Ch 3 - National Differences in Economic Development

gross domestic product (GDP)

Measures the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period

purchasing power parity (PPP)

Adjustment in GDP per capita to reflect differences in the cost of living.

• Why does a Big Mac cost more or less in different countries

Human Development Index (HDI)

Attempt by the United Nations to assess the impact of a number of factors on the quality of human life in a country.

• Life expectancy at birth

• Expected years of schooling

• Gross national income per capita

innovation

Development of new products, processes, organizations, management practices, and strategies.

entrepreneurs

Those who first commercialize innovations.

deregulation

Removal of government restrictions concerning the conduct of a business.

• Command Economy

  • Restrict FDI

  • Limit international trade

  • Prohibit Private Enterprise

• Mixed economy

  • State role limited

  • States set prices

  • Restrict FDI and international trade

• Example: India’s Economic Transformation

first-mover advantages

Advantages accruing to the first to enter a market.

late-mover disadvantages

Handicaps experienced by being a late entrant in a market.

political risk

The likelihood that political forces will cause drastic changes in a country’s business environment that will adversely affect the profit and other goals of a particular business enterprise.

Ex: Vietname transitioned to more market based, privatized, international trade and young population

• still strugles with human rights and corruption

economic risk

The likelihood that events, including economic mismanagement, will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a particular business enterprise.

legal risk

The likelihood that a trading partner will opportunistically break a contract or expropriate intellectual property rights.

GDP & PPP

Both a static picture of development

• Ex: India’s Shadow economy (not taken into consideration and gov does not get their taxes

Who is Amartya Sen?

Democratization of citizens voice in decisions of gov

• HDI - measure quality of life in different nations

• Life expectancy

• Education attainment

• average income based on PPP estimates

  • Measured from 0 to 1

0.55 are low in human development

• 0.55 - 0.699 are medium human development

• 0.7 to 0.799 are high in humand evelopment

• < 0.8 are very high human development

What are the trends that foster greater economic development:

• Democratic forms of gov

• Market based economic reforms

• Legal systems that enforce property rights

Why is innovation and entreprenuership good for economic growth?

Easier to do in a market economy than planned as there is little incentive to develop because the state owns all means of production

• More politcal freedom → democratic gov a conequence and more conductive to long term eocnomic growth

  • Ex: South Korea and Taiwan

• Strong legal and property rights

Who is Hernando De Soto?

claims that inadequate property protection in many developing nations limits economic growth

What factors affect political economy and economic progress in countries?

• Religion

• Language

• Geography

  • Landlocked countries grow slower

• Education

  • Education and GDP rates had positive impact on countries

• Demographic

  • Growing population → more innovation

  • immigration

• Sovereignty 

Why is democracy spreading?

1. Failed promises from Totalitarian countries

2. New info and communication tech

   • Reduce control over censorship

3. Prosperous middle class for long term survival

• 42% of the countries inn the world are considered free

Is authoritarianism growing?

• Share of not free countries rose from 2005 through 2023

• Examples: Turkey, Russia, Ukraine, Indonesia, Ecuador, Venezuela

What are the impacts of the spread of Market Based systems?

• The rise of Islamic fundamentalism is portrayed as a response to the alienation produced by modernization - Hunington

• Predicted conflict between West and China, West and Islam

• Many states in Asia, Latin America and western Europe sold off state owned business to private investors

privatization

• Transfers ownership from state to individuals

• Originated when PM of Great Brit Margaret Thatcher started to sell state-owned assets such as the British telephone company

• Privatization fails when receiving subsidies from state and protected from foreign competition by barriers

Legal Systems

Institutional weakness and lack of property right protections undermine contract enforcement

What are the implicaitons of a Changing Political Economy?

• Risk: Authoritarianism and totalitarian dictatorships could return and is the risk associated with investment worth it?

• Less investment in China due to COVID-119 pandemic and renewed focus on incorporating Taiwan into Chinese state

  • Corporate debt

  • China’s real estate company collapsed

What are the benefits costs and risks based on the Overall Attractiveness model?

• Benefits

  • Size of market

  • Purchasing power

  • Future wealth of consumers

• Costs

  • Paying off powerful entities

  • May be risky doing business in underdeveloped economies

  • Laws that don’t regulat business pratices or property can lead to theft of IP and lost income

• Risks

  • Political risk

    • Defined as the likelihood that political forces will cause drastic changes in a country’s business environment

  • Countries with social unrest and disorder

  • Mismanagement of its economy

  • When legal system fails to protect property rights, firms are more likely to break contracts

  • Demographic changes

What should you do to transition an economy into a market based system?

Deregulation, Privatization, and a legal system to safeguard property rights