ECONOMIC SYSTEM AND ORGANIZATION
ECONOMIC SYSTEM AND
ORGANIZATION
Economic Systems
An economic system
is the system of production, distribution and consumption of goods and services
of an economy. Alternatively, it is the set of principles and techniques by
which problems of economics are addressed, such as the economic problem of
scarcity through allocation of finite productive resources. The economic system
is composed of people and institutions, including their relationships to productive
resources, such as through the convention of property. Examples of contemporary
economic systems include capitalist systems, socialist systems, and mixed
economies. “Economic systems” is the economics category that includes the study
of respective systems.
The fundamental
economic problem in any society is to provide a set of rules for allocating
resources and consumption among individuals who can’t satisfy their wants,
given limited resources. The rules that each economic system provides function
within a framework of formal institutions (e.g., laws) and informal
institutions (e.g., customs).
ECONOMIC SYSTEM AND ORGANIZATION
In every nation, no
matter what the form of government, what the type of economic system, who
controls the government, or how rich or poor the country is, three basic
economic questions must be answered. They are:
What and how much
will be produced? The different outputs could be produced with society’s scarce
resources. Some mechanism must exist that differentiates between products to be
produced and others that remain as either unexploited inventions or as
individuals’ unfulfilled desires.
How will it be
produced? There are many ways to produce a desired item. It may be possible to
use more labor and less capital, or vice versa. It may be possible to use more
unskilled labor to substitute for fewer units of skilled labor. Choices must be
made about the particular input mix, the way the inputs should be organized,
how they are brought together, and where the production is to take place.
For whom will it be
produced? Once a commodity is produced, some mechanism must exist that
distributes finished products to the ultimate consumers of the product. The
mechanism of distribution for these commodities differs by economic system.
Capitalism
Capitalist economic
system, individuals own all resources, both human and non-human. Governments
intervene only minimally in the operation of markets, primarily to protect the
private-property rights of individuals. Free markets in which suppliers and
demanders can enter and exit the market at their own discretion are fundamental
to the capitalist economic system.
What and how much
will be produced? How will it be produced? For whom will it be produced?
In a capitalist
system, individuals own resources, either through inheritance or through
industry. The individual receives compensation for the use of resources by
others. This, combined with inherited wealth of the person, determines an
individual’s spending power. The accumulated spending power and the willingness
of individuals to allocate resources to consumption determine demand. The
availability and costs of resources, together with the potential for profits of
firms, determine supply. In a market system the demand of consumers combined
with the supply of producers determines what and how much will be produced.
Because of the
economic competitiveness of the market system, the lowest-cost production
method will be used. If anything other than the lowest-cost production method
was being used, a competing firm would have an incentive to enter production to
earn a greater profit and could afford to sell at a lower price, thus driving
the original firm out of production. Consumers could then purchase more of the
product at a lower price, allowing their limited resources to purchase more.
Production will be
allocated to those with available resources and a willingness to purchase the
output of production. These purchases then become information for suppliers in
determining what and how much to produce in the future.
Thus, pure
capitalism is an economic system based upon private property and the market in
which in principle individuals decide how, what, and for whom to produce. Under
capital ism, individuals are encouraged to follow their own self-interests,
while the market forces of supply and demand are relied upon to coordinate
economic activity. Distribution to each individual is according to his or her
ability, effort, and inherited property. Typically the economies of Canada, the
United States, and Western Europe are considered to be capitalist.
Socialism
Socialist economic
system, individuals own their own human capital and the government owns most
other, non-human resources that is, most of the major factors of production are
owned by the state. Land, factories, and major machinery are publicly owned.
What and how much
will be produced? How will it be produced? For whom will it be produced?
A socialist system
is a form of command economy in which prices and production are set by the
state. Movement of resources, including the movement of labor, is strictly
controlled. Resources can only move at the direction of the centralized
planning authority. Economic decisions about what and how much, how, and for
whom are all made by the state through its central planning agencies.
In theory, socialism
is an economic system based upon the individual’s good will toward others,
rather than a function of his or her own self-interest. Socialism attempts to
influence individuals to take other people’s needs into account and to adjust
their own needs in accordance with what’s available.
In socialist
economies, individuals are urged to consider the well-being of others; if
individuals don’t behave in a socially desirable manner, the government will
intervene. In practice, socialism has become an economic system based on
government ownership of the means of production, with economic activity
governed by central planning. The economies of Sweden and France are examples
of a socialist economic system.
