Section 3 Guided Reading and Review Communism Chapter 23 Us Gov

2a The Marketplace System and the Round Flow

Reading Assignments:

Online

- A Comparing of Command Economies and Market Economies

- Globalization and Structural Adjustment: http://www.economist.com/news/leaders/21578665-nearly-1-billion-people-have-been-taken-out-farthermost-poverty-xx-years-world-should-aim/

- Venezuela and Government Control of Economy: https://foreignpolicy.com/2016/06/xix/venezuela-maduro-nutrient-shortages-cost-controls-political-unrest/

- OPTIONAL - Republic of cuba Examines Asian Model For Economical Reforms (NPR Forenoon Edition)

- Lecture Outline

Textbook:

Chapter 2 ALL (19th Ch. 2 ALL)

Ch. 2, p. 47, (19th, 42), "Last Discussion: Shuffling the Deck"

Ch. 8, p. 186 (19th, 164), "Global Competition"

Chapter 23W of the 16th edition of our textbook, pages 2-13, institute on our Blackboard site

- State Buying and Central Planning: pp. 23W-2 to 23W-3
- Bug with Key Planning pp. 23W-three to 23W-5
- The Collapse of the Soviet Economy pp. 23W-5 to 23W-6
- The Russian Transition to a Market place System pp. 23W-half-dozen to 23W-nine
- Market Reforms in People's republic of china pp. 23W-x to 23W-xi
- Outcome and Prospects pp. 23W-11 to 23W-13
- Decision pp. 23W-13

Brief Outline

• Introduction: Structural Adjustment Programs and Globalization
• Market (Capitalist) Economies
  • Characteristics
  • Capitalism and the 5 central Questions
  • Capitalism and the 5 Es
• Bug with a Command Economy
• Structural Aligning Policies and the 5Es
  • Privatization
  • Promotion of Competition
  • Reduced Function of Government
  • Removing Price Controls
  • Freer Trade and Convertible Currency
  • Foreign Investment

I. INTRODUCTION

Entrepreneurs Emerge Every bit Cuba Loosens Control
National Public Radio (NPR), Morning Edition, September 20, 2011

"Since Cuba's communist authorities loosened its grip on the economic system, thousands of pocket-sized private businesses take sprung up. Information technology's a new borderland for budding capitalists, merely competition is vehement and ad is still tightly restricted."

http://www.npr.org/2011/09/xx/140501399/entrepreneurs-emerge-every bit-cuba-loosens-control

Major economical changes accept been occurring in the last few decades. Countries all around the earth, including the U.s.a. are currently engaged in a procedure of globalization, or structural adjustment. This includes, among other things, moving toward gratis merchandise. Globalization and the removal of trade barriers is occurring now and information technology volition continue to occur. Some of what nosotros hear in the popular press is contrary to what we are going to learn in this course. This is very truthful when discussing globalization. For example, read the following quotes from the CNN news article: Dobbs: New Congress must prove courage [http://www.cnn.com/2006/US/11/28/Dobbs.Nov29/index.html].

Lou Dobbs, Sometime CNN News commentator (Now Play tricks News) and all-time-selling author, says:
Dobbs: New Congress must show backbone [http://www.cnn.com/2006/US/11/28/Dobbs.Nov29/index.html]

• "But the consequences of faith-based free-trade will be center-popping in the disaster it wreaks on our economy and working Americans."
• "I hope they (the new Democratic congressional leadership) tin can acknowledge that and then-chosen costless trade has come at an inordinate cost to working men and women in this country. "
• "We've lost three meg manufacturing jobs equally a outcome of these so-called free merchandise agreements that enable corporate America to export plants, production and jobs to cheap strange labor markets."
• "And yet nosotros persist with our historical ignorance, and we go along to enter poorly negotiated agreements that pose great threats to the U.S. economy and the middle class."

