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CHAPTER IV

ECONOMIC SYSTEMS AND DEVELOPMENT

INTERNATIONAL BUSINESS

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Learning ObjectivesDescribe 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 transaction and

identify the remaining obstacle for business.

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ECONOMIC SYSTEMS

Centrally Planned Economy

Mixed Economy

Market Economy

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ECONOMIC SYSTEMS

Economic System

Structure and processes that a

country uses to allocate its

resources and conducts its

commercial activities.

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ECONOMIC SYSTEMS

CENTRALLY PLANNED ECONONY

MARKET ECONOMY

ECONOMIC SYSTEM

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Centrally Planned Economy

Centrally Planned Economy

Economic system in which a nation’s

land, factories, and other economic

resources are owed by the

government, which plans nearly all

economic activity

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Centrally Planned Economy

Origins of the Centrally Planned

Economy

Decline of Central Planning

Failure to Create Economic Value

Failure to Achieve Rapid Growth

Failure to Satisfy Consumer needs

Focus on China

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Mixed EconomyMixed Economy Economic system in which land , factories and other economic resources are rather equally split between private and government ownership

Origins of the Mixed Economy

Decline of Mixed Economies

Move Toward Privatization

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Privatization

Policy of selling government-owned

economic resources to private

companies and individuals

Mixed Economy

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MARKET ECONOMY

Origins of the Market Economy

Features of a Market economy

Government’s Role in a Market Economy

Economic Freedom

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MARKET ECONOMY

Market Economy Economic system in which

the majority of a nation’s land , factories, and

other economic resources are privately

owned ,either by individuals or business.

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

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MARKET ECONOMY

Origins of the Market Economy

Features of a Market Economy

Free choice

Free enterprise

Price flexibility

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MARKET ECONOMY

Government’s Role in a Market

Economy

Enforcing Antitrust Laws

Preserving Property Rights

Providing a Stable Fiscal and Monetary

Environment.

Preserving Political Stability.

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DEVELOPMENT OF NATIONS

National Production

Purchasing Power Parity

Human Development

Classifying Countries.

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Economic Development

Measure for gauging the economic

well-being of one nation’s people

as compared with that of another

nation’s people.

DEVELOPMENT OF NATIONS

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National Production

Uncounted Transactions

Question of Growth

Problem of Averages

Pitfalls of Comparison

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National ProductionUncounted Transactions Many of a nation’s transactions do not get counted in either GDP or GNP. Some of the activities not included are:

Volunteer work Unpaid household work Illegal activities such as gambling and

black market transactions Unreported transactions conducted in cash

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Purchasing Power Parity

Purchasing Power

value of goods and services that can be

purchased with one unit of a country’s

currency

Purchasing Power Parity (PPP)

Relative ability of two countries’

currencies to buy the same “basket” of

goods in those two countries.

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Human Development

Human Development Index (HDI)

Measure of the extend to which a

people’s needs are satisfied and the

degree to which these needs are

addressed equally across a nation’s

entire population

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Classifying Countries

Developed Country

Newly Industrialized Countries

Developing Countries

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Classifying Countries

Developed Countries

Country that is highly industrialized

highly efficient , and whose people

enjoy a high quality of life

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Newly Industrialized Country (NIC)

Country that has recently increased the

portion of its national production and

exports derived from industrial operations

Emerging Markets

Newly industrialized countries plus those

with the potential to become newly

industrialized

Classifying Countries

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Developing Country

Nation that has a poor infrastructure and

extremely low personal incomes

Technological Dualism

Use of the latest technologies in some

sectors of the economy coupled with the

use of outdated technologies in other

sectors

Classifying Countries

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ECONOMIC TRANSITION

Obstacles to Transaction

Focus on Russia

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Economic Transaction

Process by which a nation changes

its fundamental economic

organization and creates new free-

market institutions.

ECONOMIC TRANSITION

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Obstacles to Transition

Lack of Managerial Expertise

Shortage of Capital

Cultural Differences

Environmental Degradation

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Focus on Russia

Rough Transaction

Challenges Ahead for Russia

One Bright Spot

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Focus on Russia

Rough Transaction

Challenges Ahead for Russia

One Bright Spot

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