International Business Chapter 4 -Economic Systems - summary

Centrally planned economy is declining.

An economic system consists of the structure and processes that a country uses to allocate its resources and conduct its commercial activities. In a centrally planned economy, the government-owned land, factories, and other economic resources, and plans nearly all economic related activities. The philosophy of central planning stresses the group over individual well-being and strives for economic and social equality.

The use of central planning is declining for several reasons.

• First, Garris resources were wasted because central planners paid little attention to product quality and buyers needs.
• Second, a lack of incentives to innovate resulted in little or no economic growth and consistently low standards of living.
• Third, central planners realized that other economic systems were achieving far higher growth rates for other countries.
• Fourth, consumers became fed up with a lack of basic necessities such as adequate food, housing, and healthcare.

Mixed economy and privatization

In a mixed economy, land, factories, and other economic resources are split between private and government ownership, with governments tending to control the economic sectors crucial to national security and long-term stability. Proponents of mixed economies contend that a successful economic system must be not only efficient and innovative, but also should protect society from the excesses of Anh checked individualism and organizational greed. However, attempting to become more efficient in their use of scarce resources, many mixed economies are engaging in privatization -- the sale of government-owned economic resources to private operators.

Market economy

in a market economy, private individuals or businesses and the majority of lien, factories, and other economic resources. Economic decisions are influenced by the interplay of supply (the quantity of the product that producers are willing to provide a specific selling price) in demand (the quantity of a product that buyers are willing to purchase at a specific selling price). Market economies is rooted in the belief that individual concerns are paramount. And that the group benefits when individuals receive proper incentives and rewards.

To function smoothly, the market economy requires:

1. free choice (in buyers purchasing options)
2. free enterprise (and producers competitive decisions)
3. price flexibility (reflecting supply and demand)

The government's role in a market economy centers on:

1. enforcing antitrust laws
2. preserving property rights
3. providing a stable fiscal and monetary environment
4. preserving political stability

Measuring a nation's level of development

Economic development refers to the economic well-being of one nation's people compared with that of another nation's people.

There are three methods for gauging economic development:

1. national production -- which includes measures such as the gross national product (GNP -- the value of all goods and services produced in one year by a country) and gross domestic product (GDP -- the value of all goods and services produced in one year by the domestic economy)
2. purchasing power party (PPP), which refers to the relative ability of two countries current cease to buy the same amount of goods in those two countries and is used to correct comparisons made at official exchange rates
3. The United Nations human development Index (HDI), which measures the extent to which a people's needs are satisfied and addressed equally across the population

Economic transition

the process whereby a nation changes its fundamental economic organization in order to create free-market institutions is called economic transition.

Typically, five reform measures are involved:

1. macroeconomic stabilization
2. liberation of economic activity
3. legalization of private enterprises in privatization of state owned enterprises
4. removal of barriers to free trade, investment, and currency flows
5. development of a social welfare system

There are four major obstacles to successful economic transition.

1. First, there is a lack of managerial expertise, because central planners made virtually all operations, pricing, and sales decisions.
2. Second, there is a shortage of capital to pay for new communications in infrastructure, the financial institutions, and the education of people about the working of a market economy.
3. Third, cultural differences between transition economies and the West can make it difficult to introduce modern management practices.
4. Fourth, environmental degration has caused lower workforce productivity due to substandard health conditions.