Economics and Emerging Markets Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 4

4 - 2 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Range of Economic Systems

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Decline of Central Planning Central planning failed to:  Create economic value  Provide incentives  Achieve rapid growth  Satisfy consumer needs

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 reforms since Challenges ahead: Political problems and social unrest Unemployment and migrant labor Eventual(?) reunification with Taiwan

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Mixed Economy Noble goals:  Low unemployment and poverty  Steady economic growth  Equitable distribution of wealth But stagnant:  State-owned businesses less competitive  Prices and taxes higher, living standards mixed Government and private parties share ownership of land, factories, and other economic resources rather evenly

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Benefits of Privatization Privatization aims to:  Increase economic efficiency  Boost productivity  Raise living standards

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Discussion Question A __________ economy is one in which government and private parties share ownership of economic resources rather evenly. a. Centrally planned b. Systemic c. Mixed

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Answer to Discussion Question A __________ economy is one in which government and private parties share ownership of economic resources rather evenly. a. Centrally planned b. Systemic c. Mixed

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Private parties (individuals or businesses) own most land, factories, and other economic resources Demand Quantity buyers will purchase at a specific selling price Market Economy Supply Quantity producers will provide at a specific selling price

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Laissez-Faire Economics Less government interference in business Free choice Alternative purchase options Free enterprise Firms choose products and markets Price flexibility Prices follow supply and demand

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Government’s Role in a Market Economy  Enforce antitrust laws  Preserve property rights  Provide fiscal and monetary stability  Preserve political stability

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 Firms create new technologies and products Entrepreneurs start new businesses

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Preserve Political Stability Encourages businesses to engage in activities without fear of disrupted future operations Promotes economic growth generally Reduces worries of political risk Improves chances for business survival

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Discussion Question What are the three required features and four expected roles of government in any market economy?

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Answer to Discussion Question The three key features of a market economy are free choice, free enterprise, and price flexibility. The four roles of government in a market economy are to: enforce antitrust laws, preserve property rights, provide fiscal and monetary stability, and preserve political stability.

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Economic Freedom & Wealth Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Economic Development Economic well-being of one nation’s people relative to another nation’s people  Economic output (agricultural, industrial, and service)  Infrastructure (communications, transportation, and power)  People (physical health and education level) Productivity Ratio of outputs (that are created) to inputs (resources used to create output)

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall National Production GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities) * POTENTIAL PROBLEMS * Averages can disguise regions Overlook certain transactions May ignore purchasing power Ignore economic growth rates

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Purchasing Power Parity Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 Source: Based on data from Organization for Economic Cooperation and Development (OECD), “Statistics” section (

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Human Development Index

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 Fundamental reorganization of an economy and the creation of new free-market institutions

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Obstacles to Transition Cultural changes Environmental degradation Capital shortage Lack of managerial expertise

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall  Operated under a staunchly communist system for about 75 years  Underwent a rough transition of simultaneous economic and political reform  But the economy is improving and foreign investment is returning  Challenges include developing managerial talent and fostering political and social stability Focus on Russia