Download 1 Overview of Comparative Economics Chapter I How do we

Overview of Comparative
Economics
Chapter I
How do we compare economies?
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Criteria for Classifying Economies
How do we classify economies?
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Institutional Framework
An economy (made up of a group of people
located within a political entity that has
particular geographical characteristics)
functions according to certain
 Rules
 Customs
 Laws
which all make up the institutional framework of
the economy
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Institutional Mechanisms
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Allocation Mechanisms
Forms of Ownership
Role of Planning
Types of Incentives
The method of Income Redistribution and
Social Safety Nets
Role of Politics and Ideology
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I. Allocation Mechanisms
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What good and services are produced?
How goods and services are produced?
For whom goods and services are produced?
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Production → allocating factor inputs
Distribution → allocating produced goods and service
Three basic kinds of allocation mechanisms:
1. Traditional Economy
2. Market Economy
3. Command Economy
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II. Forms of Ownership
Who owns the means of production?
 In capitalist economies, land and produced
means of production (capital stock) are
owned by private individuals or private firms
(Market Capitalism)
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In socialist economies the state owns the
land and the capital stock (Command Socialism)
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II. Other Forms of Ownership
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Intermediate forms of ownership (like
cooperatives or worker ownership)
Under socialism: central government vs local
government ownership
Religious groups’ ownership
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II. Forms of Ownership
Market Capitalism vs Command Socialism
 United States vs Soviet Union
ALSO
 Market Socialism vs Command Capitalism
 Yugoslavia and China vs Nazi Germany
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III. Role of Planning
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Centrally planned economy → planners’
preferences dominate allocative decisionmaking
Market economy → consumers’ sovereignty
dominates allocative decision-making
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III. Role of Planning

Centrally planned economy is usually
correlated with command socialism
(Soviet Union, there are exceptions –command
without planning → Soviet Russia during 1910s and
1920s)

Market economy is usually correlated with
market capitalism (there are exceptions—indicative
planning → France and Japan)
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IV. Types of Incentives

Material Incentives → paying people
according to their productivity (their marginal
product that maximizes profits for competitive
firms hiring labor in such a system)
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Under capitalism → takes the form of rewards for
entrepreneurship and capital investment as
economic profits
Moral Incentives → trying to motivate workers
by appealing to some higher collective goal
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V. Income Redistribution and Social Safety
Nets
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Social Market Economies (or some advanced
capitalist countries) → do their income
redistribution through social safety nets
Command Socialist Economies → did not
have to redistribute income → their
governments controlled the distribution of
income by setting wages and forbidding
capital or land income
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VI. Role of Politics and Ideology
Central controversy
 Is democracy linked with market
capitalism???
 Is authoritarian regime linked with command
economy???
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VI. Role of Politics and Ideology
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Friedman “libertarian” laissez-faire → lack of
individual freedom
In democracies, social democrat parties exist
(like Sweden)
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They support income redistribution and extensive
social safety nets
They support nationalization and central planning
They do not support dictatorship
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VI. Role of Politics and Ideology
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Authoritarian political regimes pursued market
capitalism (East Asia and Latin America)
Market capitalism is not a guarantee of political
democracy
Islamic Fundamentalism
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Imposition of an Islamic code-Shari’a
It is not a liberal democracy → individual rights and
freedoms are subordinated to a Shari’a and the religious
authorities
Economically it does not follow neither capitalism nor
socialism
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Criteria for Evaluating Economies
According to what criteria can we
compare the relative performance of
economies?
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Nine Criteria
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1. Level of Output
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2. Growth Rate Output
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Relationship between population and price level
→ gives real per capita income
Must be corrected for Population Growth
3. Composition of Output
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Notable variables of composition
Breakdown between consumption and investment
The share of military output
Public versus private goods
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Nine Criteria
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4. Static Efficiency (Pareto Optimality)
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No one in society can be made better off without
making someone else worse off
Resources are being utilized to their best potential
given the existing technology
Labor force is fully employed
The composition of goods being produced is what
people want
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Nine Criteria
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5. Dynamic Efficiency
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Allocation of resources over time to maximize
long-run sustainable growth
Example of unsustainable output maximization:
Soviet Union pumping large amounts of oil in
short periods of time → creating problems in the
long run
6. Macroeconomic Stability
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The lack of large fluctuations of output,
employment or the overall price level
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Nine Criteria
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7. Economic Security
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8. Degree of Equity of Income and Wealth
Distribution
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Economic security of individuals in terms of income,
employment and health-care
Socialist and social market economies usually have more
equal distribution than strictly market capitalist economies
9. The Degree of Freedom
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In terms of work, consumption, property, investment and
civil and political realms
Market economies are ahead of command economies in
this area
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A Summary of Possible Indexes
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Overall indicators
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Per capita gross domestic product (GDP)
Real per capita GDP
Average rate of inflation
Share of gross private investment in GDP
Life expectancy at birth
Human Development Index (constructed from real
per capita income, life expectancy, adult literacy
rates and measures of educational enrollment)
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A Summary of Possible Indexes
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Focusing on the role of government
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The share of GNP going to government consumption
Government taxes
Defense spending
Spending on education and health
Economic freedom index
Income distribution
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Lorenz curve (rank a country’s population on the horizontal
axis according to income)
Gini coefficient (the area between the Lorenz curve and the
45 degree line divided by the total area under the 45degree line)
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