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
© Prentice Hall, 2008 International Business 4e Chapter 4 - 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
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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
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Decline of Central PlanningDecline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Economic Freedom & WealthEconomic Freedom & Wealth
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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)
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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
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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
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Human Development IndexHuman Development Index
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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
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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
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Obstacles to TransitionObstacles to Transition
Culturaldifferences
Culturaldifferences
Environmentaldegradation
Environmentaldegradation
Capitalshortage
Capitalshortage
Lack of managerialexpertise
Lack of managerialexpertise
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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
© Prentice Hall, 2008 International Business 4e Chapter 4 - 24
• 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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