From the Trump campaign website: https://www.donaldjtrump.com/policies/trade

• America has lost nearly one-3rd of its manufacturing jobs since NAFTA and l,000 factories since China joined the Earth Trade Organisation. [Economic Policy Institute, April 23, 2015]
• The U.Southward. merchandise deficit with the proposed TPP fellow member countries price over 2 million jobs in 2015. By far the biggest losses occurred in motor vehicles and parts, which lost about 740,000 manufacturing jobs. Imagine how many more jobs would be lost if the Trans-Pacific Partnership was actually approved. [Economic Policy Found, March three, 2016]
• The Trans-Pacific Partnership will undermine our economic system, and it volition undermine our independence:

Then read the following quotes taken from our textbook (19th edition):

• p. 96 "Nations specialize and trade for the aforementioned reasons as individuals: specialization and exchange results in a greater overall output and income."
• p. 98 "Specialization (i.e. trade) improves global resource allocation. The aforementioned total inputs of globe resources and technology result in a larger global output."
• p. 405 "Import restrictions alter the limerick of employment, only they have piffling or no effect on the volume of employment."
• p. 101 - "Actually the true benefit created past international trade is the overall increase in output obtained through specialization and exchange.
• p. 403- "the gains that US merchandise barriers create for protected industries come at the expense of much greater losses for the unabridged economy. (emphasis added). The result is economic inefficiency, reduced consumption, and lower standards of living."
• p. 403 - Written report after study finds that the costs to consumers (of trade restrictions) substantially exceed the gains to producers and government."

"Specialization according to comparative advantage results in a more efficient allocation of the world's resources, and larger outputs ...." (McConnell and Brue 2005, p. 361)

WHY?

Structural Aligning, or Globalization

Definition: A Serial of economic policies designed to reduce the role of authorities in an economy replacing government command with market incentives.

Globalization has helped take nearly 1 billion people out of extreme poverty in 20 years. How? Read the short article beneath.
http://www.economist.com/news/leaders/21578665-almost-i-billion-people-have-been-taken-out-farthermost-poverty-xx-years-earth-should-aim/

In the fifth paragraph the article says:

"Nearly of the credit [for poverty reduction in the last twenty years] must go to capitalism and gratis trade, for they enable economies to abound - and information technology was growth principally that eased destitution."

Structural Adjustment Policies

• Privatization
• Promotion of Competition
• Reduced Role of Government
• Removing Toll Controls
• Freer Trade and Convertible Currency
• Foreign Investment
• Other

Problems of Structural Adjustment Prograpms (pages 23W-8 to 23W-9 and 23W-12 to 23W-13)

• Inflation
• Initially falling output and living standards
• Inequality and social costs - disinterestedness is not necessarily accomplished in a market economic system

• Two of the most profound events of the past ii decades are the plummet of communism in the Soviet Union and the rapid emergence of the market arrangement in Cathay. Russian federation and Prc are perhaps the earth's most meaning developing economies: Together they constitute 20 percent of the world's surface surface area and 24 percent of the earth's population.

• Russia and China have taken unlike approaches to structural aligning.
  • Russia used "daze therapy" moving very chop-chop to privatize land-owned industries and introduce marketplace incentives. Furthermore, Russia, at the same time, changed its political organisation from and authoritarian communist country to a democracy.
  • Prc on the other hand began its structural adjustment plan before, just information technology is moving slowly toward capitalism. It has also retained its authoritarian communist political arrangement

• Recently, Argentina in South America take begun to move abroad from capitalism and toward socialism. Mind to the following v minute radio news article:

  The country of Venezuela which has the world's largest oil reserves and was once the richest land in Due south America. Simply now Venezuela has severe nutrient and gasoline shortages and the world'southward highest inflation rate at over fifteen,000%. "[B]asic goods such equally coffee, sugar, rice, milk, pasta, toilet paper, hand soap, and detergent remain impossible to find". Hospitals are without medicine, nutrient is rationed, and people are fleeing the country. What happened? In the concluding two decades in order to help the poor, the government took command of the economic system, nationalizing industries and controlling prices. And the economy has collapsed.

  Venezuela and Government Control of Economy: https://foreignpolicy.com/2016/06/xix/venezuela-maduro-food-shortages-toll-controls-political-unrest/

  A View of Venezuelan Nationalization

  Go to: http://world wide web.npr.org/templates/story/story.php?storyId=6849640

  Click on: "Listen"

  Weekend Edition Saturday, January 13, 2007 - In the global economic system where more and more upper-case letter is held in private easily or past publicly-traded companies, the South American nation of Venezuela seems to exist bucking the trend.

  This week, as he causeless power for a second half-dozen-twelvemonth term, President Hugo Chavez announced that Venezuela will nationalize firms in two major sectors of the economic system — telecommunications and electricity. [Notation: "nationalize" means that the regime is going to take over these businesses.]

  And some companies in those sectors take shareholders in the United states of america, including Verizon, which owns a large stake in the Venezuelan telecom giant, CANTV.

