Economic Systems and Market Methods Chapter 4 Economic Systems and Market Methods Chapter 4: Economic Systems and Market Methods Copyright © 2015 Pearson Education Ltd.

Copyright © 2015 Pearson Education Ltd. 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. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.

Copyright © 2015 Pearson Education Ltd. 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 2011. As you might expect, it tends to be higher in Western countries and lower in Eastern countries. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.

Types of Economic Systems This Figure shows the different types of economic systems. Copyright © 2015 Pearson Education Ltd.

Copyright © 2015 Pearson Education Ltd. 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. Copyright © 2015 Pearson Education Ltd.

Copyright © 2015 Pearson Education Ltd. 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. Copyright © 2015 Pearson Education Ltd.

Copyright © 2015 Pearson Education Ltd. 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. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.

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. Copyright © 2015 Pearson Education Ltd.