Economic Systems CHAPTER 3

FUNDAMENTAL QUESTIONS OF ECONOMIC SYSTEMS What are the fundamental economic questions? 1. What goods and services will be produced? The Guns and Butter Theory 2. How will the goods and services be produced? private businesses or the government 3. Who will get the goods and services? does anyone deserve them before others

These questions are answered by the type of economic system a nation operates. Most countries in the world are “Mixed Economies” -depending how much the government is involved There are four types of economic systems: Traditional Economy Mixed Economy Economy Market Economy Command “Planned” Economy

Problems Traditional Economy Economy is shaped largely by customs, traditions gender roles, and religion. Close knit communities with focus on the family unit. These determine the WHO, WHAT, and HOW questions of the decision-making dealing with goods and services. -Example: Uncontacted Brazilian tribes in the Amazon Rain Forest, Uncontacted Amazon Tribe There is little room for innovation or change. They tend to lack modern conveniences & have a low standard of living.

Comparing Mixed Economies Nations are placed on a range (with no clear divisions) of mixed economies. On one end are command “centrally planned” economies and on the opposite end are free markets economies. Iran North Korea Cuba China Russia Greece Peru United States South Africa France United Kingdom Botswana Canada Singapore Hong Kong

Mixed Economy Problems Citizens have to pay taxes Classification is based on how much government intervention there is. Combination of a market and a command economy Ex) Government takes care of people’s needs Ex) Marketplace takes care of people’s wants. Citizens have to pay taxes In the U.S. the government accounts for about 1/3 of all U.S. economic activity. Ex) regulation & public goods paid with taxes

Market Economy Problems Difficulty enforcing property rights (remember countries with less government involvement tend to have market economy qualities) Market Economy Problems Difficulty enforcing property rights Some people have few resources to sell Some firms try to monopolize markets No public goods. Ex) no national defense NO government involvement in economic decisions. Consumers decide WHAT should be produced. Businesses determine HOW the products will be produced. WHO buys the products? -The people with the most money are able to buy more goods and services. SHANTI TOWN IN HONG KONG HONG KONG

Command Economy Problems (remember countries with higher government involvement tend to have command economy qualities) Command Economy Problems All resources are government-owned. One person (dictator) or a group of officials decide WHAT products are needed. The government runs all businesses, controls all employment, and decides HOW goods and services will be produced. The government decides WHO receives the products that are produced. Poor Organization of the Economy Little freedom of choice Resources owned by the state are often wasted Workers: No measurement of success No incentives No chance for improvements

Government Philosophies Countries also have different philosophies of government which reflect not only the laws and rules, but how individuals are treated. There are three political philosophies: Capitalism Socialism Communism

Capitalism (government philosophy) Capitalism focuses on private ownership of businesses and increasing wealth through competition. There is a wide gap between the rich and the poor classes The production of goods and services is based on supply and demand in a market economy.

Socialism Communism Goods and services are provided through a central system of cooperative and/or government ownership rather than through a free market system. The government runs key industries, generally in telecommunications, mining, transportation, and banking. Socialist countries tend to have more social services and have higher taxes to pay for the services. The government runs everything and makes all decisions. Supposedly, there is no unemployment in communist countries. The government decides the type of schooling people will receive & also tells them where to live & work. Communist Manifesto top-ten-most-socialist-countries-in-the-world

Change Comes Slow… Many countries are slowly changing from either communism or socialism to capitalism. Privatization is a common factor when countries change from a command economy to free market economy. Privatization means state-owned industries are sold to private individuals and companies.

6 MAJOR GOALS OF CHOOSING AN ECONOMIC SYSTEM Economic Goals Each system also emphasizes different economic goals, as shown here. Answers to those fundamental questions depends on its economic aspirations and social values. In other words, answers will depend on what the economic system aspires to do, what their goals are. Most societies will try to address all of the 6 goals listed, but that is pretty much impossible. For example, you can’t really have economic freedom as well as economic equity.

Economic Freedom Economic Efficiency Freedom to make, buy, or sell goods and services without government interference. What are some examples of Economic Freedom & Efficiency ? Economic Efficiency Businesses and individuals are given the right to make decisions about how to use their resources without government intervention. But it is tough to achieve fully because people usually want protection from violators and will look to the government to provide that protection. What are ways in which our government seeks to protect the people economically? Or what are some things that Americans expect the government to protect us from? Making the most of resources (natural & human) with the least amount of waste in the production of goods and services

Economic Equity Economic Security Fair distribution of society’s wealth. Everyone gets a fair share of the economic pie. What are some examples of Economic Equity & Security? What are some current issues we deal with today regarding the rich and the poor? What are things in our society that could be considered fair or unfair in regards to the economy? Providing support to those who cannot support themselves Economic Security

Economic Growth Economic Stability Striving to produce more goods & services with better quality What are some examples of Economic Growth & Stability? What are ways that the U.S. tries to provide economic security for its citizens? Can you think of a current example that Americans debate about? (Healthcare) Economic Stability Keeping the economy running well and stable so the - that the goods and services we count on—electricity on demand, food and clothing in the stores—are there when we want them. Our jobs are there when we go to work each day.  http://www.awn.com/animationworld/macro-economys-impact-animation-will-wile-e-coyote-dodge-anvil