Chapter 4 Economic Systems and Development

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Presentation transcript:

Chapter 4 Economic Systems and Development

International Business 4e Chapter Preview 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

Economic Systems Centrally Planned Mixed Market Government ownership of economic resources and state planning Mostly private (individual or business) ownership of economic resources Government and private ownership of economic resoures split rather evenly © Prentice Hall, 2008 International Business 4e

Centrally Planned Economy International Business 4e Asia Central Europe Eastern Europe Latin America Russia (1917) China (1949) Cuba (1959) 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 “Communist” system is needed © Prentice Hall, 2008 International Business 4e

Decline of Central Planning Central planning failed to: Create economic value Provide incentives Achieve rapid growth Satisfy consumer needs © Prentice Hall, 2008 International Business 4e

Chinese characteristics: International Business 4e Focus on China Socialism with Chinese 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 © Prentice Hall, 2008 International Business 4e

International Business 4e 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 Steady economic growth Equitable distribution of wealth State-owned businesses uncompetitive Prices and taxes higher, living standards mixed Privatized state firms to boost competitiveness © Prentice Hall, 2008 International Business 4e

International Business 4e Market Economy Private parties (individuals or businesses) own vast majority of land, factories, and other economic resources 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 © Prentice Hall, 2008 International Business 4e

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 © Prentice Hall, 2008 International Business 4e

Government’s Role in a Market Economy Enforce antitrust laws Preserve property rights Provide fiscal and monetary stability Preserve political stability © Prentice Hall, 2008 International Business 4e

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 © Prentice Hall, 2008 International Business 4e

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 © Prentice Hall, 2008 International Business 4e

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 © Prentice Hall, 2008 International Business 4e

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 © Prentice Hall, 2008 International Business 4e

Economic Freedom & Wealth © Prentice Hall, 2008 International Business 4e

International Business 4e 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) Productivity is key Ratio of outputs (that created) to inputs (resources used to create output) © Prentice Hall, 2008 International Business 4e

International Business 4e National Production GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities) Potential problems Purchasing power 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 © Prentice Hall, 2008 International Business 4e

International Business 4e National Wealth at PPP PPP Estimate of GDP per Capita GDP per Capita Country (U.S. $) (U.S. = 100) United States 39,700 39,700 Switzerland 47,900 34,700 Australia 32,400 32,400 Canada 30,600 31,800 United Kingdom 35,600 30,800 Japan 36,500 29,600 Czech Republic 10,600 18,600 Hungary 10,000 15,900 Mexico 6,600 10,200 Turkey 4,200 7,600 © Prentice Hall, 2008 International Business 4e

Human Development Index © Prentice Hall, 2008 International Business 4e

Classifying Countries Developed Country Emerging Market Newly Industrialized Country 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 © Prentice Hall, 2008 International Business 4e

International Business 4e Economic Transition Fundamental reorganization of an economy and the creation of new free-market institutions 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 © Prentice Hall, 2008 International Business 4e

Obstacles to Transition Capital shortage Lack of managerial expertise Environmental degradation Cultural differences © Prentice Hall, 2008 International Business 4e

International Business 4e 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 © Prentice Hall, 2008 International Business 4e

International Business 4e 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