1. Economic Systems and Development

2. © Prentice Hall, 2006International Business 3e Chapter 4 - 2 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

3. © Prentice Hall, 2006International Business 3e Chapter 4 - 3 Economic Systems Centrally Planned - Government ownership of economic resources and state planning Mixed - Government and private ownership of economic resoures split rather evenly Market - Mostly private (individual or business) ownership of economic resources

4. © Prentice Hall, 2006International Business 3e Chapter 4 - 4 Centrally Planned Economy 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 Asia Central Europe Eastern Europe Latin America - Russia (1917) - China (1949) - Cuba (1959)

5. © Prentice Hall, 2006International Business 3e Chapter 4 - 5 Decline of Central Planning Central planning failed to: -Create economic value -Provide incentives -Achieve rapid growth -Satisfy consumer needs

6. © Prentice Hall, 2006International Business 3e Chapter 4 - 6 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

7. © Prentice Hall, 2006International Business 3e Chapter 4 - 7 Mixed Economy Government and private parties share ownership of land, factories and other economic resources rather evenly Noble goals - Low unemployment and poverty - Steady economic growth - Equitable distribution of wealth But stagnant - State-owned businesses uncompetitive - Prices and taxes higher, living standards mixed - Privatized state firms to boost competitiveness

8. © Prentice Hall, 2006International Business 3e Chapter 4 - 8 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

9. © Prentice Hall, 2006International Business 3e Chapter 4 - 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

10. © Prentice Hall, 2006International Business 3e Chapter 4 - 10 Government’s Role in a Market Economy Enforce antitrust laws Preserve property rights Provide fiscal and monetary stability Preserve political stability

11. © Prentice Hall, 2006International Business 3e Chapter 4 - 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

12. © Prentice Hall, 2006International Business 3e Chapter 4 - 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

13. © Prentice Hall, 2006International Business 3e Chapter 4 - 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

14. © Prentice Hall, 2006International Business 3e Chapter 4 - 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

15. © Prentice Hall, 2006International Business 3e Chapter 4 - 15 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)

16. © Prentice Hall, 2006International Business 3e Chapter 4 - 16 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 - Overlooks certain transactions - Ignores economic growth rates - Averages disguise regions - May ignore purchasing power Purchasing power parity - Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries

17. © Prentice Hall, 2006International Business 3e Chapter 4 - 17 National Wealth at PPP PPP Estimate of GDP per Capita Country (U.S. $) (U.S. = 100) United States36,10036,100 Switzerland37,40030,500 Canada23,10030,300 Australia20,70028,100 United Kingdom26,40028,000 Japan31,30027,000 Czech Republic 6,80015,100 Hungary 6,40013,900 Mexico 6,300 9,200 Turkey 2,600 6,400

18. © Prentice Hall, 2006International Business 3e Chapter 4 - 18 Classifying Countries Developed Country - Highly industrialized, highly efficient and whose people enjoy a high quality of life Emerging Market - Newly industrialized countries plus those with potential to be newly industrialized Newly Industrialized Country - Recently greater national production and exports from industrial operations Developing Country - Poor infrastructure and extremely low personal income

19. © Prentice Hall, 2006International Business 3e Chapter 4 - 19 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

20. © Prentice Hall, 2006International Business 3e Chapter 4 - 20 Obstacles to Transition Lack of managerial expertise Capital shortage Environmental degradation Cultural differences

21. © Prentice Hall, 2006International Business 3e Chapter 4 - 21 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