1. UNIT 4 Economics Emerging Markets International Trade http://wps
Describe what is meant by a centrally planned economy and explain why its use is declining.
Identify the main characteristics of a mixed economy and explain the emphasis on privatization.
Explain how a market economy functions and identify its distinguishing features.
Describe the different ways to measure a nation’s level of development.
Discuss the process of economic transition and identify the remaining obstacles for businesses.

2. Economic Systems Centrally Planned Mixed Market
Government ownership of
economic resources and
state planning
Mostly private (individual
or business) ownership of
economic resources
The phrase “economic system” refers to the structure and processes a country uses to allocate its resources and conduct its commercial activities.
Just as every culture reflects a mix of individual and group orientations, every economy displays a blend of individual and group values.
Judging by the levels of government and private ownership in an economy, we can categorize it as a (1) centrally planned economy, (2) mixed economy, or (3) market economy.
Government and private
ownership of economic
resoures split rather evenly

3. Range of Economic Systems
We can arrange national economies on a horizontal scale based on their tendencies toward individualist or collectivist economic values.
We see the hard-line communist nations of Cuba and North Korea on the far left of the diagram, and see the United States on the far right.

4. Centrally Planned Economy
**Government owns land, factories, and other economic resources.
**Govt. plans and administers economic activity and development.
Characteristics of CPE
WELFARE of the “group” is paramount rather than individual well-being.
ECONOMIC/SOCIAL GAP goal
Slow to innovate, apathy, frustration, no incentive to promote social economic interests.
“COMMUNIST” system needed.
Manages economy & society.
Property owned collectively
Control over distribution of resources is centralized
EXAMPLES:
Cuba
Libya
North Korea
Saudi Arabia
Market Economy Vs. Planned Economy - YouTube
In a centrally planned economy, government owns most economic resources and plans nearly all economic activity. In a centrally planned economy, the government decides what products to make, how to make them and how to get them to consumers. They control capital, natural resources, investment in new equipment, cooperation between manufacturers, prices and wages. They produce only the most desirable or needed goods and can protect their industries from outside competition
Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals.“
WELFARE The ultimate goal is to achieve political, social, and
EDONOMIC/SOCIAL GAP economic objectives focused on group welfare rather than individual well-being.
COMMUNIST SYSTEM centrally planned economies have strong political overtones and are closely associated with socialistic and communistic governments.
Central economic planning as practiced in the Soviet Union and other communist countries required subordination, obedience, and discipline on the part of the individual for the benefit of the state. Choice was limited to the existing supply of goods and services and private decision making in regards to employment, occupation, and selection of workplace was also severely restricted. In communist Poland, for instance, the primary role of labor unions was to expedite the production goals of the state planning commissions. Also in that country, wage levels were determined not through collective bargaining or marketplace demand but rather by central planning authorities without any union input
As an economic system, socialism seeks to manage the economy through deliberate and collective social control. Communism, however, seeks to manage both the economy and the society by ensuring that property is owned collectively and that control over the distribution of resources is centralized to achieve both classlessness and statelessness. Under communism, all people are considered equal and are provided for equally, regardless of their contributions to the economy or to society. This is different from socialism, but both socialism and communism are similar in that they seek to prevent many of the ill effects that are sometimes associated with capitalism, such as economic inequality.
It is rare, however, for any economic system to exist in a pure state.
For instance, the health-care system of the People's Republic of China, an avowed communist state, is in a state of transition. China's universal health-care system, which was based on central planning, has largely been dismantled and replaced with various health insurance schemes, many of which are funded by member contributions. By the 1970s, central planning prevailed across Eastern Europe
, Asia, Africa, and Latin America.
Although most economies today are market economies or mixed economies (which are partially planned), planned economies exist in very few countries such as Cuba, Libya, North Korea, Saudi Arabia, Belarus, and Myanmar.11
Belarus – 1991 broke off from Soviet Union as Independent republic. Located between Soviet Union, Poland, Lithuania.

