Economic Systems

Business Economics

Objectives

Three Economic Questions The Economic Systems Examples of Countries Research Project

Three Economic Questions

All economies must answer these three questions:

1.1. What goods and services will be produced?

2.2. How will they be produced?

3.3. For whom will they be produced?

Country use & distribution of scarce resources

History Culture Geography Political Situation Various of factors

Economic System

An economic system is the method used by a society to produce and distribute goods and services.

Some questions to ask: Who owns the resources? What decision-making process is

used to allocate resources and products?

What types of incentives guide economic decision makers?

Communism

The gov’t, usually authoritarian, controls the factors of production

No private ownership of property or capital The theory is that goods owned in common are available

to a classless society on an as needed basis

People are given jobs based on their abilities They are given the goods that fit their needs

Characteristics

All people who are able to work are assigned jobs Theoretically, there is no unemployment Employees who do not go to work continue to get paid

The gov’t decides the type of schooling everyone gets and tells people where to live

Housing accommodations are assigned according to need

Characteristics

Food & housing subsidies (aids) keep prices low so everyone has a place to live and food to eat

Medical care is free Little or no economic freedom No financial incentive for people to increase

productivity Want to be entrepreneurs cannot start their own

business

Strong Command Economy

The gov’t owns and controls Factories,

equipment, land Leaders answer the

3 basic questions Political structure

Communism

Command Economy

Influenced by commands, directives or central authority One person, small group who control

society Members of society carry out demands

Kim Jong II

Fidel Castro

Economies in Transition

Prior to the Soviet Union breakup, Poland owned approx 80% of the country’s productive assets After the breakup, it owned only 55%

Poland welcomed private investors that wanted to buy its state-run factories, which were inefficient & non productive

Privatization vs. Nationalization

Privatization – the processes of gov’t selling gov’t-owned businesses to private individuals/businesses Generates much needed revenue Demonstrates a high level of commitment to

making the transition to a market system Can help balance budgets

Privatization vs. Nationalization

Nationalization – the gov’t takes over private-held companies Transfer of ownership may be due to an

economic crisis, a political upheaval, or a change in gov’t policy

Developing Economies

Mostly poor countries with little industrialization Trying to become more prosperous & develop infrastructure Success depends on the education of the labor force Chad, an African Country, is a developing country

Traditional economy based on agriculture & livestock farming Cotton, cattle, & gum arabic are its primary exports

An oilfield & pipeline project paid by foreign investors has helped Chad develop its oil reserves for export This will help Chad with much needed funds for this poor nation

Traditional Economy Shaped largely by

custom or religion Family relations

play significant roles in economic activity

Same methods of production are used

Roles are narrowly defined

Traditional Economy

AdvantageEveryone has a role in it

DisadvantageDiscourage new ideas and way of doing things

Rain forests of Latin America

Parts of Africa Middle East

Socialism

Originally referred to a system on its way to the communist ideal of a classless society

Today, most countries that are defined as this, have democratic political institutions

They differ from capitalist nations because of the increased amount of gov’t involvement

Main goal is to meet basic needs for all & to provide employment for many

Characteristics

Tend to have more social services to ensure a certain standard of living for everyone

Medical care & education are free or inexpensive Systems for pensions and elderly care Businesses & individuals pay much higher taxes

than those in capitalist countries Taxes contribute to financing the gov’t

Examples of Socialist Countries

The gov’t runs key industries & makes economic decisions

State-controlled, noncompetitive companies are often found in industries such as: telecommunications, natural resources (such as gas,

water, & power), transportation, & banking

Canada, Germany, & Sweden are generally characterized have having socialist elements in their economies

Moderate Command Economy

Political structure = Socialism

Gov’t owns major industries Railroads, steel &

iron industry Limited opportunities

for private ownership

Sweden

France

Problems with Centrally Planned Economies

Consumers get low priority

Little to No freedom of choice

No reward for innovation How much should be

produced? Typically results in

surpluses and shortages

Invisible Hand of Markets

According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.”

