Socialistic

Economy
 Three Economic Questions

*All nations in the world must decide how to

answer three economic questions about the
production and distribution of goods.

=> What goods will be produced?

=> How will the goods be produced?
=> For whom will the goods be produced?

* How a society answers these three questions defines

its economic system.
 What goods will be produced?

Because of scarcity, no country can produce every

good it wants in the quantity it would like.
 How will the goods be produced?

=> Will production decisions be made by

individuals or by the government?

=> Will producers use existing technology or new

technology?
 For Whom Will The Goods Be Produced?

=> Will the government decide?

=> Will price decide?

=> Will goods be produced for the purpose of trade with

other countries?
 Socialism(Communist)

Public Enterprise Centrally Planned Economy in which all

property is owned by the State and all key economic decisions are
made centrally by the State, e.g. the former Soviet Union.

A socialist economy is a system of production where goods and

services are produced directly for use ,in contrast to a capitalist
economic system, where goods and services are produced to
generate profit.

Socialism is sometimes referred to as a command

economy
 Role of Government

In a free enterprise system(capitalistic), the government

plays a small role in the economy. It does not make
decisions about what goods and services will be
produced or how they will be produced, and it allows
prices to fluctuate.

In a socialistic system, the government may make these

decisions. Government decision makers control prices.
 Role of Government (cont.)

Under socialism, government decision makers may

write an economic plan, a plan that specifies the
direction economic activities are to take.

This plan may outline how many manufactured goods

or agricultural goods are to be produced, and the prices
that are to be charged for them.
 Role of Government in the Economy
• The government must ensure order, stability and
growth of the economy
- It achieves this through its economic policy.
• Providing direct services such as education, health,
police, roads, water, and sanitation
• Enforcing economic laws to protect labour, private
property, and consumers and promote standards of
safety and hygiene.
• Promote a stable and growing economy so that prices
do not rise quickly and so the standard of living of
people increases
• Direct assistance to companies and individuals.
 Income Distribution

* Income distribution refers to how all the income earned

in a country is divided among different groups of income
earners.

* Government decision makers under socialism are more

likely to use the government’s powers to redistribute
income, usually directing it away from society’s high
earners.
The Visions Behind Free Enterprise and Socialism

Karl Marx Adam Smith

 Adam Smith

Eighteenth-century economist whose ideas are

fundamental to free enterprise. He believed that free
enterprise is not only the economic system that produces
the most goods and services, but that it is also the most
ethical economic system.

Smith felt that our self-interest prompts us to work hard,

take risks, and in the end benefit others through our
activities. Smith also believed that if people wanted to
serve their own self-interest, they had to serve others first.
According to Smith, we are led by an “invisible hand” to
do good for others.
 Karl Marx

Karl Marx was a nineteenth-century economist who pointed out

what he believed to be many of the failures and injustices of
free enterprise. His ideas are at the heart of socialism and
communism. Marx did not see self-interest as leading to good
things. Instead, he saw it as hurting others. Marx believed that
capitalists, in pursuing their self-interests, actually exploited the
workers.
In his labor theory of value, Marx argued that all value in
produced goods comes from labor. Therefore, the value of
any item is determined by the necessary labor time needed to
produce that item.
 Surplus Value

The difference between the total value of production and

the subsistence wages paid to workers defines the surplus
value.
For example, it takes 5 hours of labor time to produce a
chair and 10 hours to produce a table, and this makes the
table twice as valuable as the chair.

According to Marx, this surplus should go to the worker.

 Characteristics of China’s
Economy

• Very high growth in very large economy

• Output structure (dominance of industry)
• Sources of growth (investment, exports)
• Major role of FDI in China
• Changing composition of trade
Does the China operate under a free enterprise system
or a socialist system?

Under free enterprise people are allowed to own property, such as

their house and land. Advocates of free enterprise believe that if
something is owned by you alone, you are more likely to take care
of it than if it were owned by you and others or owned by the
government.

A socialist view believes that it would be better for the government

to own most of the non-labor property in the economy, such as
factories, raw materials, and machinery. Socialists believe that the
government would be more likely that private individuals to make
sure this property was used for the benefit of many instead of a few.
 Chinese Economy
The People's Republic of China (PRC), commonly known as
China, is the most populous state in the world with over
1.3 billion people.

