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Economic Systems and Development Chapter Preview • 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 2 Economic Systems Centrally Planned - Government ownership of economic resources and state planning Mixed - Government and private ownership of economic resoures split rather evenly Market - Mostly private (individual or business) ownership of economic resources © Prentice Hall, 2006 International Business 3e Chapter 4 - 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 - “Communist” system is needed Asia Central Europe Eastern Europe Latin America - Russia (1917) - China (1949) - Cuba (1959) © Prentice Hall, 2006 International Business 3e Chapter 4 - 4 Decline of Central Planning Central planning failed to: - Create economic value Provide incentives Achieve rapid growth Satisfy consumer needs © Prentice Hall, 2006 International Business 3e Chapter 4 - 5 Focus on China Socialism with Chinese characteristics - Communist after civil war ended in 1949 - Agricultural reforms began in 1979 - Township and Village Enterprises legal in 1984 - Aggressive reform since that time Challenges ahead - Political problems and social unrest - Unemployment and migrant labor - Eventual(?) reunification with Taiwan - Advanced entrepreneurial and management skills © Prentice Hall, 2006 International Business 3e Chapter 4 - 6 Mixed Economy • Government and private parties share ownership of land, factories and other economic resources rather evenly • Noble goals - Low unemployment and poverty - Steady economic growth - Equitable distribution of wealth But stagnant - State-owned businesses uncompetitive - Prices and taxes higher, living standards mixed - Privatized state firms to boost competitiveness © Prentice Hall, 2006 International Business 3e Chapter 4 - 7 Market Economy Private parties (individuals or businesses) own vast majority of land, factories and other economic resources Supply - Quantity of a good or service that producers are willing to provide at a specific selling price Demand - Quantity of a good or service that buyers are willing to purchase at a specific selling price © Prentice Hall, 2006 International Business 3e Chapter 4 - 8 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 9 Government’s Role in a Market Economy Enforce antitrust laws Preserve property rights Provide fiscal and monetary stability Preserve political stability © Prentice Hall, 2006 International Business 3e Chapter 4 - 10 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 11 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 12 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 13 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 14 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) © Prentice Hall, 2006 International Business 3e Chapter 4 - 15 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 16 National Wealth at PPP Country United States Switzerland Canada Australia United Kingdom Japan Czech Republic Hungary Mexico Turkey © Prentice Hall, 2006 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 International Business 3e Chapter 4 - 17 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 Country - Recently greater national production and exports from industrial operations Developing Country - Poor infrastructure and extremely low personal income © Prentice Hall, 2006 International Business 3e Chapter 4 - 18 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 19 Obstacles to Transition Lack of managerial expertise Capital shortage Environmental degradation Cultural differences © Prentice Hall, 2006 International Business 3e Chapter 4 - 20 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 © Prentice Hall, 2006 International Business 3e Chapter 4 - 21