Download Economic Systems and Development

Economic Systems
and Development
Chapter Objective
• Discuss the decline of centrally planned
economic systems
• Describe mixed economies and privatization
• Explain how a market economy functions and
the role of each primary feature
• Identify ways to measure economic development
• Describe economic transition and the remaining
obstacles to companies
Chapter 2- 2
Economic Systems
Centrally Planned
Mixed
Market
Government ownership of
Mostly private (individual
economic resources and
or business) ownership of
state planning
economic resources
Government and private
ownership of economic
resoures split rather evenly
Chapter 2- 3
Centrally Planned Economy
Government owns most land, factories
and other economic resources and
plans nearly all economic activity
 Welfare of the group
is paramount
 Economic and social
equality is the goal
Asia
Central Europe
Eastern Europe
Latin America
Russia (1917)
China (1949)
Cuba (1959)
 “Communist” system
is needed
Chapter 2- 4
Decline of Central Planning
Central planning failed to:
 Create economic value
 Provide incentives
 Achieve rapid growth
 Satisfy consumer needs
Chapter 2- 5
Focus on China
Socialism with
Chinese characteristics:
Challenges ahead:
 Communist after civil
war ended in 1949
 Political problems and
social unrest
 Agricultural reforms
began in 1979
 Unemployment and
migrant labor
 Township and Village
Enterprises legal in 1984
 Eventual(?) reunification
with Taiwan
 Aggressive reform
since that time
 Advanced entrepreneurial
and management skills
Chapter 2- 6
Quick Study 1
1- What is meant by economic system?
Explain the relation between culture
and economics.
2- What is a centrally planned economy?
Describe the link between central
planning and communism.
3- Identify several factors that
contributed to the decline of central
planned economies.
Chapter 2- 7
Mixed Economy
Government and private parties share ownership of land,
factories and other economic resources rather evenly
Noble goals:
But stagnant:
 Low unemployment
and poverty
 State-owned businesses
uncompetitive
 Steady economic growth
 Prices and taxes higher,
living standards mixed
 Equitable distribution
of wealth
 Privatized state firms to
boost competitiveness
Chapter 2- 8
Market Economy
Private parties (individuals or businesses) own vast
majority of land, factories and other economic resources
Supply
Demand
Quantity of a good or
service that producers
are willing to provide at a
specific selling price
Quantity of a good or
service that buyers are
willing to purchase at a
specific selling price
Chapter 2- 9
Laissez-Faire Economics
Less government
interference in commerce
Free choice
• Consumers choose freely from
alternative purchase options
Free enterprise
• Firms decide which products
to sell and markets to enter
Price flexibility
• Most prices follow the forces
of supply and demand
Chapter 2- 10
Government’s Role in a
Market Economy
 Enforce antitrust laws
 Preserve property rights
 Provide fiscal and
monetary stability
 Preserve political stability
Chapter 2- 11
Enforce Antitrust Laws
Encourages development of industries with as
many competing businesses as market will sustain
 Keeps consumer prices in check
 Prevents growth-stunting monopolies
Chapter 2- 12
Preserve Property Rights
Encourages risk-taking by people and business as
claims to assets and future earnings are protected
 Market economy needs strong property rights
 Entrepreneurs start new businesses
 Firms create new technologies and products
Chapter 2- 13
Provide Fiscal & Monetary Stability
Encourages commerce in a nation because it
improves its reputation as a place to do business
 Fiscal policies (taxation, government spending)
 Monetary policies (money supply, interest rates)
 Reduces overall uncertainty
 Improves business forecasts
 Holds inflation and unemployment low
Chapter 2- 14
Preserve Political Stability
Encourages businesses to engage in activities
without fear of disrupted future operations
 Promotes economic growth generally
 Reduces worries of terrorism / kidnapping
 Improves chances for business survival
Chapter 2- 15
Economic Freedom & Wealth
Chapter 2- 16
Quick Study 2
1- What is a mixed economy? Explain the origin
of mixed economies.
2- Explain why the mixed-economy ideal is in
decline and the key role of privatization?
3- Define what is the meant by market economy
and identify its three required feature?
4- Explain government role in a market
economy. What is the relation between
economic freedom and standard of living?
Chapter 2- 17
Economic Development
Economic well-being of one
nation’s people relative to
another nation’s people
 Economic output (agricultural,
industrial, service)
 Infrastructure (communications,
transportation, power)
 People (physical health,
education level)
Productivity is key
Ratio of outputs (that created)
to inputs (resources used to
create output)
Chapter 2- 18
National Production
GDP is the value of goods and services that a nation produces
during a one-year period (GNP adds international activities)
Potential
problems
•
•
•
•
Overlooks certain transactions
Ignores economic growth rates
Averages disguise regions
May ignore purchasing power
Purchasing
power parity
Relative ability of two
countries’ currencies to buy
the same “basket” of goods in
those two countries
Chapter 2- 19
National Wealth at PPP
Country
United States
Switzerland
Canada
Australia
United Kingdom
Japan
Czech Republic
Hungary
Mexico
Turkey
GDP per Capita
(U.S. $)
PPP Estimate of
GDP per Capita
(U.S. = 100)
36,100
37,400
23,100
20,700
26,400
31,300
6,800
6,400
6,300
2,600
36,100
30,500
30,300
28,100
28,000
27,000
15,100
13,900
9,200
6,400
Chapter 2- 20
Quick Study 3
1- What is meant by economic development?
Explain how productivity (and information
technology) helps improve standards of
living.
2-Describe three measures of economic
development and list their advantages and
disadvantages.
3- Explain the concept of purchasing power
parity. What are its implications for a
nation's relative income per capita?
Chapter 2- 21
Human Development Index
Chapter 2- 22
Classifying Countries
Developed Country Highly industrialized, highly efficient and
whose people enjoy a high quality of life
Emerging Market Newly industrialized countries plus those
with potential to be newly industrialized
Newly Industrialized Recently greater national production and
Country exports from industrial operations
Developing Country Poor infrastructure and extremely low
personal income
Chapter 2- 23
Quick Study 4
1- Explain the value of the Human Development
Index (HDI) in measuring a nation's level of
development.
2- How are communicable diseases devastating
human and economic development in some
poor nations?
3- Identify the main characteristics of: (a)
developed countries, (b) newly industrialized
countries, and (c) developing countries.
4- Name three countries that fall into each of the
three country classifications.
Chapter 2- 24
Economic Transition
Fundamental reorganization of an economy and the
creation of new free-market institutions
Reforms include:

