Lesson 2 Income Level and the World Market
In assessing the potential of a market, people often look at its income level since it provides clues about the purchasing power of its residents. The concepts national income and national product have roughly the same value and can be used interchangeably if our interest is in their sum total which is measured as the market value of the total output of goods and services of an economy in a given period, usually a year. The difference is only in their emphasis. The former stresses the income generated by turning out the products while the latter, the value of the products themselves. GNP (Gross National Product) and GDP (Gross Domestic Product) are two important concepts used to indicate a country’s total income. GNP refers to the market value of goods and services produced by the property and labor owned by the residents of an economy. This term was used by most governments before the 1990s. GDP measures the market value of all goods and services produced within the geographic area of an economy. It has been preferred by most countries since the 1990s.
The difference between GNP and GDP is that the former focuses on ownership of the factors of production while the latter concentrates on the place where production takes place. For example, the dividend returned by the subsidiary of Microsoft in China is included in the US GNP but not in its GDP. And the production of the same subsidiary is included in China’s GDP but not in its GNP. The difference between GNP and GDP can be ignored since it is very small in most cases. People can use whichever term that is more easily available and they can compare a country’s GNP and another country’s GDP without worrying that the result would be terribly distorted. For instance, in 1996, the US GNP was 7637.7 billion US dollars and its GDP was 7636 billion US Dollars, a difference of only 0.02%. And in 1999, China’s GNP was 8042.28 billion yuan Reminbi and its GDP was 8191.09 billion yuan, with a difference of 1.8%, still insignificant though larger than the US figure.
In assessing the potential of a country as a market, people often look at per capita income. Similar to the case of national income and national product, per capita income and per capita GDP do not have much difference. So let’s use per capita GDP to illustrate an economy’s income level. It is calculated by dividing its total GDP by its population. Total GDP indicates the overall size of an economy, which is important in market assessment for durable equipment or bulk goods such as grain, steel, or cement. Per capita GDP reveals the average income level of consumers, which is important then marketing consumer durables. For example, China has a large GDP of roughly USD 1.4 trillion in 2003, being the seventh largest economy in the world. If adjusted by PPP, the figure would probably be as large as USD 6.4 trillion, accounting for 12% of the world’s total and ranking the second only after the USA. So China is not only a newly emerging producer but also an important newly emerging market. However its per capita GDP is still fairly low, just a bit over USD 1100. Though $1000 per capita income is believed by experts to be the level at which consumerism begins to emerge, the Chinese figure is still thrather low, ranking only the 111 in the world. In contrast, Singapore has a GDP of
roughly a bit over$ 100 billion, but a per capita income as high as $ 32 810. Obviously China and Singapore represent two different kinds of markets.
Business people are also concerned about the income distribution of a market, i.e. the proportions of its rich, middle income and poor people. Producers of quality electrical appliances such as color TVs are interested in the size of a country’s middle class, while manufacturers of expensive cars such as Rolls-Royces may want to know the number of its millionaires.
Countries of the world are divided by the World Bank into three categories of high income, middle income and low income economies. Those enjoying annual per capita income of $9386 and above are classified as high income countries. This group comprises three types of countries. The first type includes most members of the organization for economic cooperation and development (OECD). The second type are
rich oil producing countries of the middle east such as Kuwait, Saudi Arabia, and the united Arab emirates. The third type consists of small industrialized countries or regions such as Israel, Singapore, Hong Kong and Taiwan. High income countries often have good infrastructure, high purchasing power, advanced technology, efficient management, and favorable environment for trade and investment. They often prime markets for expensive consumer goods and are both attractive sources and destinations of investment.
Countries with annual per capita income below $9386 but above $765 are regarded as middle income countries. Included in this category are most east European countries and most members of the commonwealth of independent states, six OECD members are not up to the level of high income countries (Czech, Greece, Hungary, Mexico, and turkey), quite a number of Latin American countries and some comparatively developed countries in Asia, such as Indonesia, Malaysia, the Philippines, and Thailand. Among the African countries, South Africa and oil producing Libya, Nigeria and Algeria belong to this category. China with a per capita income of over $1100 is a middle income country though it was a low income country just a few years ago.
Lower income countries are those that have per capita incomes of only $765 or even less. Most African countries, some Asian countries and a few Latin American countries are included in this group. These countries usually have poor infrastructure, low consumer demand and unfavorable business environment. But that does not mean they should be neglected in international business activities, because they constitute markets for lower priced staple goods, provide cheap labor and are often rich in resources. What is more important, market is something to be developed. Once tapped, the business potential of these countries will one day become real business opportunities.
The term Triad refers to the three richest regions of the world the united stated, the European Union and Japan that offer the most important business opportunities. Any international enterprise must bear Triad in mind if they want to be successful in the increasingly competitive world market.
With a per capita income of about $30000, the United States is the richest country in the western hemisphere. Though the per capita income of a few small countries like Switzerland is much higher than that of the United States, the overall size of the US economy of about $10 trillion GDP, roughly a quarter of the world total, coupled with its political stability puts the country on a unique position in the world. It accounts for about 15% of world visible and invisible trade. The US dollar is the invoicing currency for about half of the international transactions and is an important component of foreign currency reserves of the world. The United States has been regarded by many people as a safe haven who tend to keep their wealth in US dollar when they lose confidence in the value of their own currency. And for many years the country remained the largest recipient of foreign investment. Over 160 of the world’s 500 largest corporations have their headquarters in the United States including 24 of the top 100. The country’s large middle classes make it an attractive market for enterprises all around the globe.
The second component of Triad is Western Europe that mainly refers to the European Union. With an average per capita income of over $20000, all the members before its eastward expansion are classified as high income countries. Its total GDP of over 10 trillion US dollars is the largest, larger than that of the United States. Germany, France, Britain and Italy are the four richest, most populous and developed countries of EU. These countries are each an attractive market, and combined they constitute the largest rich market in the world. In the present intensely competing world, it is necessary and beneficial to diversify our major markets, and the importance of EU as on leg of Triad cannot be over-stressed.
Japan is the third component of Triad and the second largest economy of the world. It is an important supplier of high tech products and a major importer of raw materials. While exports have greatly spurred Japan’s development, trade only accounts for a relatively small proportion of its GDP. Japan remained a target of criticism for engaging in unfair trade practices. The large trade surplus has enabled it to invest heavily abroad and for years it has been the largest creditor country of the world. With mutually complementary economy, Japan and china are major trade partners, and the two countries are close neighbours separated only by a strip of water. Sino-Japanese business relations are therefore of great importance to both countries.
Some people extend the scope of Triad to include Canada and name the broadened grouping Quad. With the world’s second largest territory, Canada is rich in natural resources and its export accounts for nearly 40% of its GDP. The percentage is much higher than those of other members of the Group of Seven and suffices to show the importance of trade to the country. Sharing a very long common border along which most of the Canadian people live, Canada and the United States, with their respective rich market, enjoy the largest single bilateral trade in the world.
So far as China is concerned, other markets we should pay particular attention to are those around us: the Four Tigers, the ASEAN countries, Russia, India, and a bit farther away Australia. These countries or regions either have rich consumers and offer good business opportunities or are developing fast with very promising market potential. And their geographical proximity to China is a great advantage for us in developing business relations with them.
Despite the above observations, it does not mean we can neglect other markets. Different markets offer different opportunities and it is not a good idea to tie one’s business to only a few markets. The best policy is to develop business opportunities wherever advantageous while keeping in mind the key markets.