1. Chapter 4 Economic Systems and Development

2. © Prentice Hall, 2008International 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 Preview

3. © Prentice Hall, 2008International Business 4e Chapter 4 - 3 Economic Systems Centrally Planned Market Mostly private (individual or business) ownership of economic resources Government and private ownership of economic resoures split rather evenly Government ownership of economic resources and state planning Mixed

4. © Prentice Hall, 2008International Business 4e Chapter 4 - 4 Centrally Planned Economy Government owns most land, factories, and other economic resources and plans nearly all economic activity Asia Central Europe Eastern Europe Latin America Russia (1917) China (1949) Cuba (1959)  Welfare of the group is paramount  Economic and social equality is the goal  “Communist” system is needed

5. © Prentice Hall, 2008International Business 4e Chapter 4 - 5 Decline of Central Planning Central planning failed to:  Create economic value  Provide incentives  Achieve rapid growth  Satisfy consumer needs

6. © Prentice Hall, 2008International Business 4e Chapter 4 - 6 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

7. © Prentice Hall, 2008International Business 4e Chapter 4 - 7 Mixed Economy 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 Government and private parties share ownership of land, factories, and other economic resources rather evenly

8. © Prentice Hall, 2008International Business 4e Chapter 4 - 8 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 Economy Supply Quantity of a good or service that producers are willing to provide at a specific selling price

9. © Prentice Hall, 2008International Business 4e Chapter 4 - 9 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

10. © Prentice Hall, 2008International Business 4e Chapter 4 - 10 Government’s Role in a Market Economy  Enforce antitrust laws  Preserve property rights  Provide fiscal and monetary stability  Preserve political stability

11. © Prentice Hall, 2008International Business 4e Chapter 4 - 11 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

12. © Prentice Hall, 2008International Business 4e Chapter 4 - 12 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

13. © Prentice Hall, 2008International Business 4e Chapter 4 - 13 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

14. © Prentice Hall, 2008International Business 4e Chapter 4 - 14 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

15. © Prentice Hall, 2008International Business 4e Chapter 4 - 15 Economic Freedom & Wealth

16. © Prentice Hall, 2008International Business 4e Chapter 4 - 16 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)

17. © Prentice Hall, 2008International Business 4e Chapter 4 - 17 National Production GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities) PotentialproblemsPotentialproblems Purchasing power parity Purchasing 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

18. © Prentice Hall, 2008International Business 4e Chapter 4 - 18 National Wealth at PPP PPP Estimate of GDP per Capita Country (U.S. $) (U.S. = 100) United States39,70039,700 Switzerland47,90034,700 Australia32,40032,400 Canada30,60031,800 United Kingdom35,60030,800 Japan36,50029,600 Czech Republic10,60018,600 Hungary10,00015,900 Mexico 6,60010,200 Turkey 4,200 7,600

19. © Prentice Hall, 2008International Business 4e Chapter 4 - 19 Human Development Index

20. © Prentice Hall, 2008International Business 4e Chapter 4 - 20 Classifying Countries Developed Country Emerging Market Newly Industrialized Country 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

21. © Prentice Hall, 2008International Business 4e Chapter 4 - 21 Economic 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

22. © Prentice Hall, 2008International Business 4e Chapter 4 - 22 Obstacles to Transition Cultural differences Environmental degradation Capital shortage Lack of managerial expertise

23. © Prentice Hall, 2008International Business 4e Chapter 4 - 23 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

24. © Prentice Hall, 2008International 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 Review