1. Economic Systems and Market Methods
Chapter 4
Economic Systems and Market Methods
Chapter 4: Economic Systems and Market Methods
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Introduction
Managers assess a country’s economic environment knowing
Countries differ in different ways
Economic and political changes alter market circumstances
It is important to understand connections, change, and consequences
The challenges of the comeback
Choices of citizens, policymakers, and institutions
Managers study economic environments to estimate how market trends and government policy influence the performance of their companies. A country’s economic policies are a leading indicator of a government’s goals and its planned use of economic tools and market reforms. Managers should study a country’s economic environment to assess its development, explain its performance, and estimate its potential. Managers do this knowing countries differ in different ways, economic and political changes alter market circumstances, that it’s critical to make connections between events and predict the consequences of changes, the challenges of the comeback, and choices of citizens, policymakers, and institutions.
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3. International Economic Analysis
A universal assessment of economic environments is difficult because of:
System Complexity
Identifying proper indicators is difficult
Market Dynamism
New economic circumstances
Market Interdependence
Markets influence each other
Data Overload
Complicates decision-making
Determining which countries warrant investment is not easy. It’s very difficult to assess the potential of a country because any type of assessment relies on behavioral assumptions as well as more scientific principles.
There are some 208 discrete economic environments in the world today. Managers need to narrow them down and identify exactly which countries offer the greatest potential return for the least risk.
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Economic Freedom
Economic freedom – people have the right to work, produce, consume, save, and invest the way they prefer
measured across business freedom, monetary freedom, fiscal freedom, investment freedom, freedom from corruption, property rights, trade freedom, government size, financial freedom, and labor freedom
So, it’s important for managers to monitor a range of economic issues, but perhaps most important is an assessment of economic freedom, or what a manager has the freedom to do. Economic freedom reflects the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty.
In some countries these freedoms are taken for granted, while in others they are rare.
Economic freedom advanced in As you might expect, it tends to be higher in Western countries and lower in Eastern countries.
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5. Economic Freedom Economic Freedom by Region, with Population
This Figure shows economic freedom by region. Notice that most people in the world live in countries with lower degrees of economic freedom.
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6. Value of Economic Freedom
Economic freedom affects
Growth rates
Productivity
Income levels
Inflation
Employment
Life expectancy
Literacy
Political openness
Environmental sustainability
Why is economic freedom important? Countries with economic freedom typically have higher per capita income, standards of living, and social stability as compared to less free countries.
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7. Types of Economic Systems
An economic system refers to the mechanism that deals with the production, distribution, and consumption of goods and services
Types
Market economy
Command economy
Mixed economy
Managers can explore a country’s economic system to understand how the host government regulates the economy, protects property rights, sets fiscal and monetary policies, and enforces antitrust regulation.
There are three main types of economic systems: market, command, and mixed economies.
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8. Types of Economic Systems
This Figure shows the different types of economic systems.
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Market Economy
In a market economy individuals rather than governments make most economic decisions
Capitalism
private ownership of capital
Laissez-faire
governmental noninterference in economic affairs
In market economies private interests own resources, and prices determine supply and demand. While there is generally an attitude of laissez-faire the invisible hand does become more visible at times because of the need to provide public goods and protect society. Market economies maximize economic freedom.
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Command Economy
In a command economy the visible hand of the state supersedes the invisible hand of individuals
Government
owns and controls resources
determines prices
Communism
In a command economy, governments plan what goods and services will be produced, the quantity in which they are produced, and the price at which they are sold. Command economies constrain economic freedom.
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Mixed Economy
Most economies are mixed economies
fall between market and command economies
Socialism
regulate economic activity with a focus on social equality and a fair distribution of wealth
In a mixed economy, both government and private enterprise influence production, consumption, and savings. This type of economy supports socialism and the notion that the partly visible hand of the government commands and controls some factors of production. Therefore, economic freedom in a mixed economy is regulated.
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12. State Capitalism: Detour or Destination?
State capitalism refers to a system in which the government explicitly manipulates market outcomes for political purposes
promote certain industries to encourage economic development
develop national companies into global leaders
foreign companies restricted from strategic industries
Will free markets prevail or will governments be in control? Many countries today are allowing greater state control. The adoption of state capitalism allows governments to decide how, when, and where assets are valued and resources are allocated. China has been supporting the ideals of state capitalism, and many other countries now see it as an attractive option.
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13. Economic Development, Performance, and Potential
Broad classes of countries include
developing countries
largest number of countries
low per capita income
emerging economies
fast growing, relatively prosperous
BRICs – Brazil, Russia, India, and China
developed countries
high per capita income and standard of living
like the U.S., Japan, France, Australia
Managers need to assess a country’s level of economic development, performance, and potential. Countries can be classified as developing countries, emerging economies, and developed countries.
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