Lec 5

TYPES OF ECONOMIC SYSTEMS

• An economic system organizes the production, distribution, and
consumption of goods and services.
THE MARKET ECONOMY
•The economic system whereby individuals, rather than the government, make most decisions is a Market
economy.

•It is anchored in the doctrine of capitalism and its thesis that private
ownership confers inalienable property rights that legitimize the profits
earned by one’s initiative, investment, and risk.
•Market economies are commonly found in developed economies,
such as Australia, Canada, Hong Kong, Switzerland, and the United
States.
THE COMMAND ECONOMY
• Communism champions the state’s ownership of resources and
control of economic activity.
• The command economy and state capitalism overlap on some
elements.
• Surveying the economic environments of various countries practicing
state capitalism, such as China, Iran, Rwanda, Russia, Saudi Arabia,
and Vietnam, finds the visible hand of an authoritarian state
influencing resource allocation, controlling some to many companies,
and regulating individual choice.
THE MIXED ECONOMY
• The mixed economic system combines elements of the
market and command economic systems; both government and private
enterprise influence production, consumption,
investment, and savings.
• The market economy is anchored in capitalism, the command
economy is anchored in communism, and the mixed economy is
anchored in socialism.
ASSESSING ECONOMIC
DEVELOPMENT,
PERFORMANCE, AND POTENTIAL
• MONETARY MEASURES
• Comprehensive, single-item monetary measures are incisive
indicators of whether an economy (1) is expanding or contracting, (2)
needs a boost or the brakes, and (3) is threatened by inflation or
recession.
• gross national income (GNI), gross domestic product (GDP), or gross
national product (GNP)
GNI
• Gross national income (GNI) is the broadest measure of a country’s
economic performance. It has four principal components: personal
consumption, business investments, government spending, and net
exports of goods and services
• For example, the value of a smartphone made by Samsung, a South
Korean MNE, as well as the value of a Samsung smartphone made in
Japan using Samsung’s resources is counted in South Korea’s GNI.
Similarly, the value of a smartphone made by Sony, a Japanese MNE,
in South Korea using Sony’s resources counts in the GNI of Japan.
• GDP
• Gross domestic product (GDP) is the total market value of all output
produced within a nation’s borders, no matter whether it is generated
by a domestic or a foreign-owned enterprise; basically, if it’s made
within a country’s borders, GDP counts it.
• GDP measures the total value of finished goods and services that have
been produced for consumers, business, and government within a
nation. Measuring the flow of economic activity in terms of the
production of, not simply its stock of productive assets, indicates
whether an economy is expanding or contracting.
• Gross national product (GNP) begins by estimating the market value
of goods and services produced in a given year by the labor, assets,
and capital supplied by the resident of a country. It then adds the
income that its citizens earned working abroad, but removes the
income earned by foreigners working within its national borders
IMPROVING ECONOMIC ANALYTICS
• GNI, GDP, and GNP estimate an economy’s absolute performance.
Despite strengths, they can distort estimations and comparisons.

• Therefore, managers improve the usefulness of economic indicators

by adjusting for the (1) rate of economic growth, (2) number of
people in a country, and (3) purchasing power of the local currency.
Rate of Economic Growth
• In the short term, an expanding economy, indicated by positive
growth in, say, GDP, means that business, jobs, and personal income
are expanding.

