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4
Economics and
Emerging Markets
Copyright © 2014 Pearson Education, Inc.
Chapter Objectives
• Describe what is meant by a centrally planned economy and
explain why its use is declining
• Identify the main characteristics of a mixed economy and
explain the emphasis on privatization
• Explain how a market economy functions and identify its
distinguishing features
• Describe the different ways to measure a nation’s level of
development
• Discuss the process of economic transition and identify the
obstacles for business
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Infosys
• Infosys is a global provider of IT services
• India has organic-led path to development
• Brainpower is driving development
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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
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Range of Economic Systems
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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
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Decline of Central Planning
Central planning failed to:
 Create economic value
 Provide incentives
 Achieve rapid growth
 Satisfy consumer needs
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North Korea
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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 reforms since
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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
less competitive
 Steady economic growth
 Prices and taxes higher,
living standards mixed
 Equitable distribution
of wealth
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Benefits of Privatization
Privatization aims to:
 Increase economic efficiency
 Boost productivity
 Raise living standards
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Discussion Question
A __________ economy is
one in which government
and private parties share
ownership of economic
resources rather evenly.
a. Centrally planned
b. Systemic
c. Mixed
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Answer to Discussion Question
A __________ economy is
one in which government
and private parties share
ownership of economic
resources rather evenly.
a. Centrally planned
b. Systemic
c. Mixed
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Market Economy
Private parties (individuals or businesses) own most
land, factories, and other economic resources
Supply
Demand
Quantity producers
will provide at a
specific selling price
Quantity buyers will
purchase at a
specific selling price
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Laissez-Faire Economics
Less government
interference in business
Free choice
• Alternative purchase options
Free enterprise
• Firms choose products and markets
Price flexibility
• Prices follow supply and demand
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Government’s Role in a
Market Economy
 Enforce antitrust laws
 Preserve property rights
 Provide fiscal and
monetary stability
 Preserve political stability
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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
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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
 Firms create new technologies and products
 Entrepreneurs start new businesses
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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
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Preserve Political Stability
Encourages businesses to engage in activities
without fear of disrupted future operations
 Promotes economic growth generally
 Reduces worries of political risk
 Improves chances for business survival
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Discussion Question
What are the three
required features
and four expected
roles of government
in any market
economy?
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Answer to Discussion Question
Three key features of a market
economy: free choice, free
enterprise, and price flexibility.
Four roles of government in a
market economy: enforce
antitrust laws, preserve
property rights, provide fiscal
and monetary stability, and
preserve political stability.
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Economic Freedom & Wealth
Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (www.heritage.org).
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Economic Development
Economic well-being of one
nation’s people relative to
another nation’s people
 Economic output (agricultural,
industrial, and service)
 Infrastructure (communications,
transportation, and power)
 People (physical health and
education level)
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Productivity
Ratio of outputs (that are
created) to inputs (resources
used to create output)
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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 *
Overlook certain transactions
Ignore economic growth rates
Averages can disguise regions
May ignore purchasing power
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Purchasing Power Parity
Relative ability of
two countries’
currencies to buy
the same “basket”
of goods in those
two countries
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National Wealth at PPP
Country
United States
Switzerland
Australia
Canada
United Kingdom
Japan
Czech Republic
Hungary
Mexico
Turkey
GDP per Capita
(U.S. $)
39,700
47,900
32,400
30,600
35,600
36,500
10,600
10,000
6,600
4,200
PPP Estimate of
GDP per Capita
(U.S. = 100)
39,700
34,700
32,400
31,800
30,800
29,600
18,600
15,900
10,200
7,600
Source: Based on data from Organization for Economic
Cooperation and Development (OECD), “Statistics”
section (www.oecd.org).
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Human Development Index
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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
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Discussion Question
___________ is the relative
ability of two countries’
currencies to buy the same
basket of goods in those
two countries.
a. Productivity
b. Purchasing Power
c. Purchasing Power Parity
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Answer to Discussion Question
___________ is the relative
ability of two countries’
currencies to buy the same
basket of goods in those
two countries.
a. Productivity
b. Purchasing Power
c. Purchasing Power Parity
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Economic Transition
Fundamental reorganization of an economy and the
creation of new free-market institutions
Reforms:

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
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Obstacles to Transition
Lack of
managerial
expertise
Capital
shortage
Environmental
degradation
Cultural
changes
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Focus on Russia
 Operated under a staunchly communist system for
about 75 years
 Underwent a rough transition of simultaneous
economic and political reform
 But the economy is
improving and foreign
investment is returning
 Challenges include
developing managerial
talent and fostering political and social stability
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Discussion Question
What is economic
transition and what
are the remaining
obstacles in postcommunist
countries?
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Answer to Discussion Question
Economic transition: Changing a nation’s
fundamental economic organization and
creating new free-market institutions. A
country must: Stabilize the economy, reduce
budget deficits, and expand credit
availability; Allow prices to reflect supply
and demand; Legalize private business, sell
state-owned companies, and support
property rights; and Reduce barriers to trade
and investment and allow currency
convertibility.
Remaining obstacles: Lack of managerial
expertise, Shortage of capital, Cultural
changes, and Environmental degradation.
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