China is governed by the Communist Party of China (CPC)

The People's Republic of China is the world's second largest
economy after the United States by both nominal GDP ($4.99
trillion in 2009) and by purchasing power parity ($8.77 trillion in
2009). China is the world's fastest-growing major economy, with
average growth rates of 10% for the past 30 years. The country's
per capita income was at $6,567 (IMF, 98th) in 2009. China is
also the second largest trading nation in the world and the largest
exporter and second largest importer of goods.
 Currency system in CHINA

Renminbi , Chinese yuan,(Currency of China)

The renminbi ("people's currency") is the currency of China, denominated as

the YUAN.

The renminbi is issued by the People's Bank of China, the monetary authority of
the PRC.

The ISO 4217 abbreviation is CNY, although also commonly abbreviated as

"RMB".

The Latinised symbol is ¥.

 CHINA IN THE 1980’s

In the modern era, China's influence in the world economy was

minimal until the late 1980s. At that time, economic reforms
initiated after 1978 began to generate significant and steady
growth in investment, consumption and standards of living.

Since 1978 hundreds of millions have been lifted out of poverty:

According to China's official statistics, the poverty rate fell from
53% in 1981 to 2.5% in 2005. However, in 2006, 10.8% of people
still lived on less than $1 a day.

The infant mortality rate fell by 39.5% between 1990 and 2005,
and maternal mortality by 41.1%. Access to telephones during the
period fell more than 94-fold, to 57.1%.
China has generally implemented reforms in a gradualist
fashion

=> China's foreign trade has grown faster than its GDP for the past
25 years.

=> China's growth comes both from huge state investment in

infrastructure and heavy industry.

=> The smaller but highly concentrated public sector, dominated

by 159 large SOEs, provided key inputs from utilities, heavy
industries, and energy resources that facilitated private sector
growth and drove investment, the foundation of national growth.
In 2008 thousands of private companies closed down and
the government announced plans to expand the public
sector to take up the slack caused by the global financial
crisis.In 2010, there were approximately 10 million small
businesses in China.
 The two most important sectors of the economy
agriculture and industry, which together employ more than 70%
of the labor force and produce more than 60% of GDP.

The two sectors have differed in many respects.

# Technology, labour productivity, and incomes have advanced

much more rapidly in industry than in agriculture.

# Agricultural output has been vulnerable to the effects of weather,

while industry has been more directly influenced by the government.

The disparities between the two sectors have combined to form an

economic-cultural-social gap between the rural and urban areas,
which is a major division in Chinese society.
China is the world's largest producer of rice and is among
the principal sources of wheat, corn (maize), tobacco,
soybeans, peanuts (groundnuts), and cotton.

The country is one of the world's largest producers of a

number of industrial and mineral products, including
cotton cloth, tungsten, and antimony, and is an important
producer of cotton yarn, coal, crude oil, and a number of
other products.

Its mineral resources are probably among the richest in the

world but are only partially developed.
 FDI:Fountain head of China’s
Economic Growth
 China has grown rapidly over the last 25 years from a very
low income level.
 Average annual GDP growth 1980-2002: 9.5 percent
 Per capita GDP rose from about $300 in 1980 to $1000 in
2002
 Output = ƒ (capital, labor)
 FDI brought in the capital and technology
 Capital financing →foreign debt
 →Foreign direct investment
 China selected FDI
 Foreign Direct Investment

90

80

70

60

50

40

30

20

10

10
20
Inflows Outflows
Although China is still a developing country with a
relatively low per capita income, it has experienced
tremendous economic growth since the late 1970s. In
large part as a result of economic liberalization policies,
the gross domestic product (GDP) increased tenfold
between 1978 and 2006, and foreign investment soared
during the 1990s.

China's challenge in the early 21st cent. will be to balance

its centralized political system with an increasingly
decentralized economic system.
 FACTS AND FIGURES

China's economy grew at an average rate of 10% per year during the
period 1990–2004, the highest growth rate in the world.

China's GDP grew 10.0% in 2003, 10.1%, in 2004, and even faster
10.4% in 2005 despite attempts made by the government to cool the
economy.

China's total trade in 2006 surpassed $1.76 trillion, making China the
world's third-largest trading nation after the U.S. and Germany.