Communism
Communist economic
system, all resources, both human and non-human, are owned by the state. The
government takes on a central planning role directing both production and
consumption in a socially desirable manner.
What and how much
will be produced? How will it be produced? For whom will it be produced?
Central planners
forecast a socially beneficial future and determine the production needed to
obtain that outcome. The central planners make all decisions, guided by what
they believe to be good for the country. The central planners also allocate the
production to consumers based on their assessment of the individual’s need.
Basic human needs and wants would be met according to the Marxist principle,
“From each according to his ability to produce, to each according to his need.”
The economies of
China, the former Soviet Union, and the former East Germany are examples of
communist economies.
Countries have
scarce resources. The economic systems of countries are designed to allocate
those resources, through a production system, to provide output for their
citizens. The fundamental questions that these systems answer are:
What and how much
will be produced?
ECONOMIC SYSTEM AND ORGANIZATION
How will it be
produced?
For whom will it be
produced?
Market economies
leave the answers to these questions to the determination of the forces of
supply and demand while command economies use a central planning agency to
direct the activities of the economy. Pure capitalist economies are market
economies in which the role of government is to ensure that the ownership of
the resources used in production are privately held. Socialist economies are
primarily command economies where most non-human resources are owned by the
state but human capital is owned by the individual. Communist economies are
also command economies but all resources, both human and non-human, are owned
by the state.
In practice, all
economies are actually mixed economies, incorporating some facets of both
market and command economies. The relative importance of the particular
economic system in the country is the determinant of the type of economic
system that it is generally considered to be.
ECONOMIC SYSTEM AND ORGANIZATION
Type of Economies
System
Three types of
economic systems exist, each with their own drawbacks and benefits; the Market
Economy, the Planned Economy and the Mixed Economy.
An economic system
is loosely defined as country’s plan for its services, goods produced, and the
exact way in which its economic plan is carried out. In general, there are
three major types of economic systems prevailing around the world.
Market Economic
System
In a market economy,
national and state governments play a minor role. Instead, consumers and their
buying decisions drive the economy. In this type of economic system, the
assumptions of the market play a major role in deciding the right path for a
country’s economic development.
Market economies aim
to reduce or eliminate entirely subsidies for a particular industry, the
pre-determination of prices for different commodities, and the amount of
regulation controlling different industrial sectors.
The absence of
central planning is one of the major features of this economic system. Market
decisions are mainly dominated by supply and demand. The role of the government
in a market economy is to simply make sure that the market is stable enough to
carry out its economic activities properly.
Planned Economic
System
A planned economy is
also sometimes called a command economy. The most important aspect of this type
of economy is that all major decisions related to the production, distribution,
commodity and service prices, are all made by the government.
The planned economy
is government directed, and market forces have very little say in such an
economy. This type of economy lacks the kind of flexibility that is present a
market economy, and because of this, the planned economy reacts slower to
changes in consumer needs and fluctuating patterns of supply and demand.
On the other hand, a
planned economy aims at using all available resources for developing production
instead of allotting the resources for advertising or marketing.
Mixed Economic
Systems
A mixed economy
combines elements of both the planned and the market economies in one cohesive
system. This means that certain features from both market and planned economic
systems are taken to form this type of economy. This system prevails in many
countries where neither the government nor the business entities control the
economic activities of that country – both sectors play an important role in
the economic decision-making of the country. In a mixed economy there is
flexibility in some areas and government control in others. Mixed economies
include both capitalist and socialist economic policies and often arise in
societies that seek to balance a wide range of political and economic views.
Government
Intervention
Government
intervention is a set of actions on the part of government that affect economic
activity, resource allocation, and especially the voluntary decisions made
through normal market exchanges. Government, by its very nature, is designed to
intervene in voluntary market activity. Some of the more common types of
government intervention include taxes, price controls, assorted regulations,
and control over government spending. The general justification for government
intervention is that voluntary decisions by consumers and businesses fail to
achieve efficiency or other goals deemed important by society.
What are the reasons
for Government Intervention?
Government should
intervene in economic activities where private sector fails to efficiently
allocate resources to achieve the greatest possible consumer satisfaction. The
four main market failures are public good, market control, externality, and
imperfect information. In each case, market acting without any government
imposed direction, does not direct an efficient amount of our resources into
the production, distribution, or consumption of the good.
There are two major
reasons why government intervention is important.
to overcome market
failure
to overcome market
power
ECONOMIC SYSTEM AND ORGANIZATION
ECONOMIC SYSTEM AND ORGANIZATION
Overcoming Market
Failure
Provision of public
goods & services. Private sector doesn’t provide public goods as they
cannot charge a price from the public for consumption.
