ECONOMIC SYSTEMS

AND MARKET METHODS

INTERNATIONAL ECONOMIC ANALYSIS
The study of economics has identified a host of objective
measures that help systematize evaluation. However, although
economics champions many scientific principles, it still relies on
various behavioral assumptions to interpret activity. As a result,
the assessment of economic environments is often more
conditional than universal because:
1. System Complexity
2. Market Dynamism
3. Market Interdependence
4. Data Overload
ECONOMIC FREEDOM
◎ Economic freedom is the absolute right of property
ownership, fully realized freedoms of movement for labor,
capital, and goods, and an absolute absence of coercion or
constraint of economic liberty beyond the extent necessary
for citizens to protect and maintain liberty itself.
◎ The greater degree of economic freedom, the greater
freedom the individuals have to decide how they wish to
work, produce, consume, save and invest.
ECONOMIC FREEDOM
◎ Economic Freedom Index estimates the extent to which a
government constrains free choice and free enterprise for
reasons that go beyond the need to protect property, liberty,
safety, and efficiency.
ECONOMIC ANALYSIS
THE VALUE OF ECONOMIC FREEDOM
◎ Economic freedom helps explain a country’s development,
performance, and potential.
◎ Higher-rated countries generally outperform laggards on a
variety of measures.
TYPES OF ECONOMIC SYSTEMS
MEASURES OF ECONOMIC PERFORMANCE
◎ The expanding barrage of data spurs managers to streamline
market evaluation.
◎ Many anchor analysis in comprehensive single-item
measures that provide a quick indicator of whether an
economy
(1) is expanding or contracting,
(2) needs a boost or should be constrained, and
(3) is threatened by recession or inflation.
Gross National Income (GNI)
◎ Gross National Income is the broadest measure of a
country’s economy.
◎ It measures the value of all production in the domestic
economy together with the income that the country receives
from other countries (mainly interest and dividends), less
similar payments it has made to other countries.
Gross National Product (GNP)
◎ GNP is the value of all final goods and services produced
within a nation in a given year, plus the income earned by its
citizens abroad, minus the income earned by foreigners from
domestic production.
◎ Conceptually, world GNP and world GNI are equal. However,
their slightly different calculation can result in a small
discrepancy at the country level.
Gross Domestic Product (GDP)
◎ The total market value of all output produced within a
nation’s borders, no matter whether generated by a domestic
or foreign-owned company, is reported as a nation’s GDP.
◎ It the most commonly used estimator of the true performance
◎ of an economy given that it measures income, not wealth.
◎ GDP estimates the flow of economic activity within a country,
not simply its stock of productive assets.
PERFORMANCE AND POTENTIAL: ALTERNATIVE
INTERPRETATIONS
◎ Sustainability
○ Green economics holds that each country is a
component of, and dependent on, the natural world.
○ Presently, there is no consensus in how to greenify GNI,
GNP, or GDP. Current candidates include
◉ Net National Product (NNP)
◉ Genuine Progress Indicator (GPI)
◉ Human Development Index (HDI)
PERFORMANCE AND POTENTIAL: ALTERNATIVE
INTERPRETATIONS
◎ Stability
○ Happynomics calls for moving from the concept of
financial prosperity to the idea of emotional prosperity.
○ An ongoing paradox is that people in rich countries are
not significantly happier than people in poor countries.
INFLATION
○ The sustained rise in prices measured against a standard
level of purchasing power.
○ Deflation is the opposite of inflation – prices for products
go down, not up. It occurs when the annual inflation rate
is less than zero.
○ Reflation – increasing the money supply and reducing
taxes to accelerate economic activity – to combat
deflation.
UNEMPLOYMENT
○ The unemployment rate is the share of out-of-work
citizens seeking employment for pay relative to the total
civilian labor force.
○ Misery index – the sum of a country’s inflation and
unemployment rates.
DEBT
○ Debt, the total of a government’s financial obligations,
measures what the state borrows from its citizens, foreign
organizations, foreign governments, and international
institutions.
○ The larger the total debt, the more uncertain an
economy’s performance and potential are.
DEBT
○ Internal debt: Portion of the government debt that is
denominated in the country’s own currency and held by
domestic residents.
○ External debt: Debt owed to foreign creditors and
denominated in foreign currency.
○ Growing public debt is a leading indicator of
• Tax increases
• Reduced growth
• Rising inflation
• Increasing austerity
INCOME DISTRIBUTION
○ Income distribution estimates the proportion of the
population that earns various levels of income.
○ There is a growing gap between the rich and poor in
virtually every country in the world.
POVERTY
○ Poverty is a multidimensional condition whereby a person
or community lacks the essentials for a minimum
standard of well-being and life.
○ Poverty is the state of having little or no money, few or no
material possessions, and limited access to education,
health, and community.
THE BALANCE OF PAYMENTS
○ A country’s balance of payments (BOP) officially known
as the Statement of International Transactions, reports its
trade and financial transactions (as conducted by
individuals, businesses, and government agencies) with
the rest of the world.
○ The BOP tracks two different kinds of transactions: the
current account, which tracks cross-border payments for
goods and services (i.e., exports and imports) and the
capital account, which tracks loans for cross-border
payments for assets.
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