Gross National Income (GNI)
High GNI: Japan, Sweden, Switzerland and USA.
Low GNI: China and India
Purchasing Power Parity
Is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries’ currency.
Official figures can be misleading…
- They don’t account for black economy transactions.
- GNI and PPP are static and do not consider economic growth rates.
- China and India are currently relatively poor, but their economies are growing more rapidly than many advanced nations.
- China may become the world’s largest economy during the next decade.
- India will become among the largest economies in the world.
Economic Development Requirements
-Economic development should be assessed by the capabilities and opportunities people enjoy.
- Development requires the removal of major impediments to freedom: poverty, tyranny, poor economic opportunities.
- Economic progress requires the democratization of political communities to give citizens a voice.
Human Development Index (HDI)
Based on:
- Life expectancy at birth
- Educational attainment
- Whether average incomes are sufficient to meet the basic needs of life in a country
Engines of Growth
Innovations and Enterpreneurship
Innovation
Includes new products, new processes, new organizations, new management practices, and new strategies.
Enterpreneurship
-First to commercialize innovative products and processes.
-Provides much of the dynamism in an economy.
Innovation and Enterpreneurship require a Market Economy
- Strong relationship between economic freedom and economic growth.
Innovation and Enterpreneurship require Strong Property Rights
- Without strong property rights, individuals and businesses risk having innovations and potential profits stolen.
- Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth.
Required Political System
Democratic regimes are probably more conducive to long-term economic growth.
- Property rights are only secure in well-functioning, mature democracies.
- Economic growth leads to establishment of democratic regimes.
If China adopts a free market system, belief is that the country will have
-Greater individual freedoms
-Democracy
Totalitarian states are detrimental to progress
- They limit freedom and suppress human development.
Countries with favorable geography are…
More likely to engage in trade and open to market-based systems.
Countries that invest in…
Education have higher growth rates because the workforce is more productive.
- Countries in Southeast Asia have offset their geographical disadvantage by investing in education.
Political economy of nation-states is marked by two trends:
- Democratic revolutions of the late 1980s and early 1990s:
- Totalitarian governments fell
-Replaced by democratically elected governments
- Greater commitment to free market capitalism. - A move away from centrally planned and mixed economies toward a more free market approach.
The Spread of Democracy
- Many totalitarian regimes failed to deliver economic progress to the bulk of their populations.
- New information and communication technologies.
- Reduced state’s ability to control access to uncensored information.
- Created new conduits for the spread of democratic ideals.
- Economic advances have led to a prosperous middle class that has pushed for democratic reforms.
Democracy is still rare in parts of the world :
- Sub-Saharan Africa
- Former communist Eastern and central Europe and former USSR
Middle East and North Africa.
Signs that authoritarianism is gaining ground:
Russia, Ukraine, Indonesia, Ecuador, and Venezuela
Egypt
Global Terrorism
Product of tensions between civilizations and a clash of value systems and ideology.
- It is one of the major threats to world peace and economic progress.
The shift toward a market-based system involves:
- Deregulation
- Privatization
- A legal system to safeguard property rights
Deregulation
The process of removing or reducing state regulations.
- Removing price controls.
- Abolishing laws regulating the establishment and operation of private enterprise.
- .Relaxing or removing restrictions on direct investment by foreign enterprises.
Privatization
The process by which a piece of property or business goes from being owned by the government to being privately owned.
- Started in Great Britain in the early 1980s.
- For privatization to work it must be paired with a general deregulation and opening of the economy.
Legal Systems for Economic Transformation
A well-functioning market economy requires laws.
- Need to protect property rights.
- Mechanisms for contract enforcement.
Countries are more likely to have higher sustained rates of economic growth when they have:
- Democratic regimes
- Market based economic policies
- Strong property rights protection
These markets are more attractive to international businesses.
First-mover Advantage
A firm’s ability to be better off than its competitors as a result of being first to market in a new product category.