Externalities in
production. The price of positive & negative externalities of production
& consumption doesn’t include in final outputs, so the government involves
by levying taxes & allowing subsidiaries to overcome externalities.
The price system
& the redistribution of income. Setting minimum & maximum prices, price
control, income tax…etc
Maintaining
competition & efficient resource allocation.
Managing the whole
economy & minimizing economic fluctuations.
Overcoming Market
Power
Price Fixing
Price discrimination
Vertical &
horizontal agreements
Cartels
Primary &
secondary boycotts
Penalties
Merges
Government Policies
Fiscal Policy
Fiscal policy refers
to government attempts to influence the direction of the economy through
changes in government taxes, or through some spending (fiscal allowances). The
two main instruments of fiscal policy are government spending and taxation.
Changes in the level and composition of taxation and government spending can
impact on the following variables in the economy:
Aggregate demand and
the level of economic activity;
The pattern of
resource allocation;
The distribution of
income
Monetary Policy
Monetary policy is
the process by which the government, central bank, or monetary authority of a
country controls the supply of money, availability of money, and cost of money
or rate of interest, in order to attain a set of objectives oriented towards
the growth and stability of the economy. Monetary theory provides insight into
how to craft optimal monetary policy. Monetary policy rests on the relationship
between the rates of interest in an economy, that is the price at which money
can be borrowed, and the total supply of money. Monetary policy uses a variety
of tools to control one or both of these, to influence outcomes like economic
growth, inflation, exchange rates with other currencies and unemployment.
Foreign Exchange
policy
Policy of government
towards the level of the exchange rate of its currency. It may want to
influence the exchange rate by using its gold and foreign currency reserves
held by its central bank to buy and sell its currency. It can also use interest
rates (monetary policy) to alter the value of the currency.
How do Fiscal &
Monetary Policies influence an Organization?
Fiscal Policy
Taxes &
government spending are the key drivers behind this policy. They can influence
organizations in several ways.
There are two types
of taxes as Direct taxes & Indirect taxes. Indirect taxes (e.g. VAT) can
effect on increments in prices of good & services, especially prices of
materials & inputs (Oil price) & import taxes on materials can effect
on prices. Increasing prices can de-motivate customers & consumption;
finally this may lead to less demand & less profit for organizations.
Direct taxes (Income
tax) can also influence an organization’s employees. When income tax rates are
increased people will have to spend a greater part from their earnings to the
government. Employees can be de-motivated & perhaps they will make efforts
to work more with the intention to earn more to cover what they lose as income
taxes, this may add additional cost to the organizations (overtime payments). Besides,
corporate income taxes can also influence organizations.
Another equipment is
fiscal policy is government spending. In Sri Lanka government expenses can be
shown as military expenses, allowing subsidiaries, free education & health,
building infrastructure, paying for government workers & maintaining
nonprofit earning essential service authorities, parliament expenses &
salaries for members of the parliament.. etc
These expenses are
decided & funds are allocated by annual budgets. Government can prioritize
some expenses & cut off some others. These decisions can effect on
organizations. For example if an organization is being highly performed with a
government subsidiary & when government decides to reduce or cut off the
subsidiary it can make negative results in that organization functions. Thus
when government spends more on military & defense some essentials
(infrastructure, education) will have fewer funds; therefore both private &
public organizations may have downfalls in their business activities.
Monetary Policy
As mentioned
earlier, monetary policy is the process by which the government, central bank,
or monetary authority of a country controls the supply of money, availability
of money, and cost of money or rate of interest, in order to attain a set of
objectives oriented towards the growth and stability of the economy.
Controlling money supply makes major effects on organizations, mainly financial
institutions & banks. Governments take several steps to control money
supply such as open market operations, rate of interest. By selling &
purchasing securities in the open market government can make changes in the
money supply in a country. When the money supply is high in an economy more
money circulates & purchasing power of increases.
International Trade
International trade
is exchange of capital, goods, and services across international borders or
territories. In most countries, it represents a significant share of gross
domestic product (GDP). While international trade has been present throughout
much of history (see Silk Road, Amber Road), it’s economic, social, and
political importance has been on the rise in recent centuries.
Industrialization,
advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization.
Without international trade, nations would be limited to the goods and services
produced within their own borders.
International trade
is in principle not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless
of whether trade is across a border or not. The main difference is that
international trade is typically more costly than domestic trade. The reason is
that a border typically imposes additional costs such as tariffs, time costs
due to border delays and costs associated with country differences such as
language, the legal system or culture.
