Economics and Economics and Emerging MarketsEmerging Markets
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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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Range of Economic SystemsRange of Economic Systems
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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 reforms since
Challenges ahead:
Political problems and social unrest
Unemployment and migrant labor
Eventual(?) reunification with Taiwan
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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 less competitive
Prices and taxes higher, living standards mixed
Government and private parties share ownership of land, factories, and other economic resources rather evenly
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Benefits of PrivatizationBenefits of Privatization
Privatization aims to:
Increase economic efficiency
Boost productivity
Raise living standards
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Discussion QuestionDiscussion Question
A __________ economy is one in which government and private parties share ownership of economic resources rather evenly.
a. Centrally planned
b. Systemic
c. Mixed
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Answer to Discussion QuestionAnswer to Discussion Question
A __________ economy is one in which government and private parties share ownership of economic resources rather evenly.
a. Centrally planned
b. Systemic
c. Mixed
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Private parties (individuals or businesses) own most land, factories, and other economic resources
Demand
Quantity buyers will purchase at a
specific selling price
Market EconomyMarket Economy
Supply
Quantity producers will provide at a
specific selling price
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Laissez-FaireLaissez-Faire Economics Economics
Less governmentinterference in business
Free choice• Alternative purchase options
Free enterprise• Firms choose products and markets
Price flexibility• Prices follow 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 Firms create new technologies and products Entrepreneurs start new businesses
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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 political risk Improves chances for business survival
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Discussion QuestionDiscussion Question
What are the three required features and four expected roles of government in any market economy?
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Answer to Discussion QuestionAnswer to Discussion Question
The three key features of a market economy are free choice, free enterprise, and price flexibility.
The four roles of government in a market economy are to: enforce antitrust laws, preserve property rights, provide fiscal and monetary stability, and preserve political stability.
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Economic Freedom & WealthEconomic Freedom & Wealth
Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (www.heritage.org).
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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, and service)
Infrastructure (communications,transportation, and
power)
People (physical health andeducation level)
Productivity
Ratio of outputs (that are created) to inputs (resources
used to create output)
Productivity
Ratio of outputs (that are 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)
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)
* POTENTIAL PROBLEMS ** POTENTIAL PROBLEMS ** POTENTIAL PROBLEMS ** POTENTIAL PROBLEMS *
Averages can disguise regionsAverages can disguise regionsAverages can disguise regionsAverages can disguise regions
Overlook certain transactionsOverlook certain transactionsOverlook certain transactionsOverlook certain transactions
May ignore purchasing powerMay ignore purchasing powerMay ignore purchasing powerMay ignore purchasing power
Ignore economic growth ratesIgnore economic growth ratesIgnore economic growth ratesIgnore economic growth rates
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Purchasing Power ParityPurchasing 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 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 7,600Source: Based on data from Organization for Economic Cooperation and Development (OECD), “Statistics” section (www.oecd.org).
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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
Fundamental reorganization of an economy and the creation of new free-market institutions
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Obstacles to TransitionObstacles to Transition
CulturalchangesCulturalchanges
Environmentaldegradation
Environmentaldegradation
Capitalshortage
Capitalshortage
Lack of managerialexpertise
Lack of managerialexpertise
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Operated under a staunchly communist system forabout 75 years
Underwent a rough transition of simultaneouseconomic and political reform
But the economy isimproving and foreigninvestment is returning
Challenges include developing managerial talent and fostering political and social stability
Focus on RussiaFocus on Russia
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