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Chapter 2- 1
Economic SystemsEconomic Systemsand Developmentand Development
Chapter 2- 2
• 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
Chapter ObjectiveChapter Objective
Chapter 2- 3
Economic SystemsEconomic Systems
Centrally Planned Market
Mostly private (individualor business) ownership of
economic resources
Government and privateownership of economic
resoures split rather evenly
Government ownership ofeconomic resources and
state planning
Mixed
Chapter 2- 4
Centrally Planned EconomyCentrally Planned EconomyCentrally Planned EconomyCentrally Planned Economy
Government owns most land, factories and other economic resources and plans nearly all economic activity Asia
Central EuropeEastern Europe
Latin America
Russia (1917)China (1949)Cuba (1959)
Welfare of the groupis paramount
Economic and socialequality is the goal
“Communist” systemis needed
Chapter 2- 5
Decline of Central PlanningDecline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs
Chapter 2- 6
Focus on ChinaFocus on China
Socialism withChinese
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
Chapter 2- 7
Quick Study 1Quick 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.
Chapter 2- 8
Mixed EconomyMixed Economy
Noble goals:Noble goals:
Low unemployment and poverty
Steady economic growth
Equitable distribution of wealth
But stagnant:But stagnant:
State-owned businesses uncompetitive
Prices and taxes higher, living standards mixed
Privatized state firms to boost competitiveness
Government and private parties share ownership of land, factories and other economic resources rather evenly
Chapter 2- 9
Private parties (individuals or businesses) own vast majority of land, factories and other economic resources
Demand
Quantity of a good or service that buyers are willing to purchase at a
specific selling price
Market EconomyMarket Economy
Supply
Quantity of a good or service that producers
are willing to provide at a specific selling price
Chapter 2- 10
Laissez-FaireLaissez-Faire Economics Economics
Less governmentinterference 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
Chapter 2- 11
Government’s Role in aGovernment’s Role in aMarket EconomyMarket Economy
Enforce antitrust laws
Preserve property rights
Provide fiscal and monetary stability
Preserve political stability
Chapter 2- 12
Enforce Antitrust LawsEnforce Antitrust Laws
Encourages development of industries with as
many competing businesses as market will sustain
Keeps consumer prices in check Prevents growth-stunting monopolies
Chapter 2- 13
Preserve Property RightsPreserve 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
Chapter 2- 14
Provide Fiscal & Monetary Provide Fiscal & Monetary StabilityStability
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
Chapter 2- 15
Preserve Political StabilityPreserve 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
Chapter 2- 16
Economic Freedom & WealthEconomic Freedom & Wealth
Chapter 2- 17
Quick Study 2Quick 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?
Chapter 2- 18
Economic DevelopmentEconomic Development
Economic well-being of one Economic well-being of one nation’s people relative to nation’s people relative to another nation’s peopleanother 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)
Productivity is key
Ratio of outputs (that created)to inputs (resources used to
create output)
Chapter 2- 19
National ProductionNational ProductionGDP is the value of goods and services that a nation produces GDP is the value of goods and services that a nation produces
during a one-year period (GNP adds international activities)during a one-year period (GNP adds international activities)
PotentialPotentialproblemsproblemsPotentialPotentialproblemsproblems
PurchasingPurchasingpower paritypower parityPurchasingPurchasing
power paritypower 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
Chapter 2- 20
National Wealth at PPPNational Wealth at PPP
PPP Estimate of GDP per Capita GDP per Capita
Country (U.S. $) (U.S. = 100)
United States 36,100 36,100Switzerland 37,400 30,500Canada 23,100 30,300Australia 20,700 28,100United Kingdom 26,400 28,000Japan 31,300 27,000Czech Republic 6,800 15,100Hungary 6,400 13,900Mexico 6,300 9,200Turkey 2,600 6,400
Chapter 2- 21
Quick Study 3Quick 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?
Chapter 2- 22
Human Development IndexHuman Development Index
Chapter 2- 23
Classifying CountriesClassifying Countries
Developed Country
Emerging Market
Newly IndustrializedCountry
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
Chapter 2- 24
Quick Study 4Quick 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.
Chapter 2- 25
Economic TransitionEconomic Transition
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
Fundamental reorganization of an economy and the creation of new free-market institutions
Chapter 2- 26
Obstacles to TransitionObstacles to Transition
Culturaldifferences
Culturaldifferences
Environmentaldegradation
Environmentaldegradation
Capitalshortage
Capitalshortage
Lack of managerialexpertise
Lack of managerialexpertise
Chapter 2- 27
Focus on RussiaFocus on Russia
Operated under a staunchly communist system forabout 75 years
Underwent a rough transition of simultaneouseconomic and political reform
But government tax revenuesare increasing and foreigninvestment is returning
Challenges include developing managerial talent and fostering political and social stability
Chapter 2- 28
Quick Study 4Quick 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?
Chapter 2- 29
• 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.
Chapter SummaryChapter Summary
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