5. Decline of Central Planning
Central planning failed to:
Create economic value
Provide incentives
Achieve rapid growth
Satisfy consumer needs
But nations that relied on central control of their economies failed to achieve their objectives. Specifically, they:
Failed to create economic value by failing to produce quality products efficiently.
Failed to provide incentives to maximize the benefits from resources, which slowed economic growth and lowered living standards.
Failed to achieve rapid economic growth and witnessed themselves falling quickly behind other nations.
And failed to satisfy consumer needs for even basic necessities.
BOTTOM LINE IS THIS:
Regardless of their good intentions, and no matter how brilliant they are as individuals, government central planners simply cannot possess all the knowledge that’s necessary to sort winners from losers in the marketplace. At least not in a way that consistently produces a result superior than simply leaving everyone alone

6. Chinese characteristics:
Focus on China
Challenges ahead:
Political problems and
social unrest
Unemployment and
migrant labor
Eventual(?) reunification
with Taiwan
QUESTION:
Why would China want a reunification with Taiwan?
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
China describes its economic system as “socialism with Chinese characteristics.”
China turned communist in 1949 but in 1979 allowed families to grow the crops they wanted and to sell their produce at free-market prices.
Then, in 1984, township and village enterprises were legalized, which laid the groundwork for a market economy.
Several challenges lie ahead for China:
First, restriction of a true democracy means that political and social unrest arises sporadically and sometimes violently.
Second, slow economic progress and high unemployment in rural areas encourages a large migrant worker class.
China is now experiencing the largest mass migration of people from the countryside to the city in history. An estimated 230 million Chinese (2010) —a number equivalent to two thirds the population of the United States four three times the number of people who emigrated to American from Europe over a century—have left the countryside and migrated to the cities in recent years. About 13 million new people join the legions every year. The number is expected to reach 250 million by 2012 and surpass 300 million and maybe reach 400 million by And
third, both China and Taiwan remain wary of reunification with the other.
Taiwan has just re-elected its incumbent president, Ma Ying-jeou, a proponent of closer economic ties with China.
But now, as President Ma begins his second-term, some expect China to start ratcheting up pressure to build stronger political ties, and move Taiwan closer to reunification with China.
An early sign of that came in a post-election statement from Beijing. An anchor on China’s state-run television read a summary: “The Mainland is willing to join hands with the people of Taiwan from all walks of life, as they break new ground in peaceful development in cross-straits relations.”
Then came the kicker.
“This is on the basis of continuing to oppose Taiwan independence, and sticking to the 1992 consensus.”
Fourth, advanced entrepreneurial and management skills.
Why would China care about reuniting with/Taiwan. Taiwan possess all of the technology and enthreneurial
intelligence China wants.

7. Mixed Economy Noble goals: But stagnant:
Government and private parties share ownership of land, factories, and other economic resources rather evenly
Noble goals:
But stagnant:
Low unemployment
and poverty
Steady economic growth
Equitable distribution
of wealth
State-owned businesses
less competitive
because
Prices and taxes higher,
living standards mixed
In a mixed economy, ownership of economic resources is split rather evenly between private and government entities.
Government controls the economic sectors important to national security and stability and provides generous unemployment programs.
Mixed economies strive for low unemployment and poverty, steady economic growth, and an equitable distribution of wealth.
Many mixed economies are hampered by government ownership that is less efficient than private ownership, and hurt by higher prices and taxes that lower living standards.

8. Purpose of privatization:
Privatization transfer from public or government control or ownership to private enterprise
Purpose of privatization:
improve the efficiency of state-owned enterprises
free up resources for social services
mobilize capital for expansion and modernization.
Benefits:
Increase economic efficiency
Boost productivity
Raise living standards
Key word: competition
The more competitive the industry, the greater the improvement in output, profitability, and efficiency.
Privatization involves the sale of government-owned economic resources to private companies and individuals.
Mixed economies use privatization to increase economic efficiency, boost productivity, and raise standards of living.
Often protected from competition and subsidized by their public owners, state enterprises in many developing countries employ too many people, often pay them wages and benefits that are higher than their private sector counterparts, and are governed by rigid labor contracts. In many cases, these features have led to low productivity and excessive labor costs, which, in turn, have contributed to inefficiencies and financial losses. Rigid labor contracts or collective bargaining agreements at the enterprise level also contribute to lowproductivity and high costs. In addition to the high job security (including guaranteed lifetimeemployment in some cases) enjoyed by state enterprise workers, such contracts often place restrictionson the right of employers to hire and fire, allocate work, and subcontract activities to nonunion parties.
These problems contribute not only to increased costs of doing business but also to high rates ofabsenteeism and moonlighting.

