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Economic Systems
The Big Ideas! Economic systems are different ways that people use
resources to make and exchange goods and services. Literacy rate, life expectancy, and Gross Domestic Product
measure economic development. Some countries have a wide mix of economic activities, while
others may have only one or two main economic activities. Countries of the world are grouped based on their level of
economic development. Divided into 2 categories
Developing nations Developed nations.
Economic Systems
An economic system describes how a country’s economy is organized Because of the problem of scarcity, every
country needs a system to determine how to use its productive resources
An economic system must answer 3 basic questions…but first, a vocabulary break.
Vocabulary Break
Economic System: The system of production, distribution, and consumption of goods and services
Scarcity: The limited supply or availability of a resource
3 Questions for Economic Systems
WHAT TO PRODUCE? (What kinds of goods and services should be produced?)
HOW TO PRODUCE? (What productive resources are used to produce goods and services?)
FOR WHOM TO PRODUCE? (Who gets to have the goods and services?)
The way a society answers these questions determines its economic system.
The 3 Basic Questions
Four Types of Economic Systems:
1. Traditional Economy
2. Command Economy
3. Market Economy
4. Mixed Economy (Market + Command)
Traditional Economy The oldest economic system in the world;
not used much today A system in which people grow their own
food and make their own goods An economic system in which economic
decisions are based on customs and beliefs People will make what they always made & will do
the same work their parents did Exchange of goods is done through
Bartering: trading without using money Found in rural and remote communities
Traditional Economy
Who decides what to produce? People follow their customs and make what
their ancestors made Who decides how to produce goods &
services? People grow & make things the same way
that their ancestors did Who are the goods & services
produced for? People in the village who need them
Traditional Economy
Examples: Villages in Africa and South America; the
Inuit tribes in Canada; Used recently in Argentina during difficult economic times
Command System The government owns most of the resources and businesses
that produce goods and services & owns most of the property The government decides what to produce, how much to produce, and
what the prices will be Governments also determines the wages of workers
Also called a planned economy
This system has not been very successful & more and more countries are abandoning it
Command Economy Who decides what to produce?
Government makes all economic decisions Who decides how to produce goods
and services? Government decides how to make
goods/services Who are the goods and services
produced for? Whoever the government decides to give
them to
Command System
Countries with communist governments have Command economies
Found in North Korea and Cuba; the communist governments of these nations own and control most businesses
*Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy.
Market Economy An economic system in which economic decisions are guided by
the changes in prices that occur as individual buyers and sellers interact in the market place
A system based on private ownership, free trade, and competition Most of the resources are owned by private citizens
Sometimes called capitalism or a demand economy Economic decisions are based on Free Enterprise (competition
between companies) Important economic questions are not answered by government but
by individuals Government does not tell a business what goods to produce or what
price to charge Individuals and businesses are free to buy and sell what they wish Prices are determined by the supply and demand for goods
The most common economic system used in the world today
Market Economy
Who decides what to produce? Businesses base decisions on supply and
demand and free enterprise (PRICE) Who decides how to produce goods
and services? Businesses decide how to produce goods
Who are the goods and services produced for? consumers
Market Economy
There are no truly pure Market economies, but the United States is close.
Mixed Economy Market + Command = Mixed There are no pure command or market
economies. To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies. Most economies are closer to one type of
economic system than another Businesses own most resources and
determine what and how to produce, but the Government regulates certain industries
Mixed Economy
Who decides what to produce? businesses
Who decides how to produce goods and services? Businesses, but the government regulates
certain industries Who are the goods and services
produced for? consumers
Mixed Economy
Most democratic countries fall in this category (there are no truly pure Market or Command economies).
A combination of command and market economies which provides goods and services
The government may own some industries, while others belong to private owners
Examples: Brazil, Mexico, Canada, UK, etc.
Which Economic System Is Best?
Let’s do some research and find out!