In this chapter, you will learn about different economic systems and their effect on international business.

You will also:

•Recognize the importance of economic development.

•Understand how nations are classified as developing, newly industrialized, emerging, or developed.

•And learn about the process of economic transition and how countries implement p pmarket-based economic reforms.

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In this chapter, you will learn about different economic systems and their effect on international business.

You will also:

•Recognize the importance of economic development.

•Understand how nations are classified as developing, newly industrialized, emerging, or developed.

•And learn about the process of economic transition and how countries implement p pmarket-based economic reforms.

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The phrase “economic system” refers to the structure and processes a country uses to allocate its resources and conduct its commercial activities.

•Just as every culture reflects a mix of individual and group orientations, every economy displays a blend of individual and group values.

•Judging by the levels of government and private ownership in an economy, we can categorize it as a (1) centrally planned economy, (2) mixed economy, or (3) market economy.

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•We can arrange national economies on a horizontal scale based on their tendencies toward individualist or collectivist economic values.

•We see the hard-line communist nations of Cuba and North Korea on the far left of the diagram, and see the United States on the far right.

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In a centrally planned economy, government owns most economic resources and plans nearly all economic activity.

•The ultimate goal is to achieve political, social, and economic objectives focused on group welfare rather than individual well-being.

•By the 1970s, central planning prevailed across Eastern Europe, Asia, Africa, and Latin America.

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But nations that relied on central control of their economies failed to achieve their objectives. Specifically, they:

•Failed to create economic value by failing to produce quality products efficiently.

•Failed to provide incentives to maximize the benefits from resources, which slowed economic growth and lowered living standards.

•Failed to achieve rapid economic growth and witnessed themselves falling quickly behind other nations.

•And failed to satisfy consumer needs for even basic necessities.

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China describes its economic system as “socialism with Chinese characteristics.”

• China turned communist in 1949 but in 1979 allowed families to grow the crops they wanted and to sell their produce at free-market prices.

• Then, in 1984, township and village enterprises were legalized, which laid the groundwork for a market economy.

• Several challenges lie ahead for China:

• First, restriction of a true democracy means that political and social , y punrest arises sporadically and sometimes violently.

• Second, slow economic progress and high unemployment in rural areas encourages a large migrant worker class.

• And third, both China and Taiwan remain wary of reunification with the other.

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In a mixed economy like Australia, ownership of economic resources is split between private and government entities.

• Government controls some economic sectors important to national security and stability and provides unemployment and pension benefits.

• Mixed economies strive for low unemployment and poverty, steady economic growth, and an equitable distribution of wealth with good health and education systems

• Some mixed economies are hampered by government ownership that is less efficient than private ownership, and hurt by higher prices and taxes that lower living standards.

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• Privatization involves the sale of government-owned economic resources to private companies and individuals.

• Mixed economies use privatization to increase economic efficiency, boost productivity, and raise standards of living.

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The correct answer is c. Mixed

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•In a market economy, we find that private businesses and individuals own most economic resources.

•The price of a good or service is dictated by two forces that comprise the price mechanism: supply and demand.

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In a market economy, individual concerns are placed above group concerns.

•In other words, the entire group is thought to benefit when individuals receive rewards for acting in their self interests.

•Market economies are grounded on the principle of laissez-faire economics, which is French for “allow them to do [without interference].”

•The three key features at the root of a market economy are:

•Free choice, which gives individuals access to alternative purchase options., g p p

•Free enterprise, which means that companies decide what to produce and which markets to compete in.

•And price flexibility, which allows most prices to rise and fall according to the forces of supply and demand.

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In a market economy, government has four primary roles:

• Enforce competition/ antimonopoly laws

• Preserve property rights

• Provide a stable fiscal and monetary environment

• And preserve political stability

Let’s look at each of these a bit more closely…

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In a market economy, government is to discourage anticompetitive behaviours of companies by policing and enforcing various laws.

•This encourages the development of industries with many competing businesses, and prevents trade-restraining monopolies that can raise prices and exploit consumers.

•Australian Competition and Consumer Commission (ACCC), Corporations Law , Trade Practices Law

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Governments in market economies are also supposed to preserve property rights.

•A strong system of property rights protection ensures that people and businesses enjoy the fruits of their labor.

•In other words, it encourages individuals and firms to create and to invest in new technologies because their efforts are rewarded by the income that these technologies generate.

•It also encourages entrepreneurs to start new businesses because it safeguards their claims to assets.

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The government in a market economy is to provide a stable fiscal and monetary environment.

•This is achieved through effective management of fiscal and monetary policies.

•Stability reduces overall risk in an economy, improves business forecasts, and helps control inflation and unemployment rates.

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Finally, government in a market economy is to preserve political stability.

•This encourages the smooth operation of a market economy.

•Political stability promotes economic growth, reduces worries over political risk, and improves chances for business survival.

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Economic development is a measure for gauging the economic well-being of one nation’s people as compared with that of another nation’s people.

It captures several economic and human economic indicators, including:

•Economic output, both agricultural and industrial.

•Infrastructure, including power and transportation facilities.

