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A country’s economic system consists of the structure and processes that it uses to allocate it’s resources and conduct it’s commercial activities.
Types of Economic Systems
- Centrally planned economy
- Mixed economy
- Market economy
Centrally planned economy
System in which a nation’s resources are owned by the government.
Origins: the ideology that the welfare of the group is more important than individual well being. (Karl Marx).
Decline: In the 80’s nations began to dismantle communist central planning in favor of market based economy.
Failures -economic value ,Provide incentives, Achieve rapid growth, Satisfy Consumer needs.
Economic system in which resources are more equally divide between private and government ownership.
Origins: the idea that a successful system must be not only efficient and innovative but should also protect society.
Decline: mixed economies are converting to market system. (Privatization).
The majority of nations resources are privately owned. Economic decisions are determined by supply and demand.
• Origins: the belief that individual concerns should be placed above group concerns.
• Features: free choice, free enterprise and price flexibility.
• Governments role: enforcing antitrust laws, preserving property rights, providing a stable fiscal and monetary environment and preserving political stability.
Development of nations
The economic development is a measure of gauging the economic well being of one nation's people as compared with that of another nation’s people.
National development indicators:
- national production
- purchasing power parity
- human development
Gross national product: value of all goods and services produced by country during a one year period, including income generated by both domestic and international activities.
Gross domestic product: value of all goods and services produced by a country’s domestic economy over one year period.
GDP or GNP per capita: nation’s GDP or GNP divided by it’s population.
Purchasing Power Parity
Purchasing power: the value of all goods and services that can be purchased with one unit of a country's currency.
Purchasing power parity: is the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries.
Human development index:
The measure of the extent to which a peoples needs (healthy life, education, decent standard of living) are satisfied and the extent to which this needs are addressed equally across a nation’s entire population.
Developed: highly industrialized and efficient countries that have a high quality of life.
-USA,France, Italy, Canada..
Newly industrialized: recently increased the portion of it’s national production and exports from industrial operations ( emerging markets: developed + newly industrialized).
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Economic System Antitrust Laws National Development Rapid Growth National Product Market Economy Political Stability Economic Systems Property Rights Human Development
-Chile, Indonesia, Poland….
Developing: nations with the poorest infrastructure and lowest personal incomes.
Process by which a nation changes it’s fundamental economic organization and creates new free-market institutions.
Reform measures to transition
- development of social welfare
- removal of trade and investment barriers
- macroeconomic stabilization
- Liberalization of ecomonic activities
- legalization of private enterprises and privatization of state owned
Obstacles to Transition:
- Lack of managerial expertise
- Shortage of capital
- Cultural Differences
- Environmental Degradation
International Business John J. Wild
Types of Economic Systems
"You can't always get what you want." That's what the Rolling Stones sang, anyway (check it out: great song even if it's a bit before your time). And while Mick Jagger probably didn't have Econ 101 in mind, he managed to sum up perfectly the core concept underlying all economics.
Scarcity is the fundamental challenge confronting all individuals and nations. We all face limitations... so we all have to make choices. We can't always get what we want. How we deal with these limitations—that is, how we prioritize and allocate our limited income, time, and resources—is the basic economic challenge that has confronted individuals and nations throughout history.
But not every nation has addressed this challenge in the same way. Societies have developed different broad economic approaches to manage their resources. Economists generally recognize four basic types of economic systems—traditional, command, market, and mixed—but they don’t completely agree on the question of which system best addresses the challenge of scarcity.
A traditional economic system is—here's a shocker—shaped by tradition. The work that people do, the goods and services they provide, how they use and exchange resources… all tend to follow long-established patterns. These economic systems are not very dynamic—things don’t change very much. Standards of living are static; individuals don’t enjoy much financial or occupational mobility. But economic behaviors and relationships are predictable. You know what you are supposed to do, who you trade with, and what to expect from others.
In many traditional economies, community interests take precedence over the individual. Individuals may be expected to combine their efforts and share equally in the proceeds of their labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe to their community.
Today you can find traditional economic systems at work among Australian aborigines and some isolated tribes in the Amazon. In the past, they could be found everywhere—in the feudal agrarian villages of medieval Europe, for example.
In a command economic system or planned economy, the government controls the economy. The state decides how to use and distribute resources. The government regulates prices and wages; it may even determine what sorts of work individuals do. Socialism is a type of command economic system. Historically, the government has assumed varying degrees of control over the economy in socialist countries. In some, only major industries have been subjected to government management; in others, the government has exercised far more extensive control over the economy.
The classic (failed) example of a command economy was the communist Soviet Union. The collapse of the communist bloc in the late 1980s led to the demise of many command economies around the world; Cuba continues to hold on to its planned economy even today.
In market economies, economic decisions are made by individuals. The unfettered interaction of individuals and companies in the marketplace determines how resources are allocated and goods are distributed. Individuals choose how to invest their personal resources—what training to pursue, what jobs to take, what goods or services to produce. And individuals decide what to consume. Within a pure market economy the government is entirely absent from economic affairs.
The United States in the late nineteenth century, at the height of the lassez-faire era, was about as close as we've seen to a pure market economy in modern practice.
A mixed economic system combines elements of the market and command economy. Many economic decisions are made in the market by individuals. But the government also plays a role in the allocation and distribution of resources.
The United States today, like most advanced nations, is a mixed economy. The eternal question for mixed economies is just what the right mix between the public and private sectors of the economy should be.
Why It Matters Today
Half of the twentieth century went down as a global battle between defenders of free markets (democratic capitalist nations, led by the United States) and believers in command economies (the communist bloc, led by the Soviet Union).
The US and USSR never went to war against each other directly, but dozens of smaller (yet still tragic and significant) wars unfolded around the world as bitter fights over economic systems turned bloody. Korea, Vietnam, Nicaragua, Afghanistan, Angola… millions of people died in the various "hot" theaters of a Cold War fought to decide whether markets or states should control economic affairs.
The great irony was that the Cold War finally ended not on a battlefield, but because the Soviet economy finally self-destructed by the late 1980s. For most of the world, the Soviet collapse proved that command economies were simply inferior to the market-dominated mixed economies of the capitalist world. Of course, China – still ruled politically by an authoritarian Communist Party, even though its economy is now more mixed if not exactly free – is now the biggest creditor nation to the United States.
Sometimes, a Song Says it Better: Revolution, by The Beatles
“You say you want a revolution”, the Beatles sang, advising:
“But if you go carrying pictures of chairman Mao You ain't going to make it with anyone anyhow”