Economic Systems and Development

1. Economic Systemsand Development

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 Preview International Business 3e

3. 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 Economic Systems International Business 3e

4. 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) Centrally Planned Economy International Business 3e

5. Central planning failed to: Create economic value Provide incentives Achieve rapid growth Satisfy consumer needs Decline of Central Planning International Business 3e

6. 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 Focus on China International Business 3e

7. 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 Mixed Economy International Business 3e

8. 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 Market Economy International Business 3e

9. 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 Laissez-Faire Economics International Business 3e

10. Enforce antitrust laws Preserve property rights Provide fiscal and monetary stability Preserve political stability Government’s Role in aMarket Economy International Business 3e

11. Encourages development of industries with as many competing businesses as market will sustain Keeps consumer prices in check Prevents growth-stunting monopolies Enforce Antitrust Laws International Business 3e

12. 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 Preserve Property Rights International Business 3e

13. 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 Provide Fiscal & Monetary Stability International Business 3e

14. 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 Preserve Political Stability International Business 3e

15. 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) Economic Development International Business 3e

16. 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 National Production International Business 3e

17. PPP Estimate of GDP per Capita GDP per Capita Country (U.S. $) (U.S. = 100) United States 36,100 36,100 Switzerland 37,400 30,500 Canada 23,100 30,300 Australia 20,700 28,100 United Kingdom 26,400 28,000 Japan 31,300 27,000 Czech Republic 6,800 15,100 Hungary 6,400 13,900 Mexico 6,300 9,200 Turkey 2,600 6,400 National Wealth at PPP International Business 3e

18. 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 Classifying Countries International Business 3e

19. 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 Economic Transition International Business 3e

20. Lack of managerial expertise Capital shortage Environmental degradation Cultural differences Obstacles to Transition International Business 3e

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 International Business 3e