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Question 1

Give two examples of collectivist economies?

In the 19th century, there were many countries practising communism economic system. These countries were spread across Africa, Eastern Europe, and Asia (McEachern 2012). However, in the twenty first century there are only five countries that are still practicing communism. These include China, Vietnam, Laos, Cuba, and North Korea.

What type of economic system operates in South Korea? Explain your answer.

South Korea operates under an economic system known as a market economy. In such an economy, the prices of products and services are determined by market forces. This means that the interactions of demand and supply determine the level of prices in the economy. In this type of economy, there are no barriers of trade. This implies that companies can set up within the economy as long as they meet the minimum requirement of a business or manufacturers license (Mankiw 2012). A market economy boasts of liberalised markets. In a market economy, the largest percentage of goods and services are owned by individuals and businesses. In this form of economic systems the price of goods and services is determined by the interactions of supply and demand. In this economy, there exist stiff competition between industries and businesses. This type of competition is encouraged because it facilitates efficient and effective production of quality products and services in the economy. This form of competition also facilitates the determination of prices within an economy.

Using the table I figure 1 compare the performance of South Korea and North Korea.

Real gross domestic product is the total value of all the final services and products that have been produced within an economy during a particular year after adjusting for deflation or inflation. From figure 1, it is evident that South Korea has a larger real gross domestic product compared to that of North Korea. During three years that are indicated in the figure, North Korea has continuously witnessed an increase in the real gross domestic product. However, this has not been the case for South Korea. The country has continuously recorded as decline in real gross domestic product throughout the three years.

Gross domestic product per capita is established by determining the gross domestic product for a country then dividing it by the total population of that country. From figure, it is evident that during the North Korea witnessed a decline in GDP per Capita during the first year, and then the economy remained constant (Arnold 2008). On the other hand, South Korea has continuously realised an increase in GDP per Capita throughout the three years. The two scenarios imply that the economy of South Korea is growing whereas that of North Korea is at a standstill.

From figure one, it is evident that the economy of North Korea largely realise on industry for economic growth followed by services and agriculture respectively. However, the economy of South Korea largely relies on services for economic prosperity followed by industry and agriculture. It is also vivid that South Korea has a larger labour force in contrast to that of North Korea. This indicates that South Korea has adequate labour force, whereas North Korea might experience or are experiencing shortages. Most of the people working in North Korea are working in the industry and services (Mankiw 2012). This situation is almost similar to that of South Korea, but the difference is the percentage of persons working in the industry and services. South Korea has a large proportion of the workforce working in the industry and service as compared to North Korea. However, North Korea proportion of the workforce working in the agricultural sector is bigger as compared to South Korea.

The budget of South Korea is approximate eighty five times that of North Korea on the basis of revenues. On the basis of expenses, South Korea spends approximately seventy five times more than North Korea. South Korea has a budget surplus, whereas North Korea has a budget deficit. From the analysis of the two figures, it is evident that South Korea has a larger economy, and it is growing (McEachern 2012).

Why might firms which produce low quality goods survive in a collectivist economy and not a market economy?

This is mainly due to the fact that a market economy is liberalised, and the prices of commodities are determined in by market forces. In a market economy, there is stiff competition between manufacturers and as a result of this, they result in searching new ways of improving the quality of products. As a result of this most of the companies that thrive under this type of economic system, are those that produce high quality products that are well priced. A firm that produces low quality products can survive in a collectivist economy because high quality goods are more expensive compared to low quality ones (Arnold 2008). In a collectivist economy, most of the people are of almost an equal economic status. This makes it nearly impossible for firms to produce products for the premium market. In a collectivist economy, most of the firms are owned by the government and the economy is regulated by the government. This means that there are barriers of trade thus there is little or no competition in the economy.

Explain what is meant by innovation and why this would be encourage in the type of economic system which operates in South Korea.

Innovation is the technique of developing new methods of accomplishing a particular task. Innovation is likely to be encouraged in the type of economic system which operates in South Korea. This is because, in a market economy, there are quite a number of companies unlike in a collectivist economy. In an economy characterized with many companies there exists stiff competition between players in the same industry. (Gottheil 2009) As a result of this, all of the players in a particular industry must be innovative in order for their company to be successful.

This means that they should adopt a strategic approach of executing tasks. In order for their strategies to be effective, the strategies must display innovation and uniqueness. They should develop strategies that will enable them to entice consumers to buy their products as well as remain buying their products (McEachern 2012). Firms in this type of economy need to ensure that their products are well differentiated, and they are priced according to their respective target markets. They also need to develop efficient and effective systems of production. These types of systems will enable them to maximize on returns by minimizing the cost of production.

From the figure 2 (North Korea) and Figure 3 (South Korea) compare and contrast the growth patterns and suggest reasons for the differences.

From an analysis of figures two and three it is evident that North Korea has been experiencing an average growth rate of approximately 1.57%. On the other hand, South Korea has been experiencing an average growth rate of approximately 5%. This indicates that the economy of South Korea is growing at a higher rate compared to that of North Korea (Mankiw 2012). The two graphs illustrate that South Korean economy has been performing well in contrast to that of North Korea since the year 1992. However, during 1999 the two countries were engaged in a battle that brought about the decline in economic growth, in South Korea. Of particular interest is the fact that during the war North Korea was able to realise and economic growth of up to 6.2% whereas South Korea realised a decline in economic growth of approximately – 7.5%. After the war, the economy of South Korea continued to grow again whereas that on North Korea declined. This is because North Korea was hit by one of the most devastating famines in history. On the other hand, South Korea has in place a market economy that encouraged investors to come and take part, in building of the economy.

Question 2

With reference to the information in the case study, using North Korea as an example of a planned economy and South Korea as an example of a mixed economy, discuss the advantages and disadvantages of planned and mixed economies.

The advantage of a nation like South Korea is that it is able to attract foreign investors, as well as local investors. These investors play a crucial role as far as building the economy is concerned. This is because these investors set up firms within the country that generate revenues for the economy of South Korea. This means that the more firms that a country has the higher level of revenues that it generates. A nation like North Korea is not likely to witness high levels of economic growth. This is because the nature of the economic system that operates in the country does not encourage the development of new firms (Gottheil 2009). This means that all firms that operate in the country are owned and controlled by the state. In a market economy, innovation is rewarded, and it is also encouraged. However, in a planned economy there is very little room for innovation. In a market economy, there is freedom among the people on decisions to sell or buy whatever products they want. Firms are also allowed to produce whatever they please. However, in a planned economy there are barriers to trade.

The kind of economic system that operates in North Korea is good because it facilitates price stability within an economy. This means that almost every person is likely to afford the services and products retailing. However, in an economy like that of South Korea prices are determined by interactions of supply and demand. This means that there are products that majority of the people will not be able to afford (Arnold 2008). This type of economy also leads to increase in the differences, in the income level of the poor and the rich.

Theory of Purchasing Power Parity Economic Assignment
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