• Longer term, GDP’s growth rate estimates a country’s economic

potential: if it is growing faster (or slower) than the growth rate of its
population, then the country’s standards of living are rising (or
falling).
• Looking at the 217 countries that compose the global business
environment, one finds, as expected, variability in the growth rates
from country to country. Notably, GDP in many emerging and
developing economies, such as Ghana, Ethiopia, India, or Côte
d’Ivoire, is rising at up to 10 times faster than that seen in the
developed economies. China, for instance, has been one of the
fastest-growing economies over the past three decades; on average, it
has grown more than 8 percent annually since 1995
Population Size
• Managers routinely adjust indicators by the number of people who
live in a country. This conversion is sensible given how unevenly the
world’s population of 7.63 billion is distributed (e.g., from a high of
1.389 billion in China to a low of 50 in the Pitcairn Islands)
• China is the world’s second-largest economy when ranked by GDP.
Adjusting its performance for its population, however, moves it to the
lower-middle tier. Similarly, in 2018, Switzerland’s GDP of $705 billion
is 3.7 percent of the $20.5 trillion reported by the United States.
However, given its population of 8.57 million residents, Switzerland’s
GDP per capita is $80,450. In comparison, GDP per capita in the
United States is $62,794 given its 327 million citizens
Purchasing Power Parity
• The prices of goods and services vary from country to country due to,
among other things, differences in factor endowments, productivity
rates, and regulations. Some prices vary little, say from one developed
economy to another developed economy.
SUSTAINABILITY AND STABILITY
• Specifically, GNI, GDP, and GNP, even after adjusting for growth rates,
population size, and purchasing power, partially profile a country’s
performance and potential. Besides the complications posed by the
shadow economy, underestimating the costs and consequences of
growth erodes the validity of analysis.
SUSTAINABILITY
• Green economics holds that an economy is a component of, and
ultimately dependent on, the natural world. Sustaining productive
business activity hinges on minimizing its environmental impact.
• Net national product (NNP) In theory, a country can measure the
depletion of natural resources and degradation of the environment
that result from making and consuming products. Just as a company
depreciates its assets when making a product, green economics
argues so too should countries.
• Genuine Progress Indicator (GPI) This measure begins by applying the
same accounting framework used to estimate GDP. It then adjusts for
the corresponding costs of reduced environmental quality, health and
hygiene, security, equity, free time, and education.
• Human Development Index (HDI) The matters of human development
do not show up immediately in performance measures.
• Ultimately, the reasoning goes, they will, given that improving the
human condition through nutrition, education, health care, and
hygiene improves performance.
• Longevity, measured by life expectancy at birth
• Knowledge, measured by the adult literacy rate and the combined primary,
secondary, and tertiary Gross Enrollment ratio
• Standard, of Living, measured by GNI per capita (PPP)
• STABILITY
• the earth lacks sufficient resources to support and sustain high
consumption for its 7.6 billion inhabitants, to say nothing of the
projected population of 9.7 billion by 2050.
• The United Nations, for instance, is progressively operationalizing its
resolution Happiness and Well-Being: Defining a New Economic
Paradigm, into practical measurements.
• Your Better Life Index (YBLI)
• 11 aspects of life that people worldwide believe are important (e.g.,
housing,
jobs, relationships, health, security, family–life–work balance, education),
but that fall beyond the scope of monetary measures.
• Gross National Wellness (GNW)
• GNW measures a country’s capacity to use its resources to promote individual
well-being in terms of economic, environmental, physical, mental, work,
social, and political dimensions of life.
• Gross National Happiness (GNH)
• GNH emphasizes equitable and sustainable socioeconomic development,
elevating spirituality, preserving cultural values, conserving the natural
environment, and championing fair, just governance.
• Happy Planet Index (HPI)
• HPI defines progress not in terms of economic development, but success in
achieving sustainable well-being for all.
INTEGRATING ECONOMIC ANALYSIS
• The Global Competitiveness Index (GCI)
• The GCI integrates relationships among 110 variables spanning 12 “pillars of
competitiveness.” Pillars tap dimensions like financial market development,
macroeconomic environment, technological readiness, market efficiency, and
innovation.
• The World Competitiveness Index (WCI)
• Four factors determine a nation’s competitiveness: economic performance,
government efficiency, business efficiency, and infrastructure.
• Ultimately, the WCI evaluates more than 300 criteria to summarize a nation’s
performance. Singapore, on the strength of its business efficiency, financial
sector, innovation, and infrastructure, tops the WCI scoreboard.
• The Global Innovation Index (GII)
• Countries increasingly look to brainpower for innovations that boost
productivity, fortify competitiveness, and increase prosperity.
• The GII anchors analysis in terms of inputs and outputs. Inputs, which
promote and enable innovation, include institutions and policies, human
capacity, infrastructure, technological sophistication, business markets, and
capital.