Another difference
between domestic and international trade is that factors of production such as
capital and labour are typically more mobile within a country than across
countries. Thus international trade is mostly restricted to trade in goods and
services, and only to a lesser extent to trade in capital, labor or other
factors of production. Then trade in goods and services can serve as a
substitute for trade in factors of production. Instead of importing a factor of
production, a country can import goods that make intensive use of the factor of
production and are thus embodying the respective factor. An example is the
import of labor-intensive goods by the United States from China. Instead of
importing Chinese labor the United States is importing goods from China that
were produced with Chinese labor.
International trade
is also a branch of economics, which, together with international finance,
forms the larger branch of international economics.
Importance of
International Trade
International trade
is that kind of trade that gives rise to the economy of the world. In this the
demand and supply and the prices are affected by the global events. For
example, the change in political conditions in Asia can increase manufacturing
cost and cost of labor of an American company located in a country in Asia.
This would then result in increase in the price of the product that you need to
buy from a local. If there is a decrease in cost of labor, on the other hand
then you may have to pay relatively less amount on the product.
Global trading
provides countries and consumers the chance to be exposed to those services and
goods that are not available in their own country. Clothes, food, jewelry,
stocks, wines, spare parts etc. and many more products are available in
international market. Trading of services is also done like: banking,
consulting and transportation, tourism. The goods and services that are bought
from the global market are called imports and the goods and services that are
sold in the overseas market are called exports. Exports and imports are
recorded in a country’s balance of payments (current account).
International
trading lets the developed countries use their resources effectively like
technology, capital and labor. As many of the countries are gifted with natural
resources and different assets (labor, technology, land and capital), they can
produce many products more efficiently sell at cheaper prices than other
countries. A country can obtain an item from another country if it cannot
effectively produce it within the national boundaries. This is the specialty of
international trade. Global trading allows the different countries to
participate in global economy encouraging the foreign direct investors. These
individuals invest their money in the foreign companies and other assets. Hence
the countries can become competitive global participants.
International
trading has become very important for every country of the world – be it big or
small, developing nation or developed nation. The concept of globalization started
way back 1980, developed due advancement of technology in areas transport and
communication.
Another encouraging
aspect is that the poor and developing nations are trying hard to beat the
competition and to satisfy the needs of the customers overseas. An increase
from less than twenty five percent to eighty percent has been observed after
the initiation of globalization. The major contribution is made by the
countries like Hungry, China, Mexico, India and Brazil.
Economic Integration
Economic integration
refers to trade unification between different states by the partial or full
abolishing of customs tariffs on trade taking place within the borders of each
state. This is meant in turn to lead to lower prices for distributors and
consumers (as no customs duties are paid within the integrated area) and the
goal is to increase trade. The trade stimulation effects intended by means of
economic integration are part of the contemporary economic Theory of the Second
Best: where, in theory, the best option is free trade, with free competition
and no trade barriers whatsoever. Free trade is treated as an idealistic
option, and although realized within certain developed states, economic
integration has been thought of as the “second best” option for global trade where
barriers to full free trade exist.
Global Market
The activity of
buying or selling goods and services in all the countries of the world, or the
value of the goods and services sold. Global marketing is simply marketing to
the entire world and destroy the differences between barriers and meet the
expectations of varieties of consumers all over the world. Marketing consists
of establishing relationships with others through planning, execution and
successful distribution of goods to satisfied consumers.
Some of the most
successful companies to achieve global marketing include auto manufacturers
such as Toyota, Ford, Honda, General Motors, and Volkswagen. These companies
all started as small entities in their own countries and eventually achieved
successful global implementation. New companies have modern marketing tools to
help them achieve successful global marketing. The internet and e-commerce
immediately makes a company a global business.
Since the internet
is a world-wide entity, a small company based in South Dakota can easily reach
customers in China with the click of a mouse. Customers can literally come from
anywhere.
Successful global
marketing was not achieved overnight for companies. Global marketing is a
process just like other aspects of marketing. Usually a company starts out with
a small export base. They work hard to achieve domestic marketing first and
then they begin tackling the rest of the world. Some companies tackle the small
export base and they don’t get any further from there. Global marketing is more
than just exporting goods to another country; it is successful implementation
of a product into a foreign trade market. Marketing decisions are made at the
home front and sent overseas and expected to sink or swim. The foreign customer
is very different from the domestic customer. Language barriers, customs
paperwork, and shipping costs deter many companies from becoming global
entities.
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