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
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

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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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