Supplements socializing the young into the values and norms of society, and basic facts of social and political natures, as well as obligations of citizenship o “The availability of a pool of skilled and educated workers seems to be a major determinant of the likely economic success of a country.” o “The general education level of a country is also a good index of the kind of products that might sell in a country and of the type of promotional material that should be used.” Identify the business and economic implications of differences in culture Social Structure o The Individual Individualism is more than political philosophy, “In western societies an individual is the building block of social organization.” Western value systems are based on individual achievement Individuals work to promotions and increased salaries through their knowledge, skills, and experience Emphasis on individual performance (in western societies) High levels of entrepreneurial activity High degree of managerial mobility between companies o Bad for the company as it lacks commitment and loyalty o Good for the individual as it provides exposure to different ways of doing business o The group Primary unit of social organization Example: In japan, the social status of an individual has traditionally been determined as much by the standing of the group to which he or she belongs as by his or her individual performance. Traditionally, the group was the family or village the person belonged to, today, it’s the company or work team that the person is in. Deep emotional attachment forms as an individual identifies himself with the group Creates efficiency and drive within a company and discourages movement between companies Social Stratification o Significance Significant if social strata affects the operation of business organizations Class consciousness shapes people relationships with members of other classes The hostility between upper and lower classes in Great Britain for example transfers into companies, making cooperation difficult which can then create difficulties for companies based in such countries to establish a competitive advantage in the global economy. Economic Implications of Religions o Christianity Of the main branches of Christianity, Protestantism has the most important economic implications according to Max Weber “Business leaders and owners of capital, as well as the higher grades of skilled labor, and even more the higher technically and commercially trained personnel of modern enterprises, are overwhelmingly protestant.” Protestant ethics emphasizes hard work, wealth creation, and frugality which help to facilitate the development of capitalism Unlike the catholic church, Protestantism allowed the individual more religious freedom that then translated into economic freedom o Islam The Koran is “pro freeenterprise” The protection of the right to private property All property is a favor from Allah Owners of property are considered trustees Open to international business so long as profits aren’t made unjustly, through exploitation or deception, or by breaking contract No payment or receipt of interest Mudarabah → instead of the bank charging a business interest on a loan, it shares in the business’ profits Murababa → when a firm want to purchase something (say equipment) using a loan, the bank will buy the equipment for the firm, who will then purchase it back from the bank at a marked up price o Hinduism The ascetic principles do not encourage entrepreneurial activity in pursuit of wealth creation Max Weber argued that Hindu values have negatively impacted economic development of postindependent India Although modernIndia is an entrepreneurial society and is rapidly growing its economy (especially within information technology) Mobility between castes is not supported in tradition because you achieve this through spiritual progression and reincarnation o Buddhism No cultural stress is put on entrepreneurial activity like it is in Protestantism, however, the lack of a supported caste system and extreme ascetic behavior allows for a more fertile entrepreneurial environment. This has led to high levels of innovation and entrepreneurial activity. o Confucianism Loyalty to ones superiors is an obligation Reduces conflict between manager and laborer Guanxi → is a relationship, it refers to networks that are supported by reciprocal obligations “You scratch my back, I’ll scratch yours” Importance is attached to honesty “When companies can trust each other to not break their contracts, the costs of doing business are lowered.” Recognize how differences in social culture influence values in business. Culture and Business o Management process and practices may need to bary according to culturally determined workrelated values o Hofstede’s Dimensions Power Distance, Individualism vs Collectivism, Uncertainty Avoidance, Masculinity vs Femininity, Longterm vs Shortterm Orientation There is talk of a movement to add a sixth dimension referred to as Indulgence vs Restraint o Indulgence refers to a society that allows relatively free gratification of basic and natural human drives related to enjoying life and having fun o Restraint refers to a society that suppresses grativiation of needs and regulates it by means of strict social norms Hofstede does not take into note that several nations have different cultures within them and cannot fall under the same dimensions His researchers were also biased in that they were from parts of the world with similar cultures and only worked within the same company (IBM) Demonstrate an appreciation for the economic and business implications of cultural change. Cultural Change o Culture is always evolving The idea of women holding senior management positions would have been scoffed at 50 years ago Japan has transitioned into a more individualistic culture rather than focusing soley on the group o Evidence that a shift away from collectivism towards individualism is advancing economic progress o As countries get richer there’s a shift from traditional to secular rational values. As well as survival values to wellbeing values Traditional → are linked to religion, family, and country Survival → values people hold oto when struggling for survival, stressing economical and physical security rather than selfexpression o Advances in transportation are helping create conditions for merging cultures The Convergence Hypothesis: A slow but steady convergence occurring across different cultures toward some universally accepted values and norms CrossCultural Literacy and Competence o Crosscultural Literacy In order for a business to be successful in another country, it must be able to adapt to other value systems and norms as well as learning what those consist of in advance Employing local citizens can help an international enterprise with assimilation Making sure executives are adept enough to understand how differences in culture affect business can create more efficient production and working contracts Be on guard against ethnocentrism o Culture and Competitive Advantage The value systems and norms of a country influence the costs of doing business in that country Those costs establish a competitive advantage in the global market place “Emphasis on group affiliation and loyalty encourages individuals to identify strongly with the companies in which they work. This in turn fosters an ethic of hard work and cooperation between management and labor.” o Two reasons Culture and Competitive Advantage are important in International Business Suggest which countries are likely to produce the most viable competitors Implications for the choice of countries in which to locate production facilities and do business
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