Economic Systems and Global Economy

Global Economic Systems

• A global economic system refers to the economy of all humans in the world, including all economic activities conducted both within and between nations, including production, consumption, economic management, work in general, financial transactions, and trade of goods and services.
• The world economy or global economy encompasses all these economic activities.

Economic Systems

• An economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country.
• Economic systems regulate the factors of production, including land, capital, labor, and physical resources.
• An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

Types of Economic Systems

• There are four main types of economic systems: traditional economies, market economies, command economies, and mixed economies.
• Traditional economies are based on goods, services, and work, following established trends, with little division of labor or specialization, and are commonly found in rural settings in second and third-world nations.
• Market-based economies, also called free market economies, are self-regulated, allowing goods to be produced and distributed in response to consumer demand.
• Command-based economies are regulated by a government body that determines the goods produced, their quantities, and the price paid for them.
• Mixed economies combine elements of market-based and command-based economies.

Measuring Economic Activity

• Gross Domestic Product (GDP) measures the production level of a country's economy, defined as the total annual value of goods and services produced within a country.
• Gross National Income (GNI) measures the total amount of income earned by a country's people and businesses, including income from outside the nation.
• GDP and GNI are used to evaluate and analyze the economic condition of a country.

Elements of an Economic System

• Land (including natural resources)
• Capital
• Labor
• Entrepreneurship (considered the fourth factor, as it organizes the other factors of production into a functional unit)
• Property rights
• Incentives
• Economic freedom
• Competition

Strategy and Structure of International Business

• Firms can increase their profitability by expanding their operations in foreign markets.
• A firm's strategy can be defined as the actions taken to attain the goals of the firm, primarily maximizing profitability and profit growth.
• Value creation is key to increasing profitability, measured by the difference between the value placed on a product by consumers and the cost of production.

Strategic Positioning

• Firms must choose between a low-cost strategy and a differentiation strategy to create value for customers.
• A firm's internal operations must be configured to support its strategic emphasis.
• A firm's value creation can be measured by the difference between the value placed on a product by consumers and the cost of production.

Economic Problems

• What kinds and quantities of goods shall be produced?
• How goods shall be produced?
• How the output will be distributed?
• When to produce?

Balance of Payments

• The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country.
• The BOP is calculated every quarter and every calendar year.
• The BOP is used to monitor international monetary transactions and determine how much money is going in and out of a country.### Economic Systems
• Command Economy:
  • Dominant centralized authority (usually government) controls economic structure
  • Production decisions made by government
  • Rigid system, slow to react to change, vulnerable to economic crises
• Mixed Economy:
  • Combines characteristics of market and command economies
  • Private sector and government control different sectors
  • Balances economic growth and social welfare
• Market Economy:
  • Based on concept of free markets, minimal government interference
  • Private entities control resources, regulate themselves
  • Allows for rapid growth, but can lead to unequal resource distribution
• Capitalist Economy:
  • Private sector controls business operations, minimal government intervention
  • Aims to maximize profits, often leads to exploitation
• Socialist Economy:
  • Government owns and operates business, aims for social welfare
  • Decreases inequality and poverty, but can lead to loss of liberty

Firm Strategy and Profitability

• Firm's strategy: actions to attain goals, maximize value for shareholders
• Increase profitability by:
  • Creating more value for customers
  • Expanding globally, realizing location economies
  • Configuring operations efficiently, managing them well
• Global expansion benefits:
  • Expanding market for domestic products
  • Realizing location economies
  • Reducing costs, increasing return

Core Competence and Location Economies

• Core competence: skills that competitors cannot easily match
• Location economies: benefits from performing activities in optimal locations
• Optimal location for activities:
  • Lowers cost of value creation
  • Enables product differentiation

Experience Curve

• Systematic reduction in production costs over product life
• Explained by:
  • Learning effect: cost savings from learning by doing
  • Economies of scale: reductions in unit costs from large-scale production