Lecture #6: Economic Systems
Three Economic Questions Every society must answer the following questions to define its economic system: What? What goods will be produced? Because of scarcity, no country can produce every good it wants in the quantity it would like. Remember when taking Cornell Notes you need to come up with at least 3 questions per page!
Three Economic Questions cont. How? How will the goods be produced? Will production decisions be made by individuals or by the government? Will producers use existing technology or new technology?
Three Economic Questions cont. For Whom? For whom will the goods be produced? Will the government decide? Will price decide? Will goods be produced for the purpose of trade with other countries?
Two Major Economic Systems Free Enterprise individuals own all or most of the resources and control their use A.K.A. capitalism or a market economy Socialism government may control or own many of the resources A.K.A. command economy communism is an ex. of socialism
Who came up with Socialism? 1848, 2 Germans, Karl Marx & Frederick Engels wrote the Communist Manifesto They were distressed by the extremely poor conditions of the working class in factories.
Differences between Free Enterprise & Socialism Resources F.E.—resources are owned & controlled by individuals Soc—resources are controlled by govt Ex: North Korea—the govt owns almost all the resources.
Differences between Free Enterprise & Socialism cont. Govt’s Role F.E.—govt plays small role Doesn’t make decisions about what goods will be produced, how they should be produced, & how much they should cost! Soc—govt plays large role Control Prices Write an Economic Plan—a plan that specifies the direction economic activities are to take
Differences between Free Enterprise & Socialism cont. Income Distribution Refers to how all the income earned in a country is divided among the different groups of income earners. F.E.—govt pays little attention to Soc—govt will redistribute income Usually away from high earners.
Differences between Free Enterprise & Socialism cont. Controlling Prices F.E.—prices are allowed to fluctuate—go up and down Soc—govt can control prices or may set wage rates
Differences between Free Enterprise & Socialism cont. Private Property F.E.—Private property is sacred—the belief is that if you own something you will take better care of it than if it is community owned. Soc—believe those who own property end up having more political power If gov’t owns property they will make sure it is used to benefit many instead of a few!
Mixed Economies Mixed An economy that is neither purely capitalist nor purely socialist. Most countries in the world have mixed economies The U.S. has a free enterprise economic system, but controls some prices!
Rank Country Score 1 Hong Kong 1.35 5 Ireland 1.70 10 Australia 1.79 12 U.S.A. 1.85 16 Canada 1.91 26 Italy 2.28 39 Japan 2.46 44 France 2.63 45 South Korea 2.64 63 Mexico 2.89 71 Thailand 2.98 90 Brazil 3.25 103 Egypt 3.38 112 China 3.46 118 India 3.53 124 Russia 3.56 137 Vietnam 3.83 149 Cuba 4.29 155 North Korea 5.00 Index of Economic Freedom 1.005.00 More Economic Freedom Less Economic Freedom Source: 2005 Index of Economic Freedom Answer the following questions in your notebook (Do not copy the chart): Which country has the most economic freedom? The least? What rank is the United States? Do any of the rankings and scores surprise you? Why?
Continuum of Mixed Economies Centrally planned Free market Source: 1999 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick Iran North Korea Cuba China Russia Greece Peru United States South Africa France United Kingdom Botswana Canada Singapore Hong Kong
Traditional Economies An economic system in which the answers to the 3 economic questions are based on customs, traditions, & cultural beliefs. Ex: Feudal System in Western Europe—all the land owned by a king. King grants lands to nobles who then grant land to peasants. Few traditional economies exist today
Traditional Economies— Modern Day Example The Hadza of Tanzania are a nomadic hunting culture, without a fixed location or many material possessions. Fewer than 1,000 remain today Their traditional economy is based on thousands of years of life in the same region, hunting the same animals. They build no permanent shelters, have no chieftains, and no economic system!
Vision Vision A sense of how the world works. Free Enterprise & Socialism are the products of certain visions
Adam Smith Adam Smith (1723-1790) Believed free enterprise produced the most goods and services, and is the most ethical economic system Self-interest causes people to work hard & take risks We are led by an “invisible hand” to do good for others Laissez-faire—“let it be”—governments should not interfere with trade or commerce—became a synonym for free enterprise Competition keeps prices down & quality up
Karl Marx Karl Marx (1818-1883) Believed many failures & injustices with free enterprise His ideas are the heart of socialism & communism Said self-interest hurting others Believed capitalists exploited workers Labor theory of value—the belief that all value in produced goods comes from labor Value is determined by how much time it took to make Surplus Value—the difference between the total value of production & the subsistence wages paid to workers. ex: it takes 5 hrs to make a chair & 10 hrs to make a table, this makes the table twice as valuable as the chair.
Review—True or False A traditional economic system uses customs, traditions, and beliefs to answer the 3 economic questions. TRUE The 2 dominant economic systems are traditional and free enterprise. FALSE Our economic vision is our sense of how the world works. A socialist thinks price should be set and controlled by the government. All nations