Comparative Economics Prepared by :Dr.Hassan Sweillam

Part one :Economic Systems

Economic Systems What is an economic system? A country’s economy or economic system is that society’s way of coordinating the production and consumption of goods and services.

Economic Systems There are four basic types of economic system 1- Traditional economy 2- Market economy 3- Command economy 4- Mixed economy

1- Traditional Economies Custom and tradition dictate what to produce, how to produce it, and for whom. Hunting, fishing and farming are the main economic activities in such an economy. Although traditional economies are rare in the 21st century, some still exist (e.g., in Papua New Guinea); Eskimos

The advantages and disadvantages of a traditional economy Traditional economies rarely achieve the goals of economic freedom. Traditional economies often provide economic security Rarely achieve, economic growth, and a high standard of living Traditional economies also tend to be sustainable because they grow slowly. They also tend to be resistant to change, technological or otherwise. They also tend to emphasize a relatively equal distribution of goods and services.

2- Free Market (Capitalist) Economies Economic decisions are made by individuals competing to earn profits based on supply and demand Resources are owned by individuals. Profit, not quotas, is the motive for increasing work Competition determines price and increases the quality of products

2- Free Market (Capitalist) Economies Individual freedom is considered very important; individuals have freedom to make economic decisions Also called “capitalist” economy Wide variety of choices and products The government plays little if any role in the marketplace Property rights are very important U.S., Japan

The advantages and disadvantages of a Market economy Does not always provide basic needs of everyone in society, which can lead people to slip into poverty Prices determine by market forces (supply and demand); competition brings down prices Market economies do not do very well in terms of economic security. Little government intervention -May make it difficult for government to provide adequate social services Capital flows to where it will get the greatest return

The advantages and disadvantages of a Market economy , cont. Resource conservation is another challenge for market economies. Great variety of goods and services People can make choices which are harmful to themselves and to others Consumers can buy whatever they like in whatever amounts they want

3- Command Economies The government or other central authority makes all economic decisions Individuals have little, if any, influence over economic functions Resources are owned by the government -There is no competition; the purpose of business is to provide goods and services, not to make a profit Factories are concerned with quotas Consumers have few, if any, choices in the market place The government sets the prices of goods No private ownership Communism Old Soviet Union, Cuba and North Korea

The advantages and disadvantages of a Command economy have not in practice tended to work out very well. The Soviet Union’s economy, for example, failed. Command economies can provide economic security limited economic freedom and provide little incentive to people to work hard. Distributes wealth among all of society No economic efficiency. Often there is insufficient resource distribution, Cannot determine societies objectives and consumer preferences. Products produces fulfill needs

4- Mixed Economies Combines elements of pure market and command economies; Government and individuals share the economic decision making process Government guides and regulates production of goods and services Resources are owned by individuals

4- Mixed Economies ,cont. Government serves to protect both producers and consumers from unfair policies and practices The government’s role in a mixed economy could vary considerably from country to country. In some its function could be limited to enforcing the laws and regulating the currency whereas in others it could involve many of the trappings of the welfare state, such as universal health care, E.g. U.K , Common in Europe, Latin America, and Africa

The advantages and disadvantages of a Mixed economy mixed economies can differ greatly from each other. Mixed economies tend to be more equitable than market economies. the government’s role in the economy may be fairly limited in some economies whereas in others the government may be very involved. have a better track record than market economies in terms of economic security and sustainability.

Part Two: Economic Schools

Classical School Adam Smith 18th century Scottish economist Published “The Wealth of Nations” in 1776 Explained the workings of the free market within capitalist economies Invisible hand of the market

Economics is the study of nature and uses of national wealth. Adam Smith (cont.) Economics is the study of nature and uses of national wealth. Father of Economics Adam Smith (1723-1790)

Adam Smith (cont.) The Classical school, which is regarded as the first school of economic thought, is associated with the 18th Century Scottish economist Adam Smith. The main idea of the Classical school was that markets work best when they are left alone, and that there is nothing but the smallest role for government.

Adam Smith (cont.) Laissez-faire - Government stays out of business practices “hands off” to let the market place determine production, consumption and distribution. Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources to where they are best employed. Individual freedom and choice emphasized.

Principles of Capitalism Competition – more businesses means lower prices and higher quality products for consumers (US!) to buy.

Principles of Capitalism Private Property – Individuals and businesses MUST be able to get the benefits of owning their OWN property. Government doesn’t control it.

Principles of Capitalism Consumer Sovereignty – consumers get to make free choices about what to buy and this helps drive production (Demand drives Supply).

Principles of Capitalism Profit Motive – people want to make or save $$$$. Their “Self Interest” motivates Capitalism.

Marxian School 19th century German economist Author of “Communist Manifesto” and “ Das Kapital” Government should control economy and distribute goods and services to the people Founder of revolutionary socialism and communism Karl Marx

Communism Falls Market reforms in China in the mid 1970s. Fall of the Berlin Wall in 1989. Collapse of the Soviet Union 1991. Free Market Capitalism (w/ some Mixed Economies) the only show in town.

Keynesian School John Keynes The Invisible Hand doesn’t always work. “The long run is a misleading guide to current affairs. In the long run we are all dead.” or . . . the trouble is people eat in the short run. John Keynes

Keynesian Economics (cont.) Government should intervene in economic emergencies through tax and spending (Fiscal Policy) and changing the money supply (Monetary Policy). This is done to smooth out the business cycle (expansion and recession) and keep inflation low.

Mixed Economy/Socialism Government involvement and ownership and control of property, of decision making, and companies. Government control of business Social “safety net” for people Socialism Common in Europe, Latin America, and Africa

Economic Systems

Review questions True or False Questions 1- There are three basic types of economic system . Answer: False 2- Hunting, fishing and farming are the main economic activities in free market economy.

Review questions True or False Questions 3- Mixed economies combines elements of pure market and command economies. Answer: True 4- The Classical school, which is regarded as the first school of economic thought, is associated with the 18th Century Scottish economist Adam Smith.

Review questions Multiple Choice Questions 1- _________ Also called “capitalist” economy. A- Traditional economy B- Mixed economy C- Command economy D- Free market economy Answer: D

Review questions 2- ____________ state that government should control economy and distribute goods and services to the people. A- The Classical school B- The Marxian school C- The Keynesian school D- None of these Answer: B

Review questions 3- The Classical school state that Markets should be left to work because the _______ acts as a powerful 'invisible hand'. A- Social mechanism B- Goods mechanism C- Command mechanism D- Price mechanism Answer: D

Review questions Brief explain Questions 1- Briefly explain the basic types of economic system ? 2- Briefly explain the classical school of economic ? 3- Briefly explain the Command Economies with its advantages and disadvantages? Brief explain Questions