  Economist Moises Naim, a one-time minister of trade and industry in Venezuela (and at present editor of Foreign Policy magazine, reviews the implications of Chavez's program with Scott Simon.

  SUMMARY

  • Industries to exist nationalized:
    • Telecommunications (telephone)
    • Electricity
  • How they will be nationalized is unknown.
    • Will the government merely take them over?, or
    • Volition the owners exist paid?
  • Why are they doing information technology?
    • "Political move" toward "socialism"
    • Previous nationalization had poor results
    • Should foreigners own these industries in Venezuela?
    • Would local or land ownership be better? (probably not)
    • Research shows that ownership affect efficiency - state ownership is less efficient

II. Review:

A. What are Structural Adjustment Programs?

• GOAL: MAXIMIZE SATISFACTION / REDUCE SCARCITY
• What is Structural Adjustment?
  
  • Definition:

    A Series of economical policies designed to reduce the part of government in an economy replacing government control with market incentives.

    

  • Structural Aligning Policies:
    (Run into: chapter 23 West pages 23W-6 to 23W-8 and 23W-10 to 23W-11)
    http://highered.mcgraw-hill.com/sites/dl/free/0072875577/141636/Webchapter23.pdf

  • Privatization
  • Promotion of Competition
  • Reduced Role of Government
  • Removing Price Controls
  • Freer Trade and Convertible Currency
  • Foreign Investment
  • Other
    

• Goals of SAPs :
  • to reduce scarcity and achieve the maximum satisfaction possible out of society's limited resources.

    

  • This means to achieve the 5Es
  • Macroeconomic goals:
    • full employment
    • low aggrandizement
    • economic growth
• Problems of SAPs (pages 23W-viii to 23W-ix and 23W-12 to 23W-xiii)
  • Inflation
  • Initially falling output and living standards
  • Inequality and social costs - equity is not necessarily achieved in a market economy

B. Economic Systems:

• Two main types:
  • Command Economy or Socialism (chapter 23W of the 16th edition)
  • Market place Economic system or Capitalism (Ch. 2)
• Economic systems are ways that countries answer the 5 fundamental questions (20th: pp. 37-forty; 19th: pp. 34-36)

  1. What will be produced?
  2. How will appurtenances and services exist produced?
  3. Who will get the output?
  4. How will the organization accommodate change?
  5. How will the system promote progress?

• Economic Systems:
  • There are no PURE command economies
  • There are no PURE market place economies
  • Instead at that place is a continuum of different characteristics

    

• Economic Systems: Characteristics
  • who owns
  • who decides
    
• Ii Types of Economic Systems
  • Pure Capitalism
    • also chosen:
      • market economic system
      • competition
      • free enterprise
      • laissez-faire capitalism
    • examples : most countries lean toward commercialism
  • Command Economy
    • too called
      • socialism
      • state-run economic system
      • centrally planned economy
      • communism
    • Examples:
      • Northward Korea
      • Cuba,
      • Turkmenistan
      • Myanmar
      • Belarus
      • Laos
      • Libya
      • Iran
      • Iraq (until 2003)

• ALL economic systems are Mixed Systems
  

  TYPE OF Arrangement	WHO OWNS?	WHO DECIDES?
  Pure Capitalism:	private buying	the marketplace system
  Command Economic system:	government buying	centralized (or gov't) decision-making
  Mixed Economic system	some private and some regime	some private and some regime

• Paul Solman Video: Capitalism vs. Socialism - The Cuban Quandary (YouTube PBS NewsHour thirteen:56)
  https://www.youtube.com/lookout man?five=UmI00B2nKFs
  • notation the important office of INCENTIVES

• 

III. Characteristics of a Capitalist Economic system

A. Basic Characteristics:

CLASS:	TEXTBOOK:
1. private property 2. liberty of enterprise and choice three. role of self interest 4. contest 5. markets and prices 6. limited role for regime	1. private holding 2. freedom of enterprise and pick 3. role of self interest 4. contest 5. markets and prices six. active, only limited authorities seven. technology and capital goods eight.specialization 9. use of money

B. private property

• provides an incentive for economical growth
  • Paul Solman Video: Individual Holding (and Pilgrims too)

  • OPTIONAL: http://www.npr.org/templates/story/story.php?storyId=1565953

    China Considers Private Property Rights on National Public Radio

    All Things Considered, Dec 22, 2003 · In Beijing, legislators propose an amendment to the Chinese constitution guaranteeing individual property rights. The motility has great symbolic importance in a land that is nominally communist, only whose people have been buying holding and trading stocks for years as the result of economic reforms by Deng Xiaoping. NPR's Rob Gifford reports.