Laissez Faire

18th century economic theory “Let it be economics” Stands for “Leave Alone”

Strongly oppose government intervention in business affairs Against minimum wage, duties (taxes on

certain goods) & trade restrictions

Capitalism

Characterized by marketplace competition and private ownership of businesses Same as free enterprise or private enterprise

An advantage is that successful employers & employees prosper

Characteristics

Government is concerned about its people and cares for those who cannot care for themselves

The gov’t also has some involvement in the free market Policies and laws that affect the market Must keep a balance between too much and too

little regulation

Political Foundations of Capitalism

The political system most frequently associated is democracy These nations believe that political power should be in the

hands of the people

Usually more than one political party from which to choose representatives to run the gov’t

People are free to elect those candidates who agree with their philosophy on how the gov’t & economy should be run

Political Foundations of Capitalism

The US and Japan are 2 examples of countries that are classified as capitalist and have a democratic form of government

Market Economy

Regulation by government is minimal

Economic activity based on the prices generated

in free, competitive markets Economic questions

Buyers & sellers Referred to as Capitalism

Market Economy

Economic decisions are based on

Buyers & Sellers

• Produce goods & services that will provide profit

Sellers & Producers

Plusses & Minuses of Market Economies

Difficulty enforcing property rights

Some people have few resources to sell

Some firms try to monopolize markets

“You need money to make money”

Freedom for everyone to be involved

Adjusts as consumer wants & needs change

Essential Question

Why do most countries have a mixed economy?

What Do You Like on a Sundae? What toppings do

you like on an ice cream sundae? Plain Vanilla? Or absolutely

everything (and I mean everything)?

What Do You Like on a Sundae?

Chances are, you were somewhere between plain and everything.

When discussing economies, most countries are somewhere in between too.

When a country is not completely a command economy and not completely a market economy, but somewhere in between, it is called a Mixed Economy.

Mixed Economy – “In Between”

Most Countries Lie Somewhere in Between-However, they may be closer to one side than the other.

7 Roles of Government in a mixed economy

1. Establishing and enforcing rules of exchangea.Property rights

b.Contract law

7 Roles of Government in a mixed economy

2. Promoting competition/prevent anticompetitive practices

7 Roles of Government in a mixed economy

3. Regulating natural monopolies One firm that can serve the entire market at

a lower per- unit cost than can two or more firms

7 Roles of Government in a mixed economy

4. Provide public goods

Technical characteristics of public goods: Non rival

consumption High cost of

excluding those who do not pay

7 Roles of Government in a mixed economy

5. Dealing with externalitiesa. Externality is a cost or

benefit that falls on third parties and is therefore ignored by the two parties to the market transaction

6. Negative externality – cost imposed on others

7. Positive externality – benefit gained by others

Visibility Impairment from Air PollutionShenandoah National Park - Virginia

7 Roles of Government in a mixed economy

6. Redistribute income

President F.D. Roosevelt Signing the Social Security Act of 1935

7 Roles of Government in a mixed economy

7. Promote macroeconomic goals of:a. Full employment

b. Price stability

c. Economic growth

Fiscal policy pursued by the Federal government

Monetary policy pursued by the Federal Reserve

Examples of Economies

Traditional:

1. Philippines

2. Nigeria

3. Nicaragua

4. Sao Paulo

5. Mumbai

Command:

1. Cuba

2. North Korea

3. China

4. Russia

5. Iran

Mixed:

1. Canada

2. Germany

3. Netherlands

4. United Kingdom

5. Italy

In-Class Research Project

Objective of Project:

- For you to research and learn about the economy of a specific country.

You will research a country of your choosing.

The Instruction sheet will provide you with clear directions.

What is the G20?

Promotes international cooperation Global economic stability Prevent future financial crisis

Argentina Australia Brazil Canada

China France Germany India

Indonesia Italy Japan Mexico

Russia Saudi Arabia South Africa Republic of Korea

Turkey United Kingdom United States

CIA World Factbook

https://www.cia.gov/library/publications/the-world-factbook/