Transcript Economic Systems and Development

Economic Systems
and Development
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
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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
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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)
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Decline of Central Planning
Central planning failed to:
-
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs
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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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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
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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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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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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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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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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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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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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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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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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
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National Wealth at PPP
Country
United States
Switzerland
Canada
Australia
United Kingdom
Japan
Czech Republic
Hungary
Mexico
Turkey
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GDP per Capita
(U.S. $)
PPP Estimate of
GDP per Capita
(U.S. = 100)
36,100
37,400
23,100
20,700
26,400
31,300
6,800
6,400
6,300
2,600
36,100
30,500
30,300
28,100
28,000
27,000
15,100
13,900
9,200
6,400
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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
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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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Obstacles to Transition
Lack of managerial expertise
Capital shortage
Environmental degradation
Cultural differences
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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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