    SUMMARY

    • "private sector will drive the economy forward" therfore belongings rights must be protected
    • private property already exists
    • doesn't necessary imply political reform (still communist)- but economic reform

C. markets and prices

• prices GUIDE resources
  [loftier prices later on a hurricane encourage people to bring plywood to Florida]
• prices RATION goods and services
  [high prices after a hurricane encourage people to conserve]
• markets and prices affect allocative efficiency

  Quick Quiz:

  TO Decide HOW TO Utilize ITS Express RESOURCES TO SATISFY Human being WANTS PURE Capitalism RELIES ON:

  A. CENTRAL PLANNING
  B. Gratis Merchandise
  C. A Toll SYSTEM
  D. Total EMPLOYMENT

D. role of self involvement

• Introduction: would you rather have authorities or individual business run the following? WHY?
  • gas station near a desert
  • your electronic mail service
  • gas stations
  • other

• Cocky interest is a powerful force and IF At that place IS Contest IN AN ECONOMY it volition result in improving the social good (efficiency and economic growth) as if in that location is some "invisible hand" guiding their decisions.
  • "greed" and productive efficiency
  • "greed" and allocative efficiency
  • "greed" and economical growth

E. freedom of enterprise and choice
(Cuba video - Cubans now take some freedon to commencement their own businesses)

• definitions
  
  • Freedom of enterprise ways that entrepreneurs and businesses have the freedom to obtain and use resource, to produce products of their choice, and to sell these products in the markets of their selection.
    
  • Freedom of choice means:
    • Owners of holding and money resources can use resources as they choose.
    • Workers can choose the preparation, occupations, and job of their selection.
    • Consumers are free to spend their income in such a way as to best satisfy their wants (consumer sovereignty).
• provides the ways for "greedy" people to help the economic system achieve allocative and productive efficiency and economic growth

F. competition = capitalism

• what is competition?
  
  • Large numbers of sellers mean that no single producer or seller tin can control the toll or market place supply.
  • Large number of buyers means that no unmarried consumer or employer can command the price or marketplace demand.
  • Depending upon marketplace atmospheric condition, producers can enter or exit industry easily.
    
• contest is the "invisible hand"
  • plywood after a hurricane
  • monopolies and inefficiency

Thousand. limited role for government (more in lesson 2b)

• What IS the economic role for regime?
• Economic goals: five Es
• Problems with capitalism:
  • at times even marketplace economies reach allocative INefficiency:
    • overproduction (too much produced) of appurtenances with negative externalities
    • underproduction (too footling produced) of goods with positive externalities
    • trend for business to increase monopoly power, and produce, less to increment profits
  • macroeconomic instability (periods of high unemployment and periods of loftier inflation)
  • no mechanism to guarantee equity

IV. The Market System at Work

A. Introduction

1. Why is the world moving toward commercialism?

2. What bug might they encounter?

B. The Market and the 5Es

i. Economic Growth -- marketplace economies have historically achieved higher rates of economic growth

2. Allocative Efficiency: -- Producing what consumers want

a. Capitalism provides incentives

(ane) more than profits = produce more

(2) losses = produce less (note: losses are important)

(iii) consumer sovereignty and "dollar votes"

b. Capitalism tends to accomplish allocative efficiency

3. Productive Efficiency -- Producing at a minimum cost

a. Capitalism and incentives

(ane) profits = total revenues - total cost

(two) minimizing costs (productive efficiency) means more profits

b. Capitalism tends to achieve productive efficiency

4. Equity

At that place is no feature of capitalism which will guarantee equity

Often, the government gets involved to help achieve equity

5. Full Employment

Economists disagree over whether capitalism will result in total employment

• Some say yes, and if there is unemployment it is usually caused by government interference
• Some say no, and at times government interest is needed to move the economy towards full employment

C. Summary:

1. Commercialism provides the incentives (profit) for a PRODUCTIVELY EFFICIENT apply of resources

2. The price mechanism provides for an ALLOCATIVELY EFFICIENT use of resources

three. Capitalism does not accept a machinery to assure EQUITY. This may exist a role of government

4. Economists disagree over whether capitalism will guarantee Total EMPLOYMENT.

5. The motion toward capitalism has resulted in high rates of ECONOMIC GROWTH in many countries. Profits, private belongings, and freedom of enterprise and choice promote growth

IV. Capitalism and the Five Central Questions

A. Introduction

1. The five key questions must be answered past all economic systems.

2. The five primal questions are:

a. What appurtenances and services volition to exist produced?
b. How will the goods and services exist produced?
c. Who will get the output?
d. How will the organization adapt modify?
east. How will the system promote progress?