•And a people’s physical health and level of education.

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There are several problems related to using GNP and GDP as indicators of economic development.

•First, they overlook certain transactions, including volunteer work and unreported cash transactions.

•Second, GNP and GDP ignore economic growth rates because they do not indicate whether an economy is growing or shrinking.

•Third, per capita figures are averages that can disguise high- or low-growth regions.

•Fourth, they may ignore national differences in purchasing power because comparisons at official exchange rates do not reflect local prices.

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•To correct for the inability to compare purchasing power across countries, we turn to another measure of economic development called purchasing power parity.

•Purchasing power parity refers to the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries.

•On the next slide, we use purchasing power parity to compare the wealth of several nations.

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•If we convert Swiss francs to dollars at official exchange rates, we estimate Switzerland’s GDP per capita at $47,900. This is higher than the official GDP per capita of the United States at $39,700. This is shown in the first column of the chart above.

•But when we adjust Switzerland’s GDP per capita for PPP we obtain a revised GDP per capita of just $34,700, which is lower than the U.S. GDP figure of $39,700. This is shown in the second column of the chart above.

•Why the difference? GDP per capita at PPP is lower in Switzerland because of•Why the difference? GDP per capita at PPP is lower in Switzerland because of that nation’s higher cost of living. It simply costs more to buy the same basket of goods in Switzerland than it does in the United States.

•The opposite situation occurs in the case of the Czech Republic. Because the cost of living there is lower than in the United States, the Czech Republic’s GDP per capita rises from $10,600 to $18,600 when PPP is considered.

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•The human development index measures the extent to which a people’s needs are satisfied and addressed equally across a nation's entire population.

•This index measures the extent to which a nation provides its people with a long and healthy life, an education, and a decent standard of living.

•There often is a disparity between wealth and the level of human development in a nation. In other words, high national income alone does not guarantee human progress.

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We can classify countries according to indicators such as GNP per capita, the portion of an economy devoted to agriculture, and the amount of exports in the form of industrial goods.

•Developed countries are highly industrialized, highly efficient, and whose people enjoy a high quality of life. People in these countries receive the finest health care and benefit from the best educational systems in the world.

•Newly industrialized countries have recently increased the portion of national production and exports that they derive from industrial operationsproduction and exports that they derive from industrial operations.

•Emerging markets are newly industrialized countries plus those having the potential to become newly industrialized.

•Developing countries have poor infrastructures, extremely low personal incomes, lack key resources and skills, and rely on one or a few sectors of production, such as agriculture or mineral mining.

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Economic transition involves changing a nation’s fundamental economic organization and creating new free-market institutions.

Countries undertaking transition must normally:

•Stabilize the economy, reduce budget deficits, and expand credit availability.

•Allow prices to reflect supply and demand.

•Legalize private business, sell state-owned companies, and support property rights.g

•And reduce barriers to trade and investment and allow currency convertibility. Economic transition involves changing a nation’s fundamental economic organization and creating new free-market institutions.

Remaining obstacles in transition countries include a lack of managerial expertise, a shortage of capital, cultural changes, and environmental degradation.

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Countries undergoing transition still can face several main obstacles:

•First, is a lack of managerial expertise. Central planners had little need for management skills in areas such as strategy, production, distribution, or advertising. But the gap between managers from the former communist nations and Western nations is narrowing.

•Second, is a shortage of capital. Transition is expensive and requires funding to develop a telecommunications and infrastructure system, to set up financial institutions and to educate people in market economicsinstitutions, and to educate people in market economics.

•Third, are cultural changes. Transition causes cultural change and replaces dependence on the government with greater emphasis on individuals. Cuts are often needed in welfare, unemployment benefits, and guaranteed government jobs.

•Fourth, is environmental degradation. Economic and social policies of former communist governments were often disastrous for the natural environment.g

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Russia’s experience with communism began in 1917 and for 75 years the government controlled all aspects of the economy.

•Ordinary citizens have suffered during Russia’s transition.

•Although some Russians retained their jobs in newly privatized businesses, others turned to the black market or organized crime. Such that some say it is difficult to

•Differentiate beetween government, the army and organized crime

•Several challenges lie ahead for Russia:

•First, managers must improve their skills in every facet of management practice.

•Second, political instability and nationalism need to be better controlled and the nation’s nuclear weapons need to be secured.

•Third, instability characterizes relations between the government and business. The imprisonment of some well-known business leaders illustrates why the Russian government is not trusted.

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•Check out Chapter 4 of the text book on You Tube to learn more about Emergng markets

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Answer:

Economic transition involves changing a nation’s fundamental economic organization and creating new free-market institutions.

Essentially, it involves:

•Stabilizing the economy, reducing budget deficits, and expanding credit availability.

•Allowing prices to reflect supply and demand.g p pp y

•Legalizing private business, selling state-owned companies, and supporting property rights.

•Reducing barriers to trade and investment and allowing currency convertibility.

Remaining obstacles in transition countries include a lack of managerial expertise, a shortage of capital, cultural changes, and environmental degradation.

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