9. Market Economy
Private parties (individuals or businesses) own most land, factories, and other economic resources
Price of a good or service is dictated by two forces that comprise the price mechanism: supply and demand.
Supply
Quantity producers will provide at a specific selling price
Demand
Quantity buyers will purchase at a specific selling price
In a market economy, we find that private businesses and individuals own most economic resources.
The price of a good or service is dictated by two forces that comprise the price mechanism: supply and demand.

10. Laissez-Faire Economic (allow to do)
Less government
interference in business
Free choice
Alternative purchase options
Free enterprise
Firms choose products and markets
Price flexibility
Prices follow supply and demand
DIFFERENCE BETWEEN LAIZZE FAIRE ECONOMICS AND MARKET ECONOMICS - Bing
In a market economy, individual concerns are placed above group concerns.
In other words, the entire group is thought to benefit when individuals receive rewards for acting in their self interests.
Market economies are grounded on the principle of laissez-faire economics, which is French for “allow them to do [without interference].” policy of minimum governmental interference in the economic affairs of individuals and society.
The three key features at the root of a market economy are:
Free choice, which gives individuals access to alternative purchase options.
Free enterprise, which means that companies decide what to produce and which markets to compete in.
And price flexibility, which allows most prices to rise and fall according to the forces of supply and demand.
laissez- faire is the policy followed during the period of mercantilism where the traders are allowed to trade freely with the minimum interference of the Government. At that time the aim of the government is to earn wealth alone and this word is purely considered in terms of trade only and it had got nothing to do with individual choice and this individual choice comes in pure capitalism where the consumer is sovereign and he gets what ever he desires or his choices

11. Government’s Role in a Market Economy
Enforce antitrust laws
Preserve property rights
Provide fiscal and
monetary stability
Preserve political stability
Let’s take a quick look at each. . .
In a market economy, government has four primary roles:
Enforce antitrust (antimonopoly) laws
Preserve property rights
Provide a stable fiscal and monetary environment
And preserve political stability
Let’s look at each of these a bit more closely…

12. Enforce Antitrust (antimonopoly) Laws
Encourages the development of industries with many competing businesses, and prevents trade-restraining monopolies that can raise prices and exploit consumers.
Keeps consumer prices in check
Prevents growth-stunting monopolies (define monopoly)
Makes “illegal” certain practices deemed to hurt
businesses and/or consumers, or violates standards of ethical behavior.
A single company or group owns all or nearly all of the market for a given type of product or service thus creating the absence of competition, which often results in high prices and inferior products.
In a market economy, government is to enforce antitrust (antimonopoly) laws.
This encourages the development of industries with many competing businesses, and prevents trade-restraining monopolies that can raise prices and exploit consumers.

13. Preserve Property Rights
Property rights--Rights to the ownership of, and profits from, land, capital, and other goods.
Encourages risk-taking by entrepreneurs and businesses as claims to assets and future earnings are protected
Governments in market economies are also supposed to preserve property rights.
A strong system of property rights protection ensures that people and businesses enjoy the fruits of their labor.
In other words, it encourages individuals and firms to create and to invest in new technologies because their efforts are rewarded by the income that these technologies generate.
It also encourages entrepreneurs to start new businesses because it safeguards their claims to assets.
Market economy needs strong property rights
Firms create new technologies and products
Entrepreneurs start new businesses
ENJOY THE FRUIT OF YOUR LABORS

14. 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
U.S. National Debt Clock : Real Time
The government in a market economy is to provide a stable fiscal and monetary environment.
This is achieved through effective management of fiscal and monetary policies. How are we doing? 15+T in debt (china hold a large sum)
Fiscal policy The two main instruments of fiscal policy are government expenditure (fully funded by tax revenue) and taxation. Changes in the level taxation and government spending can impact the economy:
Govt. spending can be funded by:
Taxation, printing of money, borrowing from abroad, sales of fixes assets
how much do we owe?
Fiscal policy refers to the use of the government budget to influence economic activity
Stability reduces overall risk in an economy, improves business forecasts, and helps control inflation and unemployment rates.