B. What will be produced? (Allocative Efficiency)

1. In order to be assisting, businesses must respond to consumers' (individuals, other businesses, and the government) wants and desires.

2. Consumer Sovereignty and "dollar votes"

C. How will the goods and services be produced? (Productive Efficiency)

1. The market place arrangement encourages and rewards those producers who are achieving least-cost production.

2. The about productively efficient technique will be the i that produces a given amount of output with the smallest input of limited resources.

D. Who will get the output? (Equity)

1. Determined by how the income is distributed

2. Products go to those who are willing and able to pay for them.

3. The productivity of the resources, the relative supply of particular resources, and the ownership of the resources will make up one's mind the income of individuals and households.

4. The resulting distribution of income may NOT be the virtually equitable (fair).

E. How will the system accommodate change?

i. Markets are dynamic - what is efficient today may not be efficient tomorrow as tastes, technology, and resource supplies alter.

ii. Prices help signal those changes and the market will answer. This guiding function of prices is essential to a well-functioning market system.

iii. In the absence of such signals, authorities or some similar institution would take to decide where resources are allocated, but without knowing what people in society want the consequence would nigh likely be allocatively inefficient.

F. How will the system promote progress?

1. The market arrangement promotes technological improvements and upper-case letter accumulation (economic growth).

2. An entrepreneur or firm that introduces a popular new production will be rewarded with increased acquirement and profits. (allocative Efficiency)

3. New technologies that reduce product costs, and thus product price, volition spread throughout the industry as a result of contest. (economic growth)

iv. Artistic destruction occurs when new products and production methods destroy the market positions of firms that are non able or willing to adapt. Notation: this is skillful for lodge.

Command Economies

I. Ideology and Institutions

A. History

1. The Russian Revolution of 1917 produced a dictatorship under Vladimir Lenin and subsequently Joseph Stalin.

2. China'due south communist takeover took place in 1947 under Mao Zedong

3. Both countries viewed centrally planned socialism as a solution to the instability of what they believed were cluttered market systems.

B. At that place were two major institutional characteristics of the previous economies of Russia and People's republic of china.

one. WHO OWNS: There was state buying of all property, transportation and advice facilities, banking institutions, virtually all industry including retail and wholesale enterprises, and most urban housing structures.

2. WHO DECIDES: There was also key economical planning, which meant that the economy was directed by the government rather than by decentralized marketplace mechanisms.

Ii. Central planning and its bug

A. Planning goals and techniques.

1. in the SOVIET UNION Industrialization and military machine strength had the highest priority in terms of resource allocation.

ii. In CHINA emphasis was placed on developing small-scale industries scattered throughout the rural areas. Both countries neglected consumer goods industries.

3. Resources were overcommitted, planners committed more than resources than were available, and then at that place were persistent SHORTAGES.

4. Resources were initially MOBILIZED to achieve rapid economic growth and this was successful through the 1950s. Both China and the Soviet Wedlock induced or coerced a larger proportion of the population into the labor forcefulness. This reduced unemployment.

5. Allocation of inputs was washed by directive: GOV'T DIRECTED Resources.

vi. Authorities Stock-still PRICES of nearly all inputs and outputs, but prices did not reflect the relative scarcity of the resources or product. The result was often prices that were too low and shortages occurred resulting in allocative inefficiency.

seven. The Soviet Union and China aimed at SELF-SUFFICIENCY and avoided merchandise with western countries if possible resulting in productive inefficiency.

B. Problems of fundamental planning were serious.

ane. The COORDINATION PROBLEM

• was massive;
• outputs of some industries are inputs in others, so problems in whatsoever unmarried sector would immediately be felt in many.
• At that place was no price mechanism to provide incentives to eliminate bottlenecks, as is true in a market economy.
• Planners had to coordinate inputs and outputs for thousands of production enterprises.
• Bottlenecks were common.

2. The INCENTIVE PROBLEM.

a. In a market system, profits and losses signal success and failure and provide incentives to increase or decrease production. In fundamental planning managers are rewarded for meeting assigned goals and have no incentive to respond to product shortages or surpluses.

b. The centrally planned system also lacked entrepreneurship. Without turn a profit there is no reward for innovation or enterprise.

c. In centrally planned systems business is essentially a government owned monopoly with no reward for improving product quality or developing more efficient product techniques.

d. Workers lack motivation because at that place are few material incentives.

