EconomicsSS6E1a, SS6E5a, SS6E8a: Compare how traditional, command, and market economies answer the economic questions of 1 – what to produce, 2- how to produce, and 3- for whom to produce.

SS6E1b, SS6E5b, SS6E8b: Explain how most countries have a mixed economy located on a continuum between pure market and pure command.

Economics• Study of the production,

distribution, and use of goods and services

• Every country has to decide how to distribute its resources to meet the needs of its people. They do this through an economic system.

• Each economic system answers 3 basic questions: What to produce? How to produce? For whom to produce?

Traditional Economy• A traditional economy is

based on customs and traditions.

• Found in agricultural societies where people live the same way their parents and grandparents did.

• People in these systems produce what they need to survive by farming, hunting and gathering and usually share with each other.

Command Economy

• The government decides what goods are made and how they are made.

• The government owns the resources and decides who gets the products (may be based on class, a reward system, waiting in line, etc).

Market Economy• A country’s economic

decisions are based on what its people want to buy and sell.

• Supply and demand for a good/service determines what to produce and how to produce it and what the price will be.

• People can own their own businesses and produce what they want.

Mixed Economy• A mixed economy has elements of traditional,

command, and market economies.• Most countries today have mixed economies that fall

somewhere in between pure market and pure command economies.

Free marketHong Kong U.S.A

Canada United Kingdom France Japan Poland

Mexico China

Iran Russia Cuba North Korea

Command

Where does the U.S. fall on this continuum? Which countries have the most government involvement in their

economies?

Sample Test QuestionIf a product is produced by hunting, based on

customs and shared by the whole community, in which kind of economy is the product mostly likely being sold?

A. TraditionalB. CommandC. MarketD. Mixed

Sample Test QuestionIf a product is produced by hunting, based on

customs and shared by the whole community, in which kind of economy is the product mostly likely being sold?

A. Traditional*B. CommandC. MarketD. Mixed

Sample Test QuestionWhich of the following statements is the BEST

example of a command economy?A. Anyone can easily start a company to sell

goods.B. Anyone can make a profit from hard work.C. The government controls the economy.D. Traditional foods are gathered for sale.

Sample Test QuestionWhich of the following statements is the BEST

example of a command economy?A. Anyone can easily start a company to sell

goods.B. Anyone can make a profit from hard work.C. The government controls the economy.*D. Traditional foods are gathered for sale.

Sample Test QuestionWhat is the most common economic system

today?A. TraditionalB. CommandC. MarketD. Mixed

Sample Test QuestionWhat is the most common economic system

today?A. TraditionalB. CommandC. MarketD. Mixed*

GDP – Gross Domestic Product• Total market value of the goods and services produced by a country’s

economy during a specific year.• Economists use it to determine the health of a country’s economy

and its economic growth compared to other economies.• Factors that influence economic growth (factors of production) are

human capital, capital goods, natural resources and entrepreneurship.

Human Capital

• People needed to make industry work – Labor• Investing in human capital (education,

training, etc) can lead to economic growth.• This is why countries with higher literacy rates

tend to have higher GDP’s and vice versa.

Capital Goods• Any goods or equipment used

by a business to produce other goods are considered capital goods.

• A business will invest money in capital goods in order to make their products faster or better = economic growth

• Ex: Brazil has the highest GDP in Latin America. Brazil also has the highest amount of investment in capital equipment. Haiti is still mainly agricultural with little investment in capital equipment which contributes to a low GDP.

Natural Resources• Resources supplied by

nature that can be used to develop wealth for a society.

• A nation’s status in the world is often influenced by what natural resources it has.

• They are the fuel for industry and a source of income when exported to other countries.

Entrepreneur• The person who takes on

the risk and possible reward of operating a new business.

• Entrepreneurs come up with new ideas and use human, capital, and natural resources to bring their ideas to life – and to the marketplace.

• Entrepreneurs are valuable because they are creative and help economies adapt to changing conditions.

Sample Test QuestionWhat type of capital is an employee?A. Market capitalB. Government capitalC. Capital goodD. Human capital

Sample Test QuestionWhat type of capital is an employee?A. Market capitalB. Government capitalC. Capital goodD. Human capital*

Sample Test QuestionAn example of capital investment is?A. Buying computersB. Building an oil rigC. Both D. Neither

Sample Test QuestionAn example of capital investment is:A. Buying computersB. Building an oil rigC. Both* D. Neither

Sample Test QuestionAn example of a natural resource is:A. schoolB. oilC. both D. neither

Sample Test QuestionAn example of a natural resource is:A. schoolB. oil*C. both D. neither

Sample Test QuestionWhen workers have the best tools, they can:A. Be more productiveB. Help the country’s economyC. both D. neither

Sample Test QuestionWhen workers have the best tools, they can:A. Be more productiveB. Help the country’s economyC. both* D. neither

Sample Test QuestionWhat is an example of investment in human

capital?A. educationB. factoriesC. highwaysD. trucks

Sample Test QuestionWhat is an example of investment in human

capital?A. education*B. factoriesC. highwaysD. trucks

Trade• The exchange of goods and services

between countries.• Countries trade goods because no

country has all the resources necessary to efficiently produce everything its people need.

