Macro & Micro economics

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1. a] i. The term ‘collectivist economy’ can be explained as the economy in which the

preferences of the larger group or society are given a front seat over the interests of the

individual. Another name for collectivist economy is ‘socialist economy’ (Heilperin,

1960).

ii. Two examples of collectivist economy are Japan and China (Pieper, 1990).

b] The type of economic system existing in South Korea is ‘mixed economy’. The

economic system in South Korea is characterized by both centralized planning and

regulation by the government as well as a wide range of freedom accruing to the

individual citizens (Globaledge, 2013a). With rapid advancements and development in

the twenty-first century, trade has become one of the important aspects for the growth of

the economy of South Korea (U.S. Department of State, 2012). In recent years, there has

been significant shift from the centrally planned system to a more market oriented

economy. In the first decade of the twenty-first century South Korea witnessed an

improvement in the economic performance owing to a rise in exports, however, the

global financial downturn has affected the economy adversely. The growth rate was

moderated in 2010 standing at 6.1% of the GDP (Globaledge, 2013b). The economy is

increasingly becoming open to overseas investors with investing regimes becoming more

transparent (2013 Index of Economic Freedom, 2013).

c] The economic performance of South and North Korea is compared using the table

given below:

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The real growth rate of North Korea has been increasing over the years since 2009 and it

has attained a positive growth rate in 2011 after being continuously negative in the past

two years. The growth rate of South Korea, although positive, has been declining since

2010. The per capita GDP has remained more or less stagnant with a slight decrease in

2009. There has been a stable rise in the purchasing power parity in South Korea since

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2010. North Korea had experienced a budget deficit in 2007 when its total expenditure

exceeded its total revenue by 0.1 billion USD. However, the economy has been growing

in terms of its real GDP. The scenario in South Korea is the reverse. There has been

budget surplus in the economy for the year 2012, but real GDP in the economy has been

declining. This hints that there has been a shortage in level of government expenditure.

The industrial sector contributes more to the GDP of North Korea while the service sector

contributes a greater percentage to the GDP in South Korea. North Korea is a smaller

economy compared to South Korea and the comparison shows that its overall

performance is better than South Korea.

d] The market economy is one in which the forces of the market determine the

remuneration for labour and the price of products and services. In such an economy the

price of a product is set according to its quality. Hence the firms producing low quality

goods would be earning lesser price as compared to the high quality substitute goods

produced by rival firms, making the firm move towards earning losses. It would lose its

position in the market and lose its customers to the other competing firms. In a

collectivist economy the government decides the prices of goods of services complying

with the notion of benefit of the entire economy. In this framework the firm producing

low quality goods would be protected by the government so that it can cover its average

variable cost and continue to remain in business. The state acts in a way in the short run

that it yields most desirable results in the long run (Shih and Shi, 1995).

e] The pattern of mixed economy exists in South Korea. In this economic framework

restructuring or liberalization can be thought of in the approach towards consumerism.

South Korean economy is characterized by plenty. Innovation in this context implies a

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financial innovation, which is a combination of monetary and fiscal policies that raises

productivity which in turn raises consumption. With the rise in productivity, although

consumption rises, income also rises that would lead to increased savings (Sen, 1993).

Innovation is important for the Korean economy because the economic development of

Korea has been based on its innovation capabilities. Financial innovation includes the

usage of technology for functioning of various business methods. With more privatization

of the economy and making it more market oriented, these inventions are crucial to the

development of the economy and rendering it a coveted position in the world market

(Anderloni, Llewellyn and Schmidt, 2009). Financial market innovation has brought

wealth to many nations across the globe and is estimated to be beneficial for South Korea

just as in other developed countries.

f] The comparison between the two figures depicting the growth rates of GDP in North

and South Korea respectively is given below:

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The comparison reveals a striking difference in the pattern of GDP in the two countries

during the years between late 1990s and the beginning of the twenty- first century. In

North Korea there has been an overall negative growth rate of the gross domestic product

in the country till 1998. In 1999 the percentage change in GDP shot to a huge 6.2 percent.

From then till 2005 there have been positive percentage changes in GDP. Widespread

famine hit North Korea during the years between 1995 and 1998. Floods took great toll
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 on the economy in the consecutive years of 1995 and 1996. Aid from China and the US

had been provided to support the situation and help the victims of famine in the country.

