1. 1 Overview of Comparative Economics Chapter I How do we compare economies?

2. 2 Criteria for Classifying Economies How do we classify economies?

3. 3 Institutional Framework An economy (made up of a group of people located within a political entity that has particular geographical characteristics) functions according to certain Rules Customs Laws which all make up the institutional framework of the economy

4. 4 Institutional Mechanisms Allocation Mechanisms Forms of Ownership Role of Planning Types of Incentives The method of Income Redistribution and Social Safety Nets Role of Politics and Ideology

5. 5 I. Allocation Mechanisms What good and services are produced? How goods and services are produced? For whom goods and services are produced?  Production → allocating factor inputs  Distribution → allocating produced goods and service Three basic kinds of allocation mechanisms: 1. Traditional Economy 2. Market Economy 3. Command Economy

6. 6 II. Forms of Ownership Who owns the means of production? In capitalist economies, land and produced means of production (capital stock) are owned by private individuals or private firms (Market Capitalism) In socialist economies the state owns the land and the capital stock (Command Socialism)

7. 7 II. Other Forms of Ownership Intermediate forms of ownership (like cooperatives or worker ownership) Under socialism: central government vs local government ownership Religious groups’ ownership

8. 8 II. Forms of Ownership Market Capitalism vs Command Socialism United States vs Soviet Union ALSO Market Socialism vs Command Capitalism Yugoslavia and China vs Nazi Germany

9. 9 III. Role of Planning Centrally planned economy → planners’ preferences dominate allocative decision- making Market economy → consumers’ sovereignty dominates allocative decision-making

10. 10 III. Role of Planning Centrally planned economy is usually correlated with command socialism (Soviet Union, there are exceptions –command without planning → Soviet Russia during 1910s and 1920s) Market economy is usually correlated with market capitalism (there are exceptions—indicative planning → France and Japan)

11. 11 IV. Types of Incentives Material Incentives → paying people according to their productivity (their marginal product that maximizes profits for competitive firms hiring labor in such a system)  Under capitalism → takes the form of rewards for entrepreneurship and capital investment as economic profits Moral Incentives → trying to motivate workers by appealing to some higher collective goal

12. 12 V. Income Redistribution and Social Safety Nets Social Market Economies (or some advanced capitalist countries) → do their income redistribution through social safety nets Command Socialist Economies → did not have to redistribute income → their governments controlled the distribution of income by setting wages and forbidding capital or land income

13. 13 VI. Role of Politics and Ideology Central controversy Is democracy linked with market capitalism??? Is authoritarian regime linked with command economy???

14. 14 VI. Role of Politics and Ideology Friedman “libertarian” laissez-faire → lack of individual freedom In democracies, social democrat parties exist (like Sweden)  They support income redistribution and extensive social safety nets  They support nationalization and central planning  They do not support dictatorship

15. 15 VI. Role of Politics and Ideology Authoritarian political regimes pursued market capitalism (East Asia and Latin America) Market capitalism is not a guarantee of political democracy Islamic Fundamentalism  Imposition of an Islamic code-Shari’a  It is not a liberal democracy → individual rights and freedoms are subordinated to a Shari’a and the religious authorities  Economically it does not follow neither capitalism nor socialism

16. 16 Criteria for Evaluating Economies According to what criteria can we compare the relative performance of economies?

17. 17 Nine Criteria 1. Level of Output  Relationship between population and price level → gives real per capita income 2. Growth Rate Output  Must be corrected for Population Growth 3. Composition of Output  Notable variables of composition  Breakdown between consumption and investment  The share of military output  Public versus private goods

18. 18 Nine Criteria 4. Static Efficiency (Pareto Optimality)  No one in society can be made better off without making someone else worse off  Resources are being utilized to their best potential given the existing technology  Labor force is fully employed  The composition of goods being produced is what people want

19. 19 Nine Criteria 5. Dynamic Efficiency  Allocation of resources over time to maximize long-run sustainable growth  Example of unsustainable output maximization: Soviet Union pumping large amounts of oil in short periods of time → creating problems in the long run 6. Macroeconomic Stability  The lack of large fluctuations of output, employment or the overall price level

20. 20 Nine Criteria 7. Economic Security  Economic security of individuals in terms of income, employment and health-care 8. Degree of Equity of Income and Wealth Distribution  Socialist and social market economies usually have more equal distribution than strictly market capitalist economies 9. The Degree of Freedom  In terms of work, consumption, property, investment and civil and political realms  Market economies are ahead of command economies in this area

21. 21 A Summary of Possible Indexes Overall indicators  Per capita gross domestic product (GDP)  Real per capita GDP  Average rate of inflation  Share of gross private investment in GDP  Life expectancy at birth  Human Development Index (constructed from real per capita income, life expectancy, adult literacy rates and measures of educational enrollment)

22. 22 A Summary of Possible Indexes Focusing on the role of government  The share of GNP going to government consumption  Government taxes  Defense spending  Spending on education and health  Economic freedom index Income distribution  Lorenz curve (rank a country’s population on the horizontal axis according to income)  Gini coefficient (the area between the Lorenz curve and the 45 degree line divided by the total area under the 45- degree line)