III. The Collapse of the Soviet Economy: The Soviet Union ceased to exist by that name in November of 1991, and became 15 separate countries.

Soviet Marriage (U.s.South.R.)

Russia and 15 new independent countries

A. After rapid economic growth through the 1950s and 1960s (about six per centum reported per year, compared to three percent in the U.S.) the rate fell to less than 3 per centum in the 1970s, and by late 1980s the Soviet Gross domestic product was actually declining.

• WHY was the initial growth charge per unit so loftier?
  • Resources were initially mobilized to attain rapid economic growth and this was successful through the 1950s. Both China and the Soviet Union induced or coerced a larger proportion of the population into the labor force.
• WHY did the growth rate decline?
  • inefficiency acquired by the coordinationand the incentive bug

B. The quality of goods was below international standards, the pick of consumer appurtenances was extremely limited, and engineering science was archaic past world standards. Shortages of bones goods were mutual, leading to long lines, blackness markets, and corruption in product distribution.

C. The lack of power to fulfill consumer needs contributed to the fall of communism.

D. There was a huge military machine burden: 15 to 20 pct of Gross domestic product was devoted to military as compared with 6 to 7 per centum of a much larger Gdp in the U.S. (The role of President Ronald Reagan'due south military build-upwardly.)

E. The agricultural sector experienced great inefficiency and consumed 25 percent of annual investment. It employed 30 percent of the labor force (in the U.Southward. the number is ii%) while all the same not producing enough for the population to feed itself. Output per farm worker was ten-25% that of U.Southward. farm workers.

IV. STRUCTURAL Aligning: The Russian Transition to a Market System.

A. Privatization

1. Since 1992 more than two-thirds (more than past now) of former state endemic enterprises have been privatized, including 90% of minor companies and 80% of service sector companies.

ii. Land reform has progressed more slowly. It volition accept many years to develop a functional market for farm land.

B. Price Reform

1. Prices in the onetime Soviet system diameter no relationship to the economic value of either products or resources.

2. Because input prices did not measure the relative scarcity of resources, it was impossible for a business firm to minimize existent production costs.

3. Prices of many consumer items were fixed at artificially low levels and shortages existed for many of these goods. (See Figure Spider web-1. We'll study this in chapter 3)

4. In Jan 1992, the authorities decontrolled about ninety% of all prices including the Russian currency. Domestic prices surged and the international value of the Russian ruble sank.

v. The decontrolled prices began to more closely reflect the marginal toll of producing appurtenances, which helped reallocate resources to best adapt consumer wants. Event: ALLOCATIVE EFFICIENCY

C. Promotion of contest.

i. The one-time Soviet Union consisted of big state-owned enterprises—monopolies that produced 30 to 40 pct of total industrial output.

2. Russian reformers realized an efficient marketplace economic system requires competition, only only limited change has occurred.

3. Joint ventures between Russia and foreign companies are one possible style to increase competition and recent legislation has opened the door for firms to invest straight in Russia.

D. Joining the world economy past making the ruble convertible.

E. Cost Level Stabilization - Keeping inflation downwards. (Come across Table 23W-1)

i. The transition to complimentary markets brought hyperinflation.

2. Large regime deficits were financed by increases in the money supply.

a. Privatization of state enterprises caused the regime to lose profits.

b. The uncertainty of transition led to general disorder and widespread tax evasion.

c. The authorities extended massive subsidy credits to both manufacture and agriculture.

d. Pensions and welfare spending was increased by press more than coin.

(the event of this increase in the coin supply is Aggrandizement. we will discuss this in unit three.)

F. Other major problems of the transition:

1. Real output began its autumn in the 1980s but the decline accelerated during the reforms; the magnitude resembles that associated with the Great Depression in the United states of america. Causes of the declined include:

a. Rapid inflation, which caused an uncertain environs.

b. Unraveling merchandise relationships with onetime Soviet Bloc trading partners.

c. Bankruptcy and endmost of many former land-owned enterprises.

d. Massive reallocation of resources including major cuts in military spending.

2. Considering real output equals real income, the Russian living standard has declined dramatically; at least 30,000 scientists accept left Russian to piece of work elsewhere.

