This document discusses different types of economic systems including centrally planned economies, mixed economies, and market economies. It describes the decline of centrally planned economies due to their failure to create economic value, provide incentives, achieve rapid growth, and satisfy customer needs. Mixed economies have moved toward privatization. Market economies rely on supply and demand and private ownership. The document also covers measuring a nation's development, classifying countries, economic transition processes, and obstacles to transition such as lack of expertise, shortage of capital, cultural differences, and environmental issues.

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Economic Systems and
Development
DY Chhunsong
Lecture 3
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Economic Systems
Structure and processes that a country uses to allocate its resources
and conduct its commercial activities.
It includes Centrally Planned Economy, Mixed Economy, or
Market Economy.

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Centrally Planned Economy
Economic system in which a nation’s land, factories, and other
economic resources are owned by the government, which plans
nearly all economic activity.
It is rooted in the belief that the welfare of the group is more
important than individual well-being.
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The Decline of Central Planning
Failure to Create Economic Value: Central planners paid little
attention to the task of producing quality goods at the lowest cost.
Failure to Provide Incentives: Reduced incentives for people and
organizations to maximize the benefits obtained from those
resources (do not want to create new technologies, new products,
and production methods).

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The Decline of Central Planning (1)
Failure to Achieve Rapid Growth: An economic system based on
private ownership fosters growth much better than central planning
(Asian 4 Tigers: Singapore, Hong Kong, Taiwan, South Korea).
Failure to Satisfy Customer Needs: People were tired with the
standards of living that was far below those of their counterparts in
market economies (North Korea).
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Mixed Economy
Economic system in which land, factories, and other economic
resources are rather equally split between private and government
ownership (important sectors to national security and stability).
It is to assure that an economic system must not only be efficient
and innovative, but should also protect society from the excesses of
individual and organizational greed.

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The Decline of Mixed Economy
Move Toward Privatization: When assets are owned by the
government there seems to be less incentive to eliminate waste or
to practice innovation.
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Market Economy
Economic system in which the majority of a nation’s land, factories,
and other economic resources are privately owned, either by
individuals or businesses.
Decisions on what to produce, prices of products, labor and capital
are determined by Supply and Demand.
It is rooted in the belief that individual concerns should be placed
above group concerns.

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Features of Market Economy
Free Choice: Individuals can access to alternative purchase options
such as dealers, models, sizes, styles, and colors.
Free Enterprise: Gives companies the ability to decide which
goods/services to produce and the markets in which to compete.
Price Flexibility: Allows most prices to rise and fall to reflect the
forces of supply and demand.
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Government’s Roles in Market Economy
Enforcing Antitrust Laws: Encourage the development of
industries with as many competing businesses as the market will
sustain (avoiding monopoly).
Preserving Property Rights: Business companies will tend to
invest in technology, invent new products, and start new businesses
if their new inventions are safeguarded (property rights).

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Government’s Roles in Market Economy (1)
Providing a Stable Fiscal and Monetary Environment: Inflation
discourages business development. It can be controlled via fiscal
policies (taxation and government spending) and monetary policies
(money supply and interest rates).
Preserving Political Stability: Political stability helps businesses
engage in activities without worrying about terrorism, kidnappings,
and other political threats to their operations.
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Development of Nations
Economic development is the measure for measuring the economic
well-being of one nation’s people as compared with that of another
nation’s people.
Some major measures are used to evaluate economic well-being
includes National Production, Purchasing Power Parity, and
Human Development.

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Development of Nations:
National Production
Gross National Product (GNP) is the value of all goods/services
produced by a country during a 1-year period (both domestic and
international business activities).
Gross Domestic Product (GDP) is the value of all goods/services
produced by the domestic economy over a 1-year period (excludes
exports, imports, international operations).
Some activities not accounted in both GNP and GDP include
volunteer work, unpaid household work, gambling and black
market, and unreported transactions conducted in cash.
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Development of Nations:
Purchasing Power Parity
Purchasing Power: Value of goods and services that can be
purchased with one unit of a country’s currency.
Purchasing Power Parity (PPP): Relative ability of two countries’
currencies to buy the same “basket” of goods in those two countries.

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Development of Nations:
Human Development
Measure of the extend to which a people’s needs are satisfied and
the degree to which these needs are addressed equally across a
nation’s entire population.
It measures the satisfaction of a people’s needs via 3 dimensions:
1). A long and healthy life, 2). An education, and 3). A reasonable
standard of living.
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Classifying Countries
Developed Country: Country that is highly industrialized, highly
efficient, and whose people enjoy a high quality of life.
Newly Industrialized Country: Country that has recently
increased the portion of its national production and exports derived
from industrial operations.
Developing Country (Least-Developed Country): Nation that has
a poor infrastructure and extremely low personal incomes.

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Economic Transition
Process by which a nation changes its fundamental economic
organization and creates new free-market institutions. It involves
five reform measures which include:
1. Macroeconomic stabilization to reduce budget deficits and
expand credit availability
2. Liberalization of economic activity that is decided by prices
reflecting supply and demand
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Economic Transition (1)
3. Legalization of private enterprises and privatization of state-
owned enterprises in accord with an effective system of
individual property rights.
4. Removal of trade and investment barriers in goods/services, and
removal of controls on convertibility of the nation’s currency
5. Development of a social-welfare system designed to ease the
transition process

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Obstacles to Transition
Lack of Managerial Expertise: A lack of qualified managers to
conduct operations in a competitive global market because central
planners formerly decided almost everything (no experience).
Shortage of Capital: To ease the change, the government needs to
improve 3 areas: 1). Developing a telecommunications and infras-
tructure system, 2). Setting up financial institutions, and 3). Educa-
ting people about market economies. It is costly.
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Obstacles to Transition (1)
Cultural Differences: Some cultures can embrace economic
change more easily while some are difficult to adopt the change.
Environmental Degradation: To make change, a nation needs to
face environmental destruction such as pollution and forestry.