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In this notes

  • Globalization and International Business
  • Global Economy and Regional Economy
  • National Differences in Socio-cultural Environment
  • National Differences in Political Environment
  • National Differences in Economic Environment
  • International Financial Environment
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  • Functional Management and Operation of IB

National Differences in Economic Environment

Binayak Niraula | Thu Jan 15 2026

Table of Contents

  1. Economic Systems
  2. Determinants of Economic Development
  3. Levels of Economic Development

Economic Systems

Market Economy

A market economy is an economic system in which decisions about production, investment, and distribution are guided by the interactions of citizens and businesses in the marketplace, based on the forces of demand and supply.

Key Features:

  • Private ownership of property and businesses
  • Prices are determined by market forces (demand and supply)
  • Profit motive drives production and innovation
  • Minimal government interference (laissez-faire)

Advantages:

  • Efficient allocation of resources
  • Encourages innovation and entrepreneurship
  • Wide variety of goods and services

Disadvantages:

  • Income inequality
  • Neglect of social welfare and public goods
  • Market failures and economic instability possible

Examples: United States, Singapore, and Hong Kong (though none are purely market economies)

Command Economy

A command economy (also known as a planned economy) is an economic system in which the government controls all major economic decisions, including what to produce, how to produce, and for whom to produce.

Key Features:

  • Government ownership of resources and industries
  • Central planning authority sets production goals and prices
  • Limited consumer choice
  • Focus on social welfare and equality

Advantages:

  • Reduced inequality in income and wealth
  • Can mobilize resources quickly for national goals
  • Ensures provision of basic needs and public services

Disadvantages:

  • Lack of efficiency and innovation
  • Shortages or surpluses due to poor planning
  • Limited personal and economic freedom

Examples: Former Soviet Union, North Korea, and Cuba

Mixed Economy

A mixed economy combines elements of both market and command systems, allowing both private enterprise and government participation in the economy.

Key Features:

  • Coexistence of private and public sectors
  • Government regulates key industries and provides public goods
  • Market mechanism determines most prices, but with government intervention
  • Balance between efficiency and social welfare

Advantages:

  • Promotes economic efficiency with social justice
  • Government can correct market failures

On this page

  • Economic Systems
  • Determinants of Economic Development
  • Levels of Economic Development
  • Encourages both competition and welfare programs

    • Disadvantages:

    • Government intervention can cause inefficiency or corruption
    • Private and public sector conflicts

    Examples: India, Nepal, France, and the United Kingdom

    Comparative Summary

    BasisMarket EconomyCommand EconomyMixed Economy
    OwnershipPrivateGovernmentBoth private & public
    Decision MakingMarket forcesCentral planningMarket + Government
    MotivationProfitSocial welfareBoth profit & welfare
    Government RoleMinimalMaximumModerate
    ExampleUSANorth KoreaIndia

    Determinants of Economic Development

    Economic development refers to the process by which a nation improves the economic, political, and social well-being of its people. Several indicators are used to measure and analyze the level of development. Among them, Inflation, Income, and Human Development Index (HDI) are key determinants.

    1. Inflation

    Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money.

    Impact on Development:

    • Moderate inflation can encourage production and investment
    • High inflation reduces the value of money, discourages savings, and increases the cost of living
    • Price stability is essential for sustainable economic growth and maintaining investor confidence

    Example: Developing countries often struggle with inflation due to fiscal deficits and weak monetary control

    2. Income (GDP and Per Capita Income)

    Income level is the most direct measure of economic performance and a major determinant of development.

