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Chapter 4
Economic Systems
and Development
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• 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
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International Business 4e
Chapter 4 - 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
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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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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
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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
uncompetitive
 Steady economic growth
 Prices and taxes higher,
living standards mixed
 Equitable distribution
of wealth
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 Privatized state firms to
boost competitiveness
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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
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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
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Chapter 4 - 9
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
 Entrepreneurs start new businesses
 Firms create new technologies and products
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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 terrorism / kidnapping
 Improves chances for business survival
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Economic Freedom & Wealth
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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)
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Productivity is key
Ratio of outputs (that 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)
Purchasing
power parity
Potential
problems
•
•
•
•
Overlooks certain transactions
Ignores economic growth rates
Averages disguise regions
May ignore purchasing power
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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
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GDP per Capita
(U.S. $)
PPP Estimate of
GDP per Capita
(U.S. = 100)
39,700
47,900
32,400
30,600
35,600
36,500
10,600
10,000
6,600
4,200
39,700
34,700
32,400
31,800
30,800
29,600
18,600
15,900
10,200
7,600
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Human Development Index
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Chapter 4 - 19
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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Economic Transition
Fundamental reorganization of an economy and the
creation of new free-market institutions
Reforms include:
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
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
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Obstacles to Transition
Lack of
managerial
expertise
Capital
shortage
Environmental
degradation
Cultural
differences
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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 government tax revenues
are increasing and foreign
investment is returning
 Challenges include
developing managerial
talent and fostering political and social stability
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Chapter 4 - 23
Chapter Review
• 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, 2008
International Business 4e
Chapter 4 - 24