15. 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
Egypt's Economy Sinks on Heels of Uprising - YouTube
Finally, government in a market economy is to preserve political stability.
This encourages the smooth operation of a market economy.
Political stability promotes economic growth, reduces worries over political risk, and improves chances for business survival.
The United States and the older members of the British Commonwealth have been politically stable for so long that few of their citizens fully understand or appreciate what they have. It is amazing that no other country has been able to copy the American system of government successfully. It is as if that system is uniquely suited to that single country.
America has worked well-until recent months. The presidential election of November 2000 left the world bewildered, with people wondering whether the United States might be starting down the road of succession problems other nations frequently experience.
If this is to be the case, then political stability will be a casualty, and America's economic progress will suffer, harming other nations as well as itself. If America is perceived as politically unstable, other nations will lose confidence in her. If the president is seen as lacking legitimacy, world leaders will find it more difficult to look to the president of the United States as the leader of the free world.

16. Economic Freedom & Wealth greater economic freedom tends to coincide with higher living standard (as shown by graph)
The connection between political freedom and economic growth is not certain or guaranteed.
But as this graph shows, greater economic freedom tends to coincide with higher living standards.

17. Economic Development (answers question: So how are we doing
Economic Development (answers question: So how are we doing?) measure for gauging the economic well-being of one nation’s people as compared with that of another nation’s people.
***Economic output (agricultural,
industrial, and service)
***Infrastructure (communications, schools,
transportation, and power, water, prisons, postal system, etc.)
***People (physical health and
education level)
Productivity
The amount of output per unit of input (labor, equipment, and capital).
EXAMPLE:
In a factory, productivity might be measured based on the number of hours it takes to produce a good, while in the service sector, productivity might be measured based on the revenue generated by an employee divided by his/her salary
Economic development is a measure for gauging the economic well-being of one nation’s people as compared with that of another nation’s people.
It captures several economic and human economic indicators, including:
Economic output, both agricultural and industrial.
Infrastructure, including power and transportation facilities.
. An underlying base or foundation especially for an organization or system.
2. The basic facilities, services, and installations needed for the functioning of a community or society, such as transportation and communications systems, water and power lines, and public institutions including schools, post offices, and prisons.
And a people’s physical health and level of education. 17

18. 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
We can classify countries according to indicators such as GNP per capita, the portion of an economy devoted to agriculture, and the amount of exports in the form of industrial goods.
Developed countries are highly industrialized, highly efficient, and whose people enjoy a high quality of life. People in these countries receive the finest health care and benefit from the best educational systems in the world.
Newly industrialized countries have recently increased the portion of national production and exports that they derive from industrial operations.
Emerging markets are newly industrialized countries plus those having the potential to become newly industrialized.
Developing countries have poor infrastructures, extremely low personal incomes, lack key resources and skills, and rely on one or a few sectors of production, such as agriculture or mineral mining.

19. Economic Transition Reforms include:
Fundamental reorganization of an economy and the creation of new free-market institutions
Reforms include:
Reduce budget deficits and expand credit availability
Allow the “price mechanism” to determine prices and economic activity (supply & demand)
Legalize private firms, privatize state-owned companies, support property rights
Remove barriers to trade and investment and eliminate currency controls
Economic transition involves changing a nation’s fundamental economic organization and creating new free-market institutions.
Countries undertaking transition must normally:
Stabilize the economy, reduce budget deficits, and expand credit availability.
Allow prices to reflect supply and demand.
Legalize private business, sell state-owned companies, and support property rights.
And reduce barriers to trade and investment and allow currency convertibility.
Transition economies:
Bulgaria, Russia, China, Poland, Ukraine

20. Obstacles to Transition
Capital
shortage
Lack of
managerial
expertise
Countries undergoing transition still can face several main obstacles:
First, is a lack of managerial expertise. Central planners had little need for management skills in areas such as strategy, production, distribution, or advertising. But the gap between managers from the former communist nations and Western nations is narrowing.
Second, is a shortage of capital. Transition is expensive and requires funding to develop a telecommunications and infrastructure system, to set up financial institutions, and to educate people in market economics.
Third, are cultural changes. Transition causes cultural change and replaces dependence on the government with greater emphasis on individuals. Cuts are often needed in welfare, unemployment benefits, and guaranteed government jobs.
Fourth, is environmental degradation. Economic and social policies of former communist governments were often disastrous for the natural environment.
Environmental
degradation
Cultural
changes
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