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ECONOMIC SYSTEM AND MARKET METHODS OVERVIEW

u Introduction
u New Markets, New
Perspectives
u Types of Economic System
u Economic Freedom and
Trends
u Measure of Economic
Performance
u Economic Analysis

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Introduction
u The Political Economy influence our
decisions where, how and when to Introduction
invest and do business (local or
international).
u What are the effects of these
u Economic, political, and legal systems
developments and changes?
are changing around the world. u Globalization
u Democratic government u Speed up economic development
u Market reforms (liberalization of
u Create favorable conditions for
markets) towards open economy
International Business
u Adoption of legal system that
enforce contracts, IPR, corruption,
safety laws etc. ECONOMIC FREEDOM

u We need specific tools to analyze

economic system in dynamic
international markets.

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Economic System Economic System

Market Economy/ Open Markets

u An economic system in which the interaction of

u There are three types of economic systems supply and demand determines the quantity in
which goods and services are produced.
u The Market Economy (Capitalism)
u The Command Economy u The goods and services that a country produces,
and the quantity in which they are produced is
u The Mixed Economy determined by market forces (demand and supply)

u If the demand exceed the supply the prices will

raise

u If the supply exceed the demand the prices will

fall

u The role of the government is to encourage fair

5 6 and free competition in the market

Economic System Economic System

Command / Planned Economy Mixed Economy
u The goods and services that a country produces, and the
quantity in which they are produced, and the prices at
which they are sold are determined by the government. u It consist elements of Market economy and
Command economy.
u Investments are made in the best interests of the nation
as a whole rather than in the interests of private
individuals. u Certain sectors of the economy are in control of
private ownership and free market mechanisms,
while other sectors are controlled by state and
u State owned businesses have little incentive to control government ownership.
costs and be efficient because they cannot go out of
business (no competition)

u Governments take over the ownership of troubled

u They are static with no innovation and improvement firms considered vital to national interest. (Pakistan,
u North Korea, Cuba, Sudan, Saudi Arab India, UK, USA, France etc.)

u The role of the government is to control and

discourage fair and free competition in the market Example- PIA, Steel Mill, PTCL, Banking, Energy,
Cement and Sugar industries etc.

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Economic Freedom
u Economic Freedom refers to the “absolute right
of property ownership, fully realized freedoms
of movement for labor, capital, and goods, and
an absolute absence of compulsion or constraint
of economic liberty beyond the extent necessary
for citizens to protect and maintain liberty itself.
u Economic Freedom- Freedom of individual to
choose how they work, produce, consume, save
and invest etc.
u The state facilitate, protect and regulate this
freedom
u We measure economic freedom through
Economic Freedom Index
u Which Economic system can guarantee
Economic Freedom?
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The Nature of Economic Transformation
Deregulations in Markets
u Deregulation involves removing legal and
government restrictions to the free play of
markets, the establishment of private enterprises,
and the manner in which private enterprises
operate.
Deregulation in Command and Mixed Economies
u removing price controls;
u allowing prices to be set by the interplay between
demand and supply;
u abolishing laws regulating the establishment and
operation of private enterprises; and
u relaxing or removing restrictions on foreign direct
investments.
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Movement Towards Market Based Systems
Spread of Market Based Economy
u Since 1980 we witnessed the transformation from
command economy to market base economies.
u More than 30 countries under the control of
communist bloc have changed their economic
system.
u Similar shift has been noticed in mixed economies
u Sold state-owned businesses to private investors
(privatization) and deregulated their economies to
promote greater competition.
Why this change happened and happening?
u Both command and mixed economies failed to
deliver the kind of sustained economic
performance that was achieved by countries
adopting market-based systems.
(USA, Switzerland, Hong Kong etc.)
The Nature of Economic Transformation
Privatization refers to transfers the ownership of state-
owned property into the hands of private individuals,
frequently by the sale of state assets through an
auction.
Privatization is seen as a way to stimulate
u gains in economic efficiency by giving new private
owners a powerful incentive,
u the reward of greater profits,
u increases in productivity,
u to enter new markets, and
u to exit losing ones.
u Privatization can not always guaranteed economic
growth.
u Example China
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Measure of Economic Performance

u Gross National Income (GNI) Measures the

total annual income received by residents of a
nation.
Assessing Economic Development

u Purchasing Power Parity (PPP) An adjustment

in gross domestic product per capita to reflect u World Bank and United Nation
differences in the cost of living. classified all countries based on
their economic development,
social criteria, per capita income,
u Gross National Products (GNP) is the total
value of all final goods and services produced life expectancy, literacy etc.
within a nation in a particular year.
u Developed Countries
u Gross Domestic Products (GDP) is the total
market value of goods and services produced u Developing Countries
by workers and capital within a nation’s u Less Developed Countries
borders; it provides the truest measure of
national economic activity. u Emerging Economies

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Emerging Economies Notions of Emerging economies

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Economic Analysis
Economic Analysis
u Inflation is the sustained rise in prices Unemployment measures
measured against a standard level of purchasing the number of workers who
power. want to work but do not
u When aggregate demand grows faster than have paid jobs
aggregate supply—essentially, too many people
try to buy too few goods, thereby creating
demand that exceeds supply that makes prices
rise faster than incomes. Underemployment occurs
u A country experiencing rising prices for a when individuals work fewer
prolonged period suffers chronic inflation. hours a day than they would
prefer or when individuals
u Deflation, a decrease in the general price level work below the level for
of goods and services, is often caused by a which they have been
reduction in the supply of money or credit. trained.
https://www.aljazeera.com/news/2019/07/zimbabwe-inflation-govt-
head-mass-strikes-190714053848224.html

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The government’s domestic debt rose 6.2 percent to Rs22.012 trillion.

Foreign debt has been recorded at Rs11.011 trillion in July 2019, compared
with Rs11.055 trillion in the previous month.
(The News, September 17, 2019)

Economic Analysis Economic Analysis

u Debt, the total of a government’s financial
obligations, measures what the state borrows
from its citizens, foreign organizations, foreign
governments, and international institutions. Income Distribution
u In economics, income
u The larger the total debt, the more uncertain an distribution is how a nation's
economy’s performance and potential are.
total GDP is distributed amongst
its population.
u Internal debts vs external debts
State bank, IMF, World Bank
u Growing public debt is a leading indicator of u Income distribution estimates the
ü Tax increase proportion of the population that
ü Reduced growth earns various levels of income
ü Rising inflation
ü Increasing austerity

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Poverty Why We
(International
u Poverty is the state Business
of having little or no Managers)
money,
Conduct the
Economic
u few or no material Analysis?
possessions, and

u limited access to
education, health,
Economic Analysis and community.

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