1. Chapter 4 Economic Systems and Development

2. International Business 4e
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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
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International Business 4e

3. 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
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International Business 4e

4. 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
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5. Decline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs
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6. 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
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7. 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
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8. 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
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9. 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
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International Business 4e

10. Government’s Role in a Market Economy
Enforce antitrust laws
Preserve property rights
Provide fiscal and
monetary stability
Preserve political stability
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11. 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
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12. 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
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13. 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
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14. 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
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15. Economic Freedom & Wealth
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International Business 4e

16. 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)
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International Business 4e

17. 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
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18. 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
Switzerland 47, ,700
Australia 32, ,400
Canada 30, ,800
United Kingdom 35, ,800
Japan 36, ,600
Czech Republic 10, ,600
Hungary 10, ,900
Mexico 6, ,200
Turkey 4, ,600
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19. Human Development Index
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20. 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
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International Business 4e

21. 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
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22. Obstacles to Transition
Capital
shortage
Lack of
managerial
expertise
Environmental
degradation
Cultural
differences
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23. 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
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International Business 4e

24. 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