Chapter 4

The Economic
Environment

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 The World Economic Pyramid

Annual per Capita Income* Tiers Population in Millions

More Than $20,000 75-100

$1,500-$20,000 1,500-1,750

Less Than $1,500 4,000

*Bases on Purchasing power parity in U.S. $.

SOURCE: U.N. World Development Reports

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 Major Industrialized Countries
of the World

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 Market Characteristics

Population demographics
Age distribution, life expectancies,
household size, urbanization.
Income
Distribution of low, medium, and high incomes.
Gross domestic product per capita.
Purchasing power parity.
Consumption patterns
Income spent on necessities and luxuries.
Product saturation or diffusion.
Product form differences.

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 Market Characteristics (continued)

Availability and quality of infrastructure

Rail traffic networks for distribution capabilities.
Communication systems for marketing.
Energy (electrical and fuel) consumption.
Foreign involvement in the economy
Degree of foreign direct investment in country or in a
specific industry.
Rules governing foreign investment.
Impact of the economic environment on social development
Urbanization, life expectancy, literacy rates, etc.
Physical Quality of Life Index (PQLI).

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 Regional Economic Integration

Levels of economic integration

Free Trade Area
Least restrictive.
Goods and services are freely trades among all members. Each
country maintains its own trade barriers for nonmembers.
Customs Union
Members establish a common trade policy with respect to
nonmembers.
Common Market
Factors of production mobility is emphasized. A common external
tariff is adopted.
Economic Union
Integration and harmonization of economic and monetary policies is
achieved leading to political union.
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 Free Trade Area

Eliminates tariff and quota barriers

among member countries.
Each country is free to set its own
tariff and quota barriers against
nonmember countries.
Can be formed for certain classes
of goods or services only.

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 Customs Union Area

Tariff and quota barriers among member countries

are eliminated.
Member countries establish common tariff and trade
barriers against nonmember countries.
Tariff revenues are shared among members
according to a prescribed formula.

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 Common Market Area

No trade barriers among member nations.

No restriction on the movement of labor, capital, or
technology across borders.
Member countries establish common tariff and trade
barriers against nonmember countries.

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 Economic Union

Has all the characteristics of a common market.

Harmonizes taxation.
Harmonizes government spending.
Harmonizes monetary policies.
Establishes a common currency.

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 European Integration

Expected economic growth from:

Eliminating transaction costs.
Economies of scale will be attained as production
becomes concentrated.
More intense competition from EU companies.
Operations from one country can be freely expanded to
other countries.
Products can be freely sold across borders to millions
of new consumers.
There is a Fortress Europe fear.

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 North America Integration

Is for purely economic reasons.

There are no constituencies for political integration.
NAFTA.
Maquiladoras.

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 NAFTA

The North American Free Trade Agreement (NAFTA)

created the worlds largest free market.
390 million U.S., Canadian, and Mexican
consumers and a total output of $10 trillion.

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 Free Trade Area of the Americas

An agreement to form a regional trading

zone stretching from Point Barrow,
Alaska to Patagonia, Argentina.

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 Integration in Asia

Association of Southeast Asian Nations (ASEAN)

East Asia Economic Group
Asia-Pacific Economic Cooperation (APEC)
South Asian Association for Regional Cooperation
(SAARC)

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 Integration in Africa and the
Middle East

Economic Community of West African States

(ECOWAS)
Afro-Malagasy Economic Union
East Africa Customs Union
West African Economic Community
Maghreb Economic Community
Gulf Cooperation Council (GCC)

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