3. Economic inequality has increased during the transition. This is a mutual problem with marketplace economies. Greater economical freedom has brought greater economical insecurity; medical and educational services have declined, alcohol corruption has increased.

4. While some new wealth has been created through entrepreneurship, others accept enriched themselves via corruption and illegal activities. The major disruptions, swift changes, and lack of regulatory oversight created major opportunities for organized offense.

six. A remaining concern about the transition to markets in Russian federation is the weakness of regime in law enforcement, particularly the collection of taxes.

Thou. Recent Revival

1. Aided by rising oil prices and production, and greater political stability, Russia'due south real Gross domestic product has increased past at least 5 percent per yr since 1999. The unemployment charge per unit fell from xiii percent in 1999 to about 8 percentage in 2002.

2. Recent income growth and stronger enforcement of revenue enhancement collection has increased tax revenues, helping to turn the authorities's 1998 upkeep deficit into a surplus in 2002.

three. The most severe economical dislocations seem to have ended, but the transition to a fully operation market economy will require additional time.

V. Market Reforms in Cathay

A. Red china has taken a different path to marketplace reform than Russian federation.

• The reforms began earlier,
• were more than gradual,
• and allowed the old systems to role along with the new.
• Besides maintained an disciplinarian, Communist, authorities system

B. Market reform began in agriculture in 1978. The primal elements were the leasing of land to individual farmers and the establishment of a 2-track cost organization (lower prices for authorities orders and market place prices for the surplus). Responding to the turn a profit motive, private farmers increased their productivity and farm production soared.

C. The success of reforms in agriculture led the fundamental government to extend the reforms to country-endemic enterprises (SOEs) in urban areas.

1. The two-track price system was again employed, gradually increasing the portion of inputs and outputs that could exist sold at marketplace prices.

ii. The authorities also encouraged the germination of urban collectives—enterprises owned jointly past managers and their workforces. The urban collectives experienced explosive growth, some at the expense of the SOEs. However, the competition spurred productivity accelerate and innovation in many of the SOEs.

D. In 1980 China created special economic zones (SEZs) open to foreign investment, private ownership, and international trade. Spatially isolated.

E. Reforms in Cathay also included building institutions to facilitate the market place system and its macroeconomic control.

1. A central bank, a stock marketplace and currency exchange facilities were established.

two. Cathay replaced the system of "profit transfers" from state enterprises to the central government with an enterprise tax organization.

F. Transformation of the Country Endemic Enterprises (SOEs).

one. In the 1990s the market place reforms continue as the Communist Party operatives running the SOEs are replaced with professional person business managers.

two. In a competitive surroundings many SOEs found that they were producing the wrong appurtenances (allocative inefficiency), in the incorrect amounts (allocative inefficiency), using the wrong combinations of inputs (productive inefficiency). In brusk they were inefficient, in both production techniques and in allocation of resource. Some will exist immune to neglect, others volition effect stock with the government holding a controlling interest.

Half dozen. Outcomes and Prospects

A. China's economical growth rate in the by 2 decades is among the highest on record for any country during any period of world history. (Encounter Tabular array 23W-2)

B. The growth of per capita income in China has resulted from increased utilize of capital, improved applied science, and shifts of labor abroad from lower-productivity toward college productivity uses.

Which definition of growth is the writer using?

• "increased apply of capital letter" = more resource = economic growth
• "improved technology" = economic growth
• "and shifts of labor away from lower-productivity toward higher productivity uses" = using resources where they are best suited - productive efficiency

C. Rapid expansion of international merchandise from $five billion in 1978 to $195 billion in 1999 took place = productive efficiency

D. Cathay still faces some pregnant economical bug in its transition to the market arrangement.

1. Outright ownership of farm country is still prohibited and this inhibits investment in farm equipment and capital improvements on the country = less economic growth

ii. The financial and budgetary command systems in China are notwithstanding weak and inadequate. Many unprofitable SOEs owe colossal sums of coin on loans made by banks.

three. Unemployment is a problem in Prc, with an estimated x per centum unemployment rate in 2002. The problem is especially acute in the interior regions of the country.

4. Cathay nevertheless has much work to practice to fully integrate its economy into the world's system of international finance and trade.

5. There is neat regional unevenness in China's economic development.

VII. Conclusion

A. Mainland china's gradual path has been more successful so far, but questions remain about time to come prospects.

B. Once Russian federation stabilizes, it may exist in a stronger position than China because information technology has become more democratic.