Such high growth is necessary if China is to generate the 15 million

jobs needed annually—roughly the size of Ecuador or Cambodia—to
employ new entrants into the job market.
 FACTS AND FIGURES(cont.)

On January 14, 2009, as confirmed by the World Bank the NBS

published the revised figures for 2007 fiscal year in which growth
happened at 13 percent instead of 11.9 percent (provisional
figures).

China's gross domestic product stood at US$3.4 trillion while

Germany's GDP was USD $3.3 trillion for 2007.

This made China the world's third largest economy by gross

domestic product.

Based on these figures, in 2007 China recorded its fastest growth

since 1994 when the GDP grew by 13.1 percent.
 FACTS AND FIGURES(cont.)

In mid-2010, China became the world's second largest economy,

surpassing Japan's economy and second only to the economy
of the United States.

In the second quarter of 2010, China's economy was valued at

$1.33 trillion, ahead of the $1.28 trillion that Japan's economy was
worth.

China could become the world's largest economy (by nominal GDP)
sometime as early as 2030.
China is the largest creditor nation in the world and owns over 25%
of US Treasury Bonds.
The table below shows the trend of the GDP of China at market
prices estimated by the IMF with figures in millions (Chinese yuan).
For purchasing power parity comparisons, the US dollar is
exchanged at 2.05 CNY only.

Per Capita
Gross US dollar Inflation Income
Year domestic index
product exchange (2000=100) (as % of
USA)

1955 91,000 2.46 19.2 2.43

1960 145,700 2.46 20.0 3.04
1965 171,600 2.46 21.6 2.63
1970 225,300 2.46 21.3 2.20
1975 299,700 1.86 22.4 2.32
1980 460,906 1.49 25.0 2.52
1985 896,440 2.93 30.0 1.65
1990 1,854,790 4.78 49.0 1.48
1995 6,079,400 8.35 91.0 2.17
2000 9,921,500 8.27 100.0 2.69

2005 18,308,500 8.19 106.0 4.05

2010 34,421,4T3 8.59 114.1 5.12

 India vs China Economy

Various economic and market trends and features of the countries, we can make a
comparison between Indian and Chinese economy.

* While India is the 11th largest economy in terms of the exchange rates, China
occupies the second position.

* Compared to the estimated $1.209 trillion GDP of India, China has an average
GDP of around $7.8 trillion.

* In case of per capital GDP, India lags far behind China with just $1016 compared
to $6,100 of the latter.

To make a basic comparison of India and China Economy, we need to have an idea
of the economic facts of the countries.
 Facts India China
around $1.209
GDP trillion around $7.8 trillion

GDP growth 6.7% 9.1%

Per capital GDP $1016 $6,100
Inflation 7.8 % -1.2 %
Labor Force 523.5 million 807.7 million
Unemployment 6.8 % 4.3 %

Factors that has made China a better economy than India:

1. Colonial rule
2. Technology
3. Greater FDIs
4. Liberalisation
Agriculture

It forms a major economic sector in both the countries. However, the

agricultural sector of China is more developed than that of India. Unlike India,
where farmers still use the traditional and old methods of cultivation, the
agricultural techniques used in China are very much developed. This leads to
better quality and high yield of crops which can be exported.

Liberalization of the market

In spite of being a Socialist country, China started towards the liberalization of

its market economy much before India. This strengthened the economy to a
great extent.

India was very slow in embracing globalization and open market economies.
While India's liberalization policies started in the 1990s, China welcomed
foreign direct investment and private investment in the mid 1980s. This made a
significant change in its economy and the GDP increased considerably.
Difference in infrastructure and other aspects of economic
growth

Compared to India, China has a much well developed infrastructure. Some of

the important factors that have created a stark difference between the
economies of the two countries are manpower and labor development, water
management, health care facilities and services, communication, civic
amenities and so on.

All these aspects are well developed in China which has put a positive impact
in its economy to make it one of the best in the world. Although India has
become much developed than before, it is still plagued by problems such as
poverty, unemployment, lack of civic amenities and so on. In fact unlike India,
China is still investing in huge amounts towards manpower development and
strengthening of infrastructure.
Effect of such market penetration
Chinese superemacy in indian markets
Effect of such market penetration