Reduce budget deficits and expand credit

Allow the “price mechanism” to determine prices
and economic activity

Legalize private firms and privatize state-owned
assets within a property rights framework

Remove barriers to trade and investment and
eliminate currency controls

Ensure social-welfare system to ease transition
Chapter 2- 25
Obstacles to Transition
Lack of
managerial
expertise
Capital
shortage
Environmental
degradation
Cultural
differences
Chapter 2- 26
Focus on Russia
 Operated under a staunchly communist system for
about 75 years
 Underwent a rough transition of simultaneous
economic and political reform
 But government tax revenues
are increasing and foreign
investment is returning
 Challenges include
developing managerial
talent and fostering political and social stability
Chapter 2- 27
Quick Study 4
1- What are several of the reform measures
involved in undergoing economic transition to
a market economy?
2- Describe some of the remaining obstacles to
businesses in transitional economies.
3- Explain Russia’s experience with economic
transition. What are some tips for people
wishing to do business in Russia?
Chapter 2- 28
Chapter Summary
•
This chapter introduces different economic systems and examines the effect of economics
on international business. Business transactions depend on a nation’s economic system—
the structure and processes that a country uses to allocate its resources and conduct its
commercial activities. A centrally planned economy is a system in which land, factories,
and other economic resources are owned by the government, which plans nearly all
economic activity. In a mixed economy, ownership of land, factories, and other economic
resources are more equally split between private and government. In a market economy,
the majority of land, factories, and other economic resources are privately owned. The
forces of supply and demand determine who produces what and the prices of products,
labor, and capital. Development can be measured using four alternative methods: the
volume of a nation’s annual production using such figures as gross domestic product and
gross national product; purchasing power parity—the relative ability of two countries’
currencies to buy the same “basket” of goods in those two countries; and a nation’s level
of human development—a measure of the extent to which a government satisfies the
broader needs of its people. Economic transition creates new free-market institutions.
Chapter 2- 29
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