This pushed up the process of development which led to a positive change in the growth

rate of GDP.

The GDP growth rate in South Korea also exhibits a downward surge between 1997 and

1999. The cause behind this is the financial crisis that hit South Korea during this period.

After the crisis got over, policy reforms were brought into place so as to strengthen the

financial sector. Therefore the GDP growth rates have improved thereafter. The

differences with North Korea lies in the fact that while North Korea has been ripped with

calamities since the beginning of the 1990s, which led to a continuous negative growth of

its GDP, the episode of downfall in GDP in the overall positive statistics of GDP in South

Korea was caused due to a phenomenal rise in inflation and the recession in the world

economy.

1. The planned economy enjoys certain advantages. In a planned economy the varieties and

volumes “of goods and services” (P. Welch and G. Welch, 2009) produced in the

economy are decided by the planning authorities. This might help the economies to

achieve its goals and objectives faster compared to less organized economies. Due to

coordination through a centralized authority, development of industries or certain aspects

of the agricultural sector might appear to be accomplished more quickly and successfully.

Elimination of unemployment can also be made easier by forcing the producers to utilize

more labour intensive methods of production. Development in the North Korean

economy is achieved by focusing on the growth of the industrial sector.

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On the other hand, planned economies suffer disadvantage when centralized planning

fails to achieve the desired results and also hinders the citizens to maximise individual

profits. Natural level of demand and supply is not always matched through central

planning which creates a sub-optimal result. Besides, as found in North Korea during

famine, the process of making plans and implementing them is a lengthy one which takes

more time than can be permitted by the urgency of the situation.

The greatest advantage of the mixed economy is that it enjoys the merits of both market

economies and planned economies. The right to hold private property leads to capital

formation and healthy competition among producers. The economy also functions in a

planned way leading to efficient resource allocation. There is a synthesis between welfare

of the society and private gain. Government plans are useful in such an economic system

in tackling evils like unemployment, shortage of food and unchecked population growth.

In 1980s South Korea enjoyed huge economic development with active support from the

government for the development of key industries in the country (Park, 1998). While the

private sector prospers by maximising private profit, the interests of the poorer section of

the society are safeguarded by the government from exploitation by monopolists.

However, the mixed economic system also entails certain demerits. Since a large section

of the economy remains outside the control of state, it creates a hurdle in the process of

implementing the plans. The public sector often remains unsuccessful in fully achieving

its objectives due to the independent nature of the private sector. This might be a reason

behind the falling rates of growth in the South Korean economy. Besides, the absence of

personal gains acts as a de-motivator to the employees in the public sector, creating a lag

in efficiency. The private sector also faces several obstacles to free growth due to the
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policies implemented by the government to check monopolistic tendencies of the private

sector firms. These disadvantages have obstructed the path of large scale growth in South

Korea.

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References

2013 Index of Economic Freedom, 2013. [online] Available at:

<http://www.heritage.org/index/country/southkorea> [Accessed 4 March 2013].

Anderloni, L. A., Llewellyn, D. T., and Schmidt, R. H., 2009. Financial Innovation in Retail and
Corporate Banking. Massachusetts: Edward Elgar Publishing.

Globaledge, 2013a. South Korea: Introduction [online] Available at:

<http://globaledge.msu.edu/countries/south-korea> [Accessed 4 March 2013].

Globaledge, 2013b. South Korea: Economy. [online] Available at:

<http://globaledge.msu.edu/countries/south-korea/economy> [Accessed 4 March 2013].
Heilperin, M. A., 1960. Studies in Economic Nationalism. Auburn: Ludwig von Mises Institute.
Pieper, R., 1990. Human Resource Management: An International Comparison. Germany:
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Park, T. W., 1998. The U.S. and the Two Koreas: A New Triangle. London: Lynne Rienner
Publishers.
Shih, C., and Shi, Z., 1995. State and Society in China's Political Economy: The Cultural
Dynamics of Socialist Reform. London: Lynne Rienner Publishers.

Sen, R. K., 1993. Development and Future Studies: India and the Third World. Calcutta:
Academic Publishers.

U.S. Department of State, 2012. U.S. Relations with South Korea. [online] Available at:
<http://www.state.gov/r/pa/ei/bgn/2800.htm> [Accessed 4 March 2013].

Welch, P. J., and Welch, G. F., 2009. Economics: Theory and Practice. USA: John Wiley & Sons.

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