oil exploration and refining businesses the world over operate as virtual
oligopolies。 Frequently the temptation to act in a cartel to fix prices is too
great to resist。 BA had colluded with Virgin Atlantic on at least six occasions
between August 2004 and January 2006； the Office of Fair Trading said。
Economics 199
Between August 2004 and January 2006； British Airways and Virgin
Atlantic； the dominant players on the route from London to US cities；
colluded with each other to fix the price of fuel surcharges。 During that
time； surcharges rose from ￡5 to ￡60 per ticket。 British Airways had to set
aside ￡350 million to deal with fines in the UK and United States。
Perfect petition
This is a utopian environment in which there are many suppliers of identical
products or services； with equal access to all the necessary resources
such as money； materials； technology and people。 There are no barriers to
entry； so businesses can enter or leave the market at will and consumers
have perfect information on every aspect of the alternative goods on offer。
petitive markets
Sometimes referred to confusingly as monopolistic petition； this rests
between oligopoly and perfect petition； but is closer to perfect petition。
Here a large number of relatively small petitors； each with small
market shares； pete with differentiated products satisfying diverse
consumer wants and needs。
ESSENTIAL ECONOMICS
Despite the peting schools of thought on how business and the economy
interact； there is at least general agreement on the most important
factors。 True； there is much disagreement on how important these factors
are and even on how they can be influenced； but on the factors themselves
there is a measure of agreement。 MBAs will need a grasp of these key issues
in order to play a full role in shaping the strategy of their organization。
Economic growth
Government’s role in economic policy is generally accepted as being to steer
a path that ensures long…term growth without leading to a general rise in
prices （see Inflation； below）。 The underlying belief is that growth in goods
and services leads to a happier； more satisfied population； while spreading
democracy； diversity； social mobility and greater all…round tolerance。 Also；
the bigger the gross domestic product （GDP） the more guns and bombs a
country can afford； both to defend itself and to impose its will on others
who are weaker。 There is certainly evidence that people judge their wellbeing
by paring themselves to others； but unfortunately as ine
goes up； so do expectations。
200 The Thirty…Day MBA
There have been many a。。empts at creating a more prehensive
measure of economic health。 Gross National Happiness （grossin
ternationalhappiness/） and the Genuine Progress Indicator （
rprogress/sustainability_indicators/genuine_progress_indicator。htm）
are a。。empts to include a range of other factors such as life expectancy； crime
rates； pollution； long…term environmental damage； resource depletion and
ine distribution； for example。
GDP is the yardstick taken to measure the economy； even though that
doesn’t necessarily say much about the level of happiness in a country。
There are a number of ways of paring GDP both between countries and
between time periods and； needless to say； economists can’t agree which is
best。
Gross domestic product
GDP is the total market value of all final goods and services produced in
a country in a one…year period。 A country’s balance sheet； like that for a
business； shows the sources and uses of funds。 A country’s GDP is usually
arrived at using the expenditure method； using the equation GDP =
consumption （spending by consumers） ＋ gross investment （spending by
business） ＋ government spending ＋ （exports – imports）。 Each ponent
of expenditure plays a part in helping increase GDP and hence economic
growth。 （See Keynes above。）
The rate of growth of GDP ma。。ers greatly。 The UK and Europe’s longrun
GDP growth rate of around 2。5 per cent will lead to a doubling of the
countries’ wealth in around three decades。 China and India； whose growth
rate routinely exceeds 8 per cent； will see average wealth double in less
than one decade。 All other things being equal； panies looking to set up
overseas will head for the countries with rapid growth in GDP。
Gross domestic product per person
Measuring a country’s total GDP misses an important consideration – the
population。 If the growth in both GDP and population were uniform there
would be no problem； but that is not the case。 Britain’s country GDP grew
at 2。75 per cent between 2003 and 2007； but as the population grew sharply
too； GDP per person grew at a rather slower 2。1 per cent。 Japan with its
shrinking population also grew its GDP per head by 2。1 per cent； matching
that of Britain and beating the United States whose growth measured in
this way was only 1。9 per cent as opposed to the 2。9 per cent the United
States reported for the economy as a whole。
Economics 201
Gross domestic product at purchasing power
parity （PPP）
GDP； usually referred to as nominal GDP； is arrived at by the simple process
of adding up expenditure and does not reflect differences in the cost of
living in different countries or the currency exchange rate prevailing at the
time。 The same amount of GDP； in other words； can buy a lot more goods
and services in one country than another。 China’s GDP per person is about
￡1；000 nominal but ￡3；500 at PPP。 Calculating PPP is fraught with problems
as people buy very different baskets of goods and services。 One way round
the imperfections is to produce light…hearted a。。empts at showing PPP using
an external product mon to most countries。 The Economist has published
a Big Mac Index （BMI） since 1986； with a few variations such the Tall La。。e
index and a Coca…Cola map that showed the inverse relationship between
the amount of Cola consumed per capita in a country and the general
standard of health。 In 2007； monwealth Securities； an Australian bank；
created the iPod Index with much the same aim of calculating a proxy for
PPP on a country…by…country basis。
BUSINESS CYCLES
Economies tend to follow a cyclical pa。。ern that moves from boom； when
demand is strong； to slump； economists’ shorthand for a downturn。 The
death of the cycle has o。。en been claimed as politicians believe they have
bee be。。er managers of demand； but the ‘this time it’s different’ school
of thinking have been proved wrong time and time again。
The cycle itself is caused by the collective behaviour of billions of people
– the unfathomable ‘animal spirits’ of businesses and households。 Maynard
Keynes （see above） explained animal spirits as： ‘Most； probably； of our
decisions to do something positive； the full consequences of which will
be drawn out over many days to e； can only be taken as the result of
animal spirits – a spontaneous urge to action rather than inaction； and not
as the oute of a weighted average of quantitative benefits multiplied by
quantitative probabilities。’
Added to the urge to act is the equally inevitable herd…like behaviour that
leads to excessive optimism and pessimism。 Charles Mackay （Extraordinary
Popular Delusions and the Madness of Crowds）； Joseph De La Vega （Confusión
de Confusiones） and the more recent Irrational Exuberance 2nd edition （Robert
J Shiller） between them provide a prehensive insight into the capacity
for collective overreaction。 From the tulip mania in 17th…century Holland
and the South Sea Bubble （1711–20） to the internet bubble in 1999 and the
collapse in US real estate in 2008； the story behind each bubble has been
unfortably familiar。 Strong market demand for some modity （gold；
202 The Thirty…Day MBA
copper； oil）； currency； property or type of share leads the general public
to believe that the trend cannot end。 Over…optimism leads the public at
large to overextend itself in acquiring the object of the mania； while lenders
fall over each other to fan the flames。 Finally； either the money runs out or
groups of investors bee cautious。 Fear turns to panic selling； so crea