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Political Environment and Economic Systems

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31 views17 pages

Political Environment and Economic Systems

pp

Uploaded by

Aditya Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 2

Political Environment
and
Economic Systems

Copyright © 2019 McGraw Hill Education, All Rights Reserved.

PROPRIETARY MATERIAL © 2019 The McGraw Hill Education, Inc. All rights reserved. No part of this PowerPoint slide may be displayed, reproduced or distributed in any form or by
any means, without the prior written permission of the publisher, or used beyond the limited distribution to teachers and educators permitted by McGraw Hill for their individual
course preparation. If you are a student using this PowerPoint slide, you are using it without permission.
Learning Objectives

 Understand the history of economic thought

 Analyse how an economic system works

 Explain the real-life situations vis-á-vis economic


systems in different countries

Copyright © 2019
ECONOMIC SYSTEMS

 Capitalism: Adam Smith & The Wealth of Nations


(1776)

 Communism: Karl Marx & Das Kapital (1886)

 Mixed Economy

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The Free Market of Adam Smith

“The uniform, constant and uninterrupted effort of every


man, to better his own condition, the principle from which
national and public as well as private opulence is originally
derived, is frequently powerful enough to maintain the
natural progress of things toward improvement, in spite
both of the extravagance of government, and of the
greatest errors of administration.”

- Adam Smith

Copyright © 2019
How Does This Happen?

Buyers and sellers negotiate prices in a free market


and carry out transactions of buying and selling
that leave all parties mutually better off.

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Capitalism

 System based on Free market


 Capital: owned by a minority of individuals
 Private Property rights: legal right to use this capital for
private gain
 Market system (Supply & Demand factors)
– To determine distribution of goods & services
– To allocate resources
– To establish income levels, wages, rents & profits
– Govt. Role is limited
– Ex: USA, UK etc.

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A Startling Idea

Economic order can emerge as the unintended


consequence of the actions of many people, each
seeking his own interest.

-Milton Friedman

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Communism According to Marx

 The natural evolution of communism after capitalism

 State owns all factors of production and distribution.


Ex: Cuba

 The workers reap the profits from their labor rather


than subsistence wages

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Question?

 Why did the people of the United States


choose markets as the means to organize
economic activity?

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MIXED ECONOMY

 India’s experience since the First Five Year Plan


 Equal importance to private and public sector. However,
major factors of production and distribution are owned
and managed by the state.
 Success or Failure?…Debatable issue
Ex: India, France and Holland

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POVERTY

 Absolute Poverty:

Measured as total number living below a specified min level of


real income/poverty line(people who are unable to satisfy
basic needs)

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Human Poverty Index (HPI)

 UNDP HPI measures poverty in terms of 3


deprivations-of life(percentage of people unlikely
to live beyond 40 years),of basic education(as
measured by % of adults who are illiterate), & of
overall economic provisioning(% of people without
access to health services & safe water+% of under-
weight children under 5)
[Source:HD report 2001, UNDP]

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Poverty characteristics

 Rural Poverty, Women & Poverty, Ethnic Poverty


 Rural Poor as % of population is 79%(India),
80%(Malaysia), 37% (Mexico), 96%(Kenya).
 Women make up majority of world’s poor.
 Minority ethnic groups are poor (Latin America
etc.

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INCOME DISTRIBUTION AND PLANNING -
POLICY OPTIONS

1. Altering the distribution of income to change


factor prices (eg: relative price of labor, ensuring
min.wages)
2. Progressive Distribution of Asset Ownership
(Classic case: Land reforms): Purpose is to
transform tenant cultivators into small holders
who will then have incentive to raise production
and improve their income.

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INCOME DISTRIBUTION AND PLANNING -
POLICY OPTIONS

3. Reducing income distribution at the Upper levels through


progressive income and wealth taxes (Rich required to
pay larger % of their income in taxes than poor and high
indirect taxes on cigarettes and beer)
4. Direct Transfer Payments & Public Provision of Goods and
services (Ex: Public Distribution system in India).
Subsidies for farmers, Pension and policies to keep price
of essential foodstuffs low.

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INDIAN SCENARIO

The impact of planning strategy of the last 2


decades on social sector indicate significant
improvements - yet, there is need to improve the
quality of life. Govt expenditure for social services
has more than doubled from Rs.11,631 crore in 95-
96 to Rs.35,478 in 03-04. As per the Planning
commission estimates, there was a significant
decline in proportion of people living below
poverty line, from 51.3% (77-78) to 26.1% (99-00).

Copyright © 2019
COUNTRY CASES

Cases: US & CANADA


INDIA & POLAND
CUBA & VIETNAM

Copyright © 2019

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