economics and emerging markets copyright © 2014 pearson education, inc. 4

Economics and Economics and Emerging MarketsEmerging Markets

Copyright © 2014 Pearson Education, Inc.

4

Copyright © 2014 Pearson Education, Inc. 4 - 2

• Describe 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 transition and identify the obstacles for business

Chapter ObjectivesChapter Objectives


InfosysInfosys

• Infosys is a global provider of IT services• India has organic-led path to development• Brainpower is driving development

• Infosys is a global provider of IT services• India has organic-led path to development• Brainpower is driving development


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


Range of Economic SystemsRange of Economic Systems


Centrally Planned EconomyCentrally Planned EconomyCentrally Planned EconomyCentrally Planned Economy

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

economic activity

AsiaCentral EuropeEastern EuropeLatin America

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

Welfare of the groupis paramount

Economic and socialequality is the goal

“Communist” systemis needed


Decline of Central PlanningDecline of Central Planning

Central planning failed to:

Create economic value

Provide incentives

Achieve rapid growth

Satisfy consumer needs


North KoreaNorth Korea


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 reforms since

Challenges ahead:

Political problems and social unrest

Unemployment and migrant labor

Eventual(?) reunification with Taiwan


Mixed EconomyMixed Economy

Noble goals:

Low unemployment and poverty

Steady economic growth

Equitable distribution of wealth

But stagnant:

State-owned businesses less competitive

Prices and taxes higher, living standards mixed

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


Benefits of PrivatizationBenefits of Privatization

Privatization aims to:

Increase economic efficiency

Boost productivity

Raise living standards


Discussion QuestionDiscussion Question

A __________ economy is one in which government and private parties share ownership of economic resources rather evenly.

a. Centrally planned

b. Systemic

c. Mixed


Answer to Discussion QuestionAnswer to Discussion Question

A __________ economy is one in which government and private parties share ownership of economic resources rather evenly.

a. Centrally planned

b. Systemic

c. Mixed


Private parties (individuals or businesses) own most land, factories, and other economic resources

Demand

Quantity buyers will purchase at a

specific selling price

Market EconomyMarket Economy

Supply

Quantity producers will provide at a

specific selling price


Laissez-FaireLaissez-Faire Economics Economics

Less governmentinterference in business

Free choice• Alternative purchase options

Free enterprise• Firms choose products and markets

Price flexibility• Prices follow supply and demand


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


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


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 Firms create new technologies and products Entrepreneurs start new businesses


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


Preserve Political StabilityPreserve Political Stability

Encourages businesses to engage in activities

without fear of disrupted future operations

Promotes economic growth generally Reduces worries of political risk Improves chances for business survival



What are the three required features and four expected roles of government in any market economy?



Three key features of a market economy: free choice, free enterprise, and price flexibility.

Four roles of government in a market economy: enforce antitrust laws, preserve property rights, provide fiscal and monetary stability, and preserve political stability.


Economic Freedom & WealthEconomic Freedom & Wealth

Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (www.heritage.org).


Economic DevelopmentEconomic Development

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

Economic output (agricultural,industrial, and service)

Infrastructure (communications,transportation, and

power)

People (physical health andeducation level)

Productivity

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

used to create output)

Productivity

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

used to create output)


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)

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)

* * POTENTIAL PROBLEMS * ** * POTENTIAL PROBLEMS * *

Averages can disguise regionsAverages can disguise regions

Overlook certain transactionsOverlook certain transactions

May ignore purchasing powerMay ignore purchasing power

Ignore economic growth ratesIgnore economic growth rates


Purchasing Power ParityPurchasing Power Parity

Relative ability of two countries’

currencies to buy the same “basket” of goods in those

two countries


National Wealth at PPPNational Wealth at PPP

PPP Estimate of GDP per Capita GDP per Capita

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

United States 39,700 39,700Switzerland 47,900 34,700Australia 32,400 32,400Canada 30,600 31,800United Kingdom 35,600 30,800Japan 36,500 29,600Czech Republic 10,600 18,600Hungary 10,000 15,900Mexico 6,600 10,200Turkey 4,200 7,600Source: Based on data from Organization for Economic Cooperation and Development (OECD), “Statistics” section (www.oecd.org).


Human Development IndexHuman Development Index


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



___________ is the relative ability of two countries’ currencies to buy the same basket of goods in those two countries.

a. Productivity

b. Purchasing Power

c. Purchasing Power Parity


Economic TransitionEconomic Transition

Reforms: 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

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


Obstacles to TransitionObstacles to Transition

CulturalchangesCulturalchanges

Environmentaldegradation

Environmentaldegradation

Capitalshortage

Capitalshortage

Lack of managerialexpertise

Lack of managerialexpertise


Operated under a staunchly communist system forabout 75 years

Underwent a rough transition of simultaneouseconomic and political reform

But the economy isimproving and foreigninvestment is returning

Challenges include developing managerial talent and fostering political and social stability

Focus on RussiaFocus on Russia



What is economic transition and what are the remaining obstacles in post-communist countries?



Economic transition: Changing a nation’s fundamental economic organization and creating new free-market institutions. A country must: Stabilize the economy, reduce budget deficits, and expand credit availability; Allow prices to reflect supply and demand; Legalize private business, sell state-owned companies, and support property rights; and Reduce barriers to trade and investment and allow currency convertibility.

Remaining obstacles: Lack of managerial expertise, Shortage of capital, Cultural changes, and Environmental degradation.

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