ECONOMIC ENVIRONMENT

Economic Systems CommandMarket

Command Economy A system where the state owns businesses. The government determines what, where, and how much is produced. And, who receives how much.

Market Economy A system where the state allows entrepreneurs to own businesses. Entrepreneurs bear the rewards and risks

: Command Economies do allow some businesses to be owned by entrepreneurs. Likewise, Market Economies may own certain businesses and regulate businesses and/or inputs.

Market Reforms Cause Unemployment And, hardship; especially for unskilled individuals. Can lead to: poverty, homelessness, crime, and hopelessness.

Ironically, the biggest losers of non-market reforms are the poor. They have to put up with lousy products and higher prices.

Economic Freedom 2002 _______________________________________ RepressedMostlyMostlyFree ____________Unfree__Free ___________ MyanmarSaudiGermany Hong Kong SyriaBrazilCzech Singapore UzbekistanTurkeyJapanNew Zealand IranChinaS. KoreaIreland CubaIndiaPolandUnited States IraqRussiaGreeceAustralia N. KoreaVietnamMexicoChile Heritage.org/index/2002/#contents

Economic Freedom Trade Policy Taxation Government Ownership Monetary Policy Restrictions on Foreign Investment

... Restrictions on Banking Wage and Price Controls Property Rights Regulations Black Market

Economic Freedom & Growth

Economic & Political Freedom

Adam Smith on Government Defense & Rule of Law Welfare of the Handicapped, Seniors, and Children. Public Services

Invest in Human Capital Enhance Skills of People Invest in Health & Environment Invest in Infrastructure Increase the Stock of Physical Capital Do not burden productive sector with government regulations and control Respect Property Rights Open the Economy to Foreign Trade Open the Economy to Foreign Investment Keep Government Small

Economic Indicators Size Growth Inflation Unemployment Balance of Payment

Gross Domestic Product The total value of goods and services produced in a country, regardless of who produces it.

Gross National Product/Income GDP, plus investment income from foreign countries, minus investment income to foreign countries.

GDP/Capita or GNP/Capita The contribution of each individual toward the total economic activity of a country. Though, not entirely accurate, the GDP per capita is used as a proxy of that country’s individuals’ relative income level.

2001 GDP/Capita High Income >$ 9,206 Middle Income Low Income <$ 745

GNPs of top 12 countries-2001 »PopGNP Rank GNP/C Rank »million b $ Dollars USA Japan Germany U.K France China Italy Canada Spain Mexico Brazil India World Development Report

GNPs of 10 biggest countries-2001 »PopGNP Rank GNP/C Rank »million b $ Dollars China India USA Indonesia Brazil Russia Pakistan Bangladesh Nigeria Japan World Development Report

GDPs & MNCs in 2001 in b$ Walmart 220 Exxon 192 General Motors 177 General Electric126 Citigroup112 IBM 86 Philip Morris 73 Boeing 58 Sweden 210 Austria 189 Poland 175 Venezuela125 South Africa113 Malaysia 88 Philippines 71 Czech 56 Fortune.com World Development Report

Economic Growth GDP t - GDP t-n Growth = *100 GDP t-n Where GDP t and GDP t-n are the nominal GDPs for the year (or any period) ‘t’ and ‘t-n’, respectively.

Real GDP Growth/year for of Selected Countries China10.3 Ireland 7.3 India 6.0 USA 3.5 Japan 1.3 Russia -4.8 Ukraine -9.3 World Development Report

Beware GDP/GNP growth rates are usually based on figures in local currency. These do not account for inflation. An apparent high growth in the GDP/GNP may be deceptive if the rate of inflation in that country is high.

For Example: Consider Argentina Year GDPGrowth (m Pesos) %

Real GDP The real GDP for year t: rGDP t = GDP t / (1+i) Where, i is the inflation rate between period t and t-n, and GDP t is the “nominal” GDP for the year t.

Inflation CPI t - CPI t-n Inflation = CPI t-n where CPI = Consumer Price Index for period t and t-n

The inflation adjusted GDP means that it is the value of GDP for year t, measured in the currency value of some previous year (t-n).

Real GDP Growth Rate rGDP t - GDP t-n Growth = *100 GDP t-n Where GDP t-n is the nominal GDP for the year t-n.

Consider Argentina again. Year GDPNominalInflationReal (m Pesos)GrowthFractionGrowth % % % % % %

COUNTRY’S ABILITY TO SUPPORT FOREIGN TRADE/INVESTMENTS Current Earnings Savings Credit Potential

BALANCE OF PAYMENTS STATEMENT A summary of a nation’s financial transactions with the rest of the world.

THREE CATEGORIES 1) Current Account 2) Capital Account 3) Reserves Account

CURRENT ACCOUNT 1- Merchandise Trade 2- Service trade 3- Investment Earnings 4- Private and Official Transfers

CAPITAL ACCOUNT 1) foreign direct investment 2) portfolio investment 3) loans by private foreign banks, government, and multilateral agencies.

RESERVES 1) Cash 2) Gold, etc.

Balance of Payment U.S.: 1999: $b Current Account Debit –Merchandise –Services -197 –Income -299 –Transfers -47 Total CreditBalance US Census Bureau, Statistical Abstracts of the US:2000

Balance of Payment of the U.S.: 1999 Capital Account Debit –FDI -152 –Portfolio- 98 –Other -131 Total -381 Current Balance Overall Balance CreditBalance

Balance of Payment of the U.S.: 1999 Debit Overall Balance Reserve Account –Foreign Assets 0 –Change in Res. 0 Discrepancy -39 Total1993 Credit Balance

Merchandise Trade Balance ban or restrict the import of foreign goods encourage setting up of import- substitution industries encourage setting up of export based industries

Service Trade Balance prohibit or restrict the import of foreign services encourage setting up of import substitution industries promote setting up of export based industries (tourism)

Investment Earnings Balance severe restrictions on the use of foreign exchange place restrictions repatriation of incomes encourage reinvestment/generation of foreign exchange

Transfers Balance restrictions on financial aid.

Capital Account Balance Restrictions on outgoing foreign investments. Incentives to attract foreign direct investment.

Reserves Falling reserve base triggers: devaluation of currency This, however, lead to: High inflation Capital flight

ECONOMIC INTEGRATION 1- Free Trade Agreement 2- Customs Union 3- Common Market 4- Monetary Integration 5- Full Economic Integration

Free Trade Area A formal agreement between two or more countries to reduce (preferably eliminate) import barriers among member countries. Example: NAFTA »EFTA »MERCOSUR

Customs Union Members of a customs union not only have reduced or eliminated tariffs among themselves, but also have a common external tariffs on goods imported from non-member countries. Example: ASEAN

Common Market A common market eliminates all tariffs and barriers to trade among member countries, adopts a set of common external tariffs on non-members, and removes all restrictions on the flow of capital and labor among member countries.

Monetary Union Monetary union establishes a common currency and a common central bank to coordinate the monetary policies of the member countries. Example: EU

Political Union Political union entails a common political system among member countries. Example: U.S.A.