    (a) Gross Domestic Product (GDP):

    • GDP is the total value of all final goods and services produced within a country in a given year
    • Higher GDP indicates greater economic activity and productivity

    (b) Per Capita Income (PCI):

    • PCI measures the average income per person in a country
    • It is calculated as: Per Capita Income = GDP / Population

    Types of Per Capita Income:

    1. Nominal Per Capita Income:

    • Measured at current market prices (without adjusting for cost of living or inflation)
    • Easier to calculate but may not reflect true purchasing power

    2. Per Capita Income based on Purchasing Power Parity (PPP):

    • Adjusts income according to differences in the cost of living between countries
    • Reflects real living standards more accurately

    Example: India's per capita income at PPP is much higher than nominal PCI, showing that living costs are lower compared to developed countries

    3. Human Development Index (HDI)

    HDI is a composite index developed by the United Nations Development Programme (UNDP) to measure overall human well-being, not just income.

    Components of HDI:

    1. Income: Measured by GNI per capita (PPP)
    2. Education: Measured by mean years of schooling and expected years of schooling
    3. Health: Measured by life expectancy at birth

    Interpretation:

    • HDI ranges from 0 to 1
    • Higher HDI indicates better quality of life and social progress

    Example:

    • Norway has a very high HDI (>0.95)
    • Nepal's HDI is around 0.60, showing progress but still developing

    Summary of Determinants

    IndicatorMeaningRole in DevelopmentExample/Effect
    InflationRise in general price levelStable inflation promotes investment; high inflation harms growthModerate in developed countries, high in developing
    GDPTotal output of goods and servicesIndicates economic size and performanceHigh GDP = stronger economy
    Per Capita Income (Nominal)GDP per person at current pricesShows average income but ignores cost of livingMay over/understate real welfare
    Per Capita Income (PPP)Adjusted for cost of livingReflects real purchasing power and living standardUseful for comparing countries
    HDIComposite index (income, health, education)Measures overall human wellbeingBroader measure of development

    Conclusion: Economic development is a multi-dimensional process. While income and GDP show economic strength, inflation reflects stability, and HDI represents the true social and human progress of a nation. Sustainable development requires a balance among these indicators.

    Levels of Economic Development

    The level of economic development refers to the stage a country has reached in terms of income, industrialization, standard of living, and overall human welfare. The World Bank classifies countries mainly on the basis of Gross National Income (GNI) per capita (calculated in U.S. dollars using the World Bank Atlas method).

    1. Developed Economies

    Developed economies are nations with high income, advanced industrialization, strong infrastructure, and high living standards.

    Characteristics:

    • High GNI per capita (as per World Bank, over USD 13,845 in 2025)
    • Dominance of service and technology sectors
    • Low poverty and unemployment rates
    • High literacy, education, and life expectancy

    Examples: United States, Japan, Germany, United Kingdom, Canada

    2. Developing Economies

    Developing economies are nations with moderate to low income levels, limited industrialization, and improving living standards.

    Characteristics:

    • GNI per capita between USD 1,086 and USD 13,845
    • Agriculture and manufacturing still significant to GDP
    • Rapid population growth and urbanization
    • Struggles with inequality, unemployment, and limited infrastructure

    Examples: Nepal, India, Bangladesh, Kenya, Vietnam

    3. Emerging Economies

    Emerging economies are transitional countries that are rapidly industrializing and integrating into the global economy. They show strong economic growth and potential to become developed economies.

    Characteristics:

    • Fast GDP growth and expanding middle class
    • Increasing foreign investment and exports
    • Ongoing structural and market reforms
    • Improving education and technology sectors

    Examples: China, Brazil, South Korea, Indonesia, Mexico

    World Bank's Income-Based Classification (FY2025)

    CategoryGNI per Capita (USD)Examples
    Low-income≤ 1,085Afghanistan, Ethiopia
    Lower-middle income1,086 – 4,255India, Nepal
    Upper-middle income4,256 – 13,845China, Malaysia
    High-income (Developed)≥ 13,846USA, Japan, Germany

    Conclusion: According to the World Bank, the level of economic development depends mainly on income per capita and the structure of the economy. Developed countries enjoy high living standards and technology; developing nations are progressing toward that level, while emerging economies are rapidly transforming with growing industrial and financial strength.