• Exports: Goods sent to other countries.

• Imports: Goods brought in from other countries.

• Countries specialize in what they do best. Specialization increases trade because a country can get what it needs at the lowest cost when produced by someone who specializes in producing that item.

Trade Barriers• Limits to what can be traded to a

country.• Governments try to use these

limits to protect their businesses from foreign competition.

• Trade barriers include tariffs, quotas, voluntary restrictions and embargos.

• Trade agreements (such as NAFTA) remove barriers and increase wealth in countries in the agreement.

Tariff• Tax on imports.• By taxing imported goods, a country can

protect the goods made in its own country.• The tax will make an imported good cost

more.

Quotas

• Limits the number of goods that can be imported from a certain country.

• Quotas can cause scarcity (limited supply of something) that causes the price of the imported good to rise.

Embargo

• Ban on trade with a certain country.• The U.S. has a trade embargo with Cuba.

Currency• System of money a

country uses.• International trade

requires a system for exchanging currencies between nations.

• Money from one country must be converted into the currency of another country to pay for goods in that country.

• The exchange rate is how much one currency is worth in terms of the other.

Sample Test QuestionA tax on imports is called a(an):A. quotaB. tariffC. embargoD. sale

Sample Test QuestionA tax on imports is called a(an):A. quotaB. tariff*C. embargoD. sale

Sample Test QuestionWhat is an advantage of specialization as a voluntary

trade benefit?A. Factories cannot produce goods as quickly.B. Workers do not become experts in their jobs.C. A factory can produce more goods in less time

and for less money.D. Businesses cannot sell as many types of goods

when they specialize.

Sample Test QuestionWhat is an advantage of specialization as a voluntary

trade benefit?A. Factories cannot produce goods as quickly.B. Workers do not become experts in their jobs.C. A factory can produce more goods in less time

and for less money.*D. Businesses cannot sell as many types of goods

when they specialize.

Sample Test QuestionWhich of the following countries is NOT a part of

the North American Free Trade Agreement (NAFTA)?

A. The United StatesB. CanadaC. MexicoD. Brazil

Sample Test QuestionWhich of the following countries is NOT a part of

the North American Free Trade Agreement (NAFTA)?

A. The United StatesB. CanadaC. MexicoD. Brazil*

Sample Test QuestionWhich of the following BEST describes the

currency exchange rate?A. It helps international trade.B. It is a trade barrier.C. It creates jobs overseas.D. It never changes.

Sample Test QuestionWhich of the following BEST describes the

currency exchange rate?A. It helps international trade.*B. It is a trade barrier.C. It creates jobs overseas.D. It never changes.

Income

• Money that comes in for a person or business.• For most people, income is money that comes

from getting paid to do work.• Income may also come from gifts, from selling

something, or from savings/investments.

Needs vs. Wants

• People spend money on needs – things you can’t live without (food, shelter, basic clothing).

• People also spend money on wants – something we would like to have but don’t need.

Budget

• Plan for how much money will be spent on each type of item that a person must buy.

• Following a budget helps people plan to have enough money for necessities.

Savings• Income not spent• Saving money can allow people

to buy something expensive in the future.

• One common way to save money is to deposit it in a bank.

• In a bank, money earns interest.

• Interest is a charge (fee) that the bank pays to use the deposited money.

Invest• Spending money in the

hope of earning more money than is spent.

• The biggest investment most people make is a home.

• Stocks and bonds are small investments in large companies.

• Every kind of investment involves a level of risk.

Credit• Borrowed money• Someone who borrow

money from a bank must pay interest to them.

• It is important only borrow money when absolutely necessary and to pay back borrowed money as quickly as possible.

Sample Test QuestionJohn got a check for his birthday for $100. He wants to buy

a bicycle that costs $110. His father told him to put the money into the bank where it will earn interest. This is an example of which economic activity?

A. earningB. savingC. borrowingD. crediting

Sample Test QuestionJohn got a check for his birthday for $100. He wants to buy

a bicycle that costs $110. His father told him to put the money into the bank where it will earn interest. This is an example of which economic activity?

A. earningB. saving*C. borrowingD. crediting

Sample Test QuestionThe BEST definition for “interest” is the?A. Money you are paid to do work.B. Money you pay to buy food.C. Money you pay to borrow money.D. Money that you pay for your rent.

Sample Test QuestionThe BEST definition for “interest” is the?A. Money you are paid to do work.B. Money you pay to buy food.C. Money you pay to borrow money.*D. Money that you pay for your rent.

Sample Test QuestionWhich of the following statements in the BEST

example of investing?A. One person borrows money to buy a gift for

another.B. One person works to earn money from another.C. One person buys a home.D. One person pays their phone bill.

Sample Test QuestionWhich of the following statements in the BEST

example of investing?A. One person borrows money to buy a gift for

another.B. One person works to earn money from another.C. One person buys a home.*D. One person pays their phone bill.