1. Economic Systems and Development

2. Chapter Objective
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. 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

4. Centrally Planned Economy
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

5. Decline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs

6. Chinese characteristics:
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. Quick Study 1
1- What is meant by economic system? Explain the relation between culture and economics.
2- What is a centrally planned economy? Describe the link between central planning and communism.
3- Identify several factors that contributed to the decline of central planned economies.

8. Mixed Economy Noble goals: But stagnant:
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

9. Market Economy Supply Demand
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

10. 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

11. Government’s Role in a Market Economy
Enforce antitrust laws
Preserve property rights
Provide fiscal and
monetary stability
Preserve political stability

12. 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

13. 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

14. 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

15. 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

16. Economic Freedom & Wealth

17. Quick Study 2
1- What is a mixed economy? Explain the origin of mixed economies.
2- Explain why the mixed-economy ideal is in decline and the key role of privatization?
3- Define what is the meant by market economy and identify its three required feature?
4- Explain government role in a market economy. What is the relation between economic freedom and standard of living?

18. 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)

19. 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

20. National Wealth at PPP PPP Estimate of GDP per Capita GDP per Capita
Country (U.S. $) (U.S. = 100)
United States 36, ,100
Switzerland 37, ,500
Canada 23, ,300
Australia 20, ,100
United Kingdom 26, ,000
Japan 31, ,000
Czech Republic 6, ,100
Hungary 6, ,900
Mexico 6, ,200
Turkey 2, ,400

21. Quick Study 3
1- What is meant by economic development? Explain how productivity (and information technology) helps improve standards of living.
2-Describe three measures of economic development and list their advantages and disadvantages.
3- Explain the concept of purchasing power parity. What are its implications for a nation's relative income per capita?

22. Human Development Index

23. 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

24. Quick Study 4
1- Explain the value of the Human Development Index (HDI) in measuring a nation's level of development.
2- How are communicable diseases devastating human and economic development in some poor nations?
3- Identify the main characteristics of: (a) developed countries, (b) newly industrialized countries, and (c) developing countries.
4- Name three countries that fall into each of the three country classifications.

25. 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

26. Obstacles to Transition
Capital
shortage
Lack of
managerial
expertise
Environmental
degradation
Cultural
differences

27. 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

28. Quick Study 4
1- What are several of the reform measures involved in undergoing economic transition to a market economy?
2- Describe some of the remaining obstacles to businesses in transitional economies.
3- Explain Russia’s experience with economic transition. What are some tips for people wishing to do business in Russia?

29. Chapter Summary
This chapter introduces different economic systems and examines the effect of economics on international business. Business transactions depend on a nation’s economic system—the structure and processes that a country uses to allocate its resources and conduct its commercial activities. A centrally planned economy is a system in which land, factories, and other economic resources are owned by the government, which plans nearly all economic activity. In a mixed economy, ownership of land, factories, and other economic resources are more equally split between private and government. In a market economy, the majority of land, factories, and other economic resources are privately owned. The forces of supply and demand determine who produces what and the prices of products, labor, and capital. Development can be measured using four alternative methods: the volume of a nation’s annual production using such figures as gross domestic product and gross national product; purchasing power parity—the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries; and a nation’s level of human development—a measure of the extent to which a government satisfies the broader needs of its people. Economic transition creates new free-market institutions.

30. Thanks