chapter 4 economic systems and development. © prentice hall, 2008international business 4e chapter...

Chapter 4 - 1International Business 4e© Prentice Hall, 2008

Chapter 4Chapter 4Economic SystemsEconomic Systemsand Developmentand Development

© Prentice Hall, 2008 International Business 4e Chapter 4 - 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 PreviewChapter Preview


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


Centrally Planned EconomyCentrally Planned EconomyCentrally Planned EconomyCentrally Planned Economy

Government owns most land, factories, and other economic resources and plans nearly all

economic activity

AsiaCentral Europe

Eastern Europe

Latin America

Russia (1917)China (1949)Cuba (1959)

Welfare of the groupis paramount

Economic and socialequality is the goal

“Communist” systemis needed


Decline of Central PlanningDecline of Central Planning

Central planning failed to:

Create economic value

Provide incentives

Achieve rapid growth

Satisfy consumer needs


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


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


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


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


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


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


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


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


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


Economic Freedom & WealthEconomic Freedom & Wealth


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)


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


National Wealth at PPPNational Wealth at PPP

PPP Estimate of GDP per Capita GDP per Capita

Country (U.S. $) (U.S. = 100)

United States 39,700 39,700Switzerland 47,900 34,700Australia 32,400 32,400Canada 30,600 31,800United Kingdom 35,600 30,800Japan 36,500 29,600Czech Republic 10,600 18,600Hungary 10,000 15,900Mexico 6,600 10,200Turkey 4,200 7,600


Human Development IndexHuman Development Index


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


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


Obstacles to TransitionObstacles to Transition

Culturaldifferences

Culturaldifferences

Environmentaldegradation

Environmentaldegradation

Capitalshortage

Capitalshortage

Lack of managerialexpertise

Lack of managerialexpertise


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


• 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 ReviewChapter Review

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