The Economic Environment Flashcards
How do we measure the level of development of a particular economy?
The size, growth potential, and stability of the market
Command Economic System
- Government owns most or all of the resources
- Bias toward large-scale, capital-intensive production
- Applies the visible hand of the state, central planning, and collectivism
- Philosophical anchor: communism
Mixed Economic System
- Government and private ownership of economic resources
- Balancing economic efficiency but protecting against greed
- philosophical anchor: socialism
Market Economic System
- Mostly private ownership
- Bias toward entrepreneurial innovation
- Applies the invisible hand and individualism
- Philosophical anchor: capitalism
Example of Pure Centrally Planned Economy?
North Korea, Cuba
Example of Pure Market Economy?
Hong Kong (United States following but not pure market economy)
What type of system do managers prefer?
Market economy because it allows them to operate their business, there is a link between economic freedom and wealth (graph of freedom level vs. gdp per capita)
Property rights dimension
Ability of individuals to accumulate private property
Freedom from corruption dimension
Degree that corruption introduces insecurity and uncertainty into economic relaitonships
Fiscal freedom
Tax burden imposed onto citizens
Government spending
Government spenditures as a percentage of GDP
Labor freedom
Aspects of the legal and policy framework that regulates the country’s labor market
Business freedom
The ability to start, operate, and close a business (burden of regulation)
Monetary freedom
The degree of price stability and the extent of price controls
Trade freedom
The absence of tariff and non-tariff barriers that affect imports
Investment freedom
Ability of individuals and firms to move resources without restrictions internally and across borders
Financial freedom
Efficiency of banking as well as independence of financial sector from the government
Political freedom and economic freedom are generally….
Linked. However, examples like China, some countries can improve in one index (economic) and still remain the same in the other (political)
Why have China and Russia developed so differently economically?
They both began with low economic and political freedom, but Russia tried to jump and improve both factors which caused too much change and stress at one time and China focused only on economic freedom
What happened to Chile in between 1985 and 1995?
They previously had a totalitarian free market, but became democratic after imprisoning dictator which caused them to increase political freedom only
Argentina, what happened?
100 years ago it was the country of the future and GDP was higher than Germany, France, and Italy but now it is behind Chile, Mexico, Uruguay, and Brazil because of a history of PROTECTIONISM and populism (corruption)
Economic freedom supermodels?
Small populations, but free and independent
- Denmark
- Finland
- Norway
- Sweden
Why is this region the economic supermodel?
- Trust in strangers, but belief in individual rights
- Lots of honesty and transparency in government
- Leader in e-government
- Moving quickly toward capitalism and privitization
Highest misery index in Europe?
Spain, high levels of inflation and unemployment lead to high economic misery index
Caution of economic measurements?
- System complexity
- Market Dynamism
- Market Interdependence
- Data overload
Key economic measures
- GDP
- GNI
- Purchasing Power Parity
- Rate of economic growth
- Population size
- Sustainability
- Degree of stability
- Key indicators
GNI
Gross National Income
- Market value of final goods and services newly produced by domestically owned factors
- Ford production value in USA and Mexico would count
- Toyota production in USA would not count in USA (counts in Japan)
- Quick measure to compare one country to another
GDP
Gross Domestic Product
- GDP: The market value of production that takes place within a nation’s borders without regard to whether production is done by domestic or foreign factors
- Both Ford and Toyota production in the USA counts
- Ford produced in Mexico does not
- Large populations and high per capita GDP are most desirable
For USA, does GDP and GNI differ much?
No, but for a smaller country there is a large discrepancy (Ireland for example)
Largest economy by GNI?
USA, accounts for 22% of world total (next are China, Japan, and Germany)
Purchasing power parity
The number of units of a country’s currency required to buy the same amount of goods and services in the domestic market that one unit of income would buy in another country
- Helps adjust GNI because it will either be understated or overstated (dollar buys more things other places)
- USA is overstated in GNI
- Adjusted for PPP, India is 4th (from 9th)
Current Account Balance
- Exports v. imports
- Want a surplus
- Germany is number 1 - strong manufacturing sector (China second)
Re Emerging economies
India & China, as developed economies decrease, india and China are re-emerging (highest GDP growth rates)
Why interest in emerging economies?
- Less developed economies with indication of advanceement
- Low income, rapid growth, LIBERALIZATION
- Investment to fuel economic growth
- Availability of resources (manufacturing potential)
Challenges of emerging economies?
- Lack of developed communication
- Inefficient distribution
- High economic and political volatility
- High levels of government involvement (corruption)
