Chapter 2- 1

Economic SystemsEconomic Systemsand Developmentand Development

Chapter 2- 2

• 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

Chapter ObjectiveChapter Objective

Chapter 2- 3

Economic SystemsEconomic Systems

Centrally Planned Market

Mostly private (individualor business) ownership of

economic resources

Government and privateownership of economic

resoures split rather evenly

Government ownership ofeconomic resources and

state planning

Mixed

Chapter 2- 4

Centrally Planned EconomyCentrally Planned EconomyCentrally Planned EconomyCentrally Planned Economy

Government owns most land, factories and other economic resources and plans nearly all economic activity Asia

Central EuropeEastern Europe

Latin America

Russia (1917)China (1949)Cuba (1959)

Welfare of the groupis paramount

Economic and socialequality is the goal

“Communist” systemis needed

Chapter 2- 5

Decline of Central PlanningDecline of Central Planning

Central planning failed to:

Create economic value

Provide incentives

Achieve rapid growth

Satisfy consumer needs

Chapter 2- 6

Focus on ChinaFocus on China

Socialism withChinese

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

Chapter 2- 7

Quick Study 1Quick Study 1

1- What is meant by economic system? Explain the relation between culture and economics.

2- What is a centrally planned economy? Describe the link between central planning and communism.

3- Identify several factors that contributed to the decline of central planned economies.

Chapter 2- 8

Mixed EconomyMixed Economy

Noble goals:Noble goals:

Low unemployment and poverty

Steady economic growth

Equitable distribution of wealth

But stagnant:But stagnant:

State-owned businesses uncompetitive

Prices and taxes higher, living standards mixed

Privatized state firms to boost competitiveness

Government and private parties share ownership of land, factories and other economic resources rather evenly

Chapter 2- 9

Private parties (individuals or businesses) own vast majority of land, factories and other economic resources

Demand

Quantity of a good or service that buyers are willing to purchase at a

specific selling price

Market EconomyMarket Economy

Supply

Quantity of a good or service that producers

are willing to provide at a specific selling price

Chapter 2- 10

Laissez-FaireLaissez-Faire Economics Economics

Less governmentinterference 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

Chapter 2- 11

Government’s Role in aGovernment’s Role in aMarket EconomyMarket Economy

Enforce antitrust laws

Preserve property rights

Provide fiscal and monetary stability

Preserve political stability

Chapter 2- 12

Enforce Antitrust LawsEnforce Antitrust Laws

Encourages development of industries with as

many competing businesses as market will sustain

Keeps consumer prices in check Prevents growth-stunting monopolies

Chapter 2- 13

Preserve Property RightsPreserve 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

Chapter 2- 14

Provide Fiscal & Monetary Provide Fiscal & Monetary StabilityStability

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

Chapter 2- 15

Preserve Political StabilityPreserve 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

Chapter 2- 16

Economic Freedom & WealthEconomic Freedom & Wealth

Chapter 2- 17

Quick Study 2Quick Study 2

1- What is a mixed economy? Explain the origin of mixed economies.

2- Explain why the mixed-economy ideal is in decline and the key role of privatization?

3- Define what is the meant by market economy and identify its three required feature?

4- Explain government role in a market economy. What is the relation between economic freedom and standard of living?

Chapter 2- 18

Economic DevelopmentEconomic Development

Economic well-being of one Economic well-being of one nation’s people relative to nation’s people relative to another nation’s peopleanother 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)

Productivity is key

Ratio of outputs (that created)to inputs (resources used to

create output)

Chapter 2- 19

National ProductionNational ProductionGDP is the value of goods and services that a nation produces GDP is the value of goods and services that a nation produces

during a one-year period (GNP adds international activities)during a one-year period (GNP adds international activities)

PotentialPotentialproblemsproblemsPotentialPotentialproblemsproblems

PurchasingPurchasingpower paritypower parityPurchasingPurchasing

power paritypower parity

• Overlooks certain transactions• Ignores economic growth rates• Averages disguise regions• May ignore purchasing power

Relative ability of two countries’ currencies to buy

the same “basket” of goods in those two countries

Chapter 2- 20

National Wealth at PPPNational Wealth at PPP

PPP Estimate of GDP per Capita GDP per Capita

Country (U.S. $) (U.S. = 100)

United States 36,100 36,100Switzerland 37,400 30,500Canada 23,100 30,300Australia 20,700 28,100United Kingdom 26,400 28,000Japan 31,300 27,000Czech Republic 6,800 15,100Hungary 6,400 13,900Mexico 6,300 9,200Turkey 2,600 6,400

Chapter 2- 21

Quick Study 3Quick Study 3

1- What is meant by economic development? Explain how productivity (and information technology) helps improve standards of living.

2-Describe three measures of economic development and list their advantages and disadvantages.

3- Explain the concept of purchasing power parity. What are its implications for a nation's relative income per capita?

Chapter 2- 22

Human Development IndexHuman Development Index

Chapter 2- 23

Classifying CountriesClassifying Countries

Developed Country

Emerging Market

Newly IndustrializedCountry

Developing Country

Highly industrialized, highly efficient and whose people enjoy a high quality of life

Newly industrialized countries plus those with potential to be newly industrialized

Recently greater national production and exports from industrial operations

Poor infrastructure and extremely low personal income

Chapter 2- 24

Quick Study 4Quick Study 4

1- Explain the value of the Human Development Index (HDI) in measuring a nation's level of development.

2- How are communicable diseases devastating human and economic development in some poor nations?

3- Identify the main characteristics of: (a) developed countries, (b) newly industrialized countries, and (c) developing countries.

4- Name three countries that fall into each of the three country classifications.

Chapter 2- 25

Economic TransitionEconomic Transition

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

Fundamental reorganization of an economy and the creation of new free-market institutions

Chapter 2- 26

Obstacles to TransitionObstacles to Transition

Culturaldifferences

Culturaldifferences

Environmentaldegradation

Environmentaldegradation

Capitalshortage

Capitalshortage

Lack of managerialexpertise

Lack of managerialexpertise

Chapter 2- 27

Focus on RussiaFocus on Russia

Operated under a staunchly communist system forabout 75 years

Underwent a rough transition of simultaneouseconomic and political reform

But government tax revenuesare increasing and foreigninvestment is returning

Challenges include developing managerial talent and fostering political and social stability

Chapter 2- 28

Quick Study 4Quick Study 4

1- What are several of the reform measures involved in undergoing economic transition to a market economy?

2- Describe some of the remaining obstacles to businesses in transitional economies.

3- Explain Russia’s experience with economic transition. What are some tips for people wishing to do business in Russia?

Chapter 2- 29

• This chapter introduces different economic systems and examines the effect of economics on international business. Business transactions depend on a nation’s economic system—the structure and processes that a country uses to allocate its resources and conduct its commercial activities. A centrally planned economy is a system in which land, factories, and other economic resources are owned by the government, which plans nearly all economic activity. In a mixed economy, ownership of land, factories, and other economic resources are more equally split between private and government. In a market economy, the majority of land, factories, and other economic resources are privately owned. The forces of supply and demand determine who produces what and the prices of products, labor, and capital. Development can be measured using four alternative methods: the volume of a nation’s annual production using such figures as gross domestic product and gross national product; purchasing power parity—the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries; and a nation’s level of human development—a measure of the extent to which a government satisfies the broader needs of its people. Economic transition creates new free-market institutions.

Chapter SummaryChapter Summary

ThanksThanks