Lecture International business - Chapter 4: Economics and emerging markets

4

Economics and 
Emerging Markets

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Chapter Objectives
•

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
obstacles for business

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Infosys
• Infosys is a global provider of IT services
• India has organic-led path to development
• Brainpower is driving development

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Economic Systems

Centrally Planned

Mixed

Market

Government ownership of
Mostly private (individual
economic resources and
or business) ownership of

state planning
economic resources
Government and private
ownership of economic
resoures split rather evenly
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Range of Economic Systems

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Centrally Planned Economy
Government owns most land,
factories, and other economic
resources and plans nearly all
economic activity
 Welfare of the group
is paramount
 Economic and social
equality is the goal

Asia
Central Europe
Eastern Europe

Latin America
Russia (1917)
China (1949)
Cuba (1959)

 “Communist” system
is needed
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Decline of Central Planning

Central planning failed to:
 Create economic value
 Provide incentives
 Achieve rapid growth
 Satisfy consumer needs
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North Korea

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Focus on China
Socialism with
Chinese characteristics:

Challenges ahead:

  Communist after civil
       war ended in 1949

  Political problems and
       social unrest

  Agricultural reforms
       began in 1979

  Unemployment and
       migrant labor

  Township and Village
        Enterprises legal in 1984

  Eventual(?) reunification
       with Taiwan

  Aggressive reforms since

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Mixed Economy
Government and private parties share ownership of land,
factories, and other economic resources rather evenly

Noble goals:

But stagnant:

 Low unemployment
and poverty

 State-owned businesses
less competitive

 Steady economic growth

 Prices and taxes higher,
living standards mixed

 Equitable distribution
of wealth

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Benefits of Privatization

Privatization aims to:
 Increase economic efficiency
 Boost productivity
 Raise living standards

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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
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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
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Market Economy
Private parties (individuals or businesses) own most
land, factories, and other economic resources

Supply

Demand

Quantity producers
will provide at a
specific selling price

Quantity buyers will
purchase at a
specific selling price

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Laissez­Faire 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

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Government’s Role in a
Market Economy
 Enforce antitrust laws
 Preserve property rights
 Provide fiscal and
monetary stability
 Preserve political stability
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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

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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
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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
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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

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Discussion Question

What are the three
required features
and four expected
roles of government
in any market
economy?
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Answer to Discussion Question
Three key features of a market
economy: free choice, free
enterprise, and price flexibility.
Four roles of government in a
market economy: enforce
antitrust laws, preserve
property rights, provide fiscal
and monetary stability, and
preserve political stability.
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Economic Freedom & Wealth

 
Source: Index of Economic Freedom (Washington, D.C.: Heritage Foundation, 2006), (www.heritage.org).

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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)

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Productivity
Ratio of outputs (that are
created) to inputs (resources
used to create output)
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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 *
Overlook certain transactions

Ignore economic growth rates
Averages can disguise regions
May ignore purchasing power
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