SUMMARY:

WHAT ARE THEY DOING? - Structural Adjustment Programme policies

There are a great variety of policies that comprise Structural Adjustment. Here is a list of some of the most important ones:

• Privatization - the selling of regime owned industries to the private sector. This is a fundamental change that is occurring around the world - even in the United States.
• Promotion of Contest - we'll detect out that the give-and-take "competition" has a special significant in economic science, but here all we mean is that many firms compete with each other for your business.
• Reduced Role of Government - but we are non maxim no government. How much the authorities should get involved in the economy is currently an of import political question here in the US.
• Removing Price Controls - As we will run across, a fundamental office of structural aligning is to let markets to set up prices rather than the regime. If people are used to regime controlled Low prices they frequently oppose the removal of these cost controls.
• Freer Trade and Convertible Currency - another major change occurring worldwide is the removal of trade barriers. More than on this later
• Foreign Investment - along with free trade goes the free move of uppercase.

WHY ARE THEY DOING IT? - Goals of SAPs

Nosotros tin assume that the governments that are undertaking structural adjustment programs want to improve the standard of living for their citizens. They promise to do this past achieving the 5Es of economic science:

• economical growth
• productive efficiency
• allocative efficiency
• equity
• full employment

They also want to achieve the macroeconomic issues of:

• full employment
• low inflation
• economic growth

We volition soon discuss whether they are achieving these goals.

WHAT NEGATIVE EFFECTS MIGHT ARISE? - Problems

Often, as countries brainstorm to implement their structural adjustment policies, things get worse earlier they become better - or they go worse for some and better for others. Common bug associated, at least initially, with structural adjustment programs would include.

• Inflation as the governments removes price controls
• Rising unemployment as people are laid off from inefficient authorities owned enterprises resulting in falling output and lower living standards
• Inequality and other social costs equally some people gain but others lose

OVERALL ASSESSMENT OF SAPs

Although many people protest SAPs,

nigh economists, and governments, believe the benefits of greater efficiency accomplished through globalization outweigh the costs.

Therefore all around the world governments are moving their economies from command economies towards capitalism. The goal of unit i is to learn some fundamental economic principles to help us better sympathise these changes.

When countries undertake structural adjustment programs they movement FROM a command economy TO a market place economy with the following results:

CHARACTERISTIC		COMMAND ECONOMY		Market place Economy
ownership of resource:	From:	regime ownership	To:	individual ownership
decision making:	From:	centrally planned	To:	by the marketplace
motivation:	From:	"the social good"	To:	cocky interest and turn a profit
prices and wages:	From:	gear up by the government often distorted	To:	fix past the market modify with market
effect:	From:	inefficiency full employment low inflation depression standard of living shortages more than equal distrib	To:	economic efficiency periods of unemploy. periods of inflation high standard of living wide range bachelor less equal distrib.
problems:	From:	corruption=cocky interest lack of incentives (the incentive problem) distorted prices (the coordination trouble) inefficiency	To:	monopoly= inefficiency inequality changing prices instability (UE, IN) pollution
OVERALL:	From:	LESS FOR More than (INEFFICIENT) and a lower standard of living	To:	More FOR LESS (EFFICIENT) and a higher standard of living

WHY:

Pure Capitalism and the Market place Organisation:
The Market place and the 5 Es

Characteristics of a Market Economy (Capitalism)

A. private property
B. markets and prices
C. role of cocky interest: incentives
D. freedom of enterprise and choice
East. competition

i. large numbers
2. complimentary entry and exit
3. produce standardized products

F. limited part for authorities

The Market and the 5Es

ane. Economic Growth

Capitalist economies tend to have more rapid rates of growth

2. Allocative Efficiency: Producing what consumers want

a. Commercialism and incentives

(one) more profits = produce more than

(2) losses = produce less

(3) consumer sovereignty and "dollar votes"

b. Capitalism tends to achieves allocative efficiency

3. Productive Efficiency: Producing at a minimum cost

a. Capitalism and incentives

(1) profits = total revenues - full price

(ii) minimizing costs means more profits

b. Capitalism tends to reach productive efficiency

4. Equity

There is no characteristic of commercialism which will guarantee equity

Often, the government gets involved to help achieve equity

5. Full Employment

Economists disagree over whether capitalism volition result in full employment

• Some say aye, and if there is unemployment it is usually acquired by government interference
  
• Some say no, and at times government interest is needed to motility the economy towards full employment

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Source: http://www2.harpercollege.edu/mhealy/eco212/lectures/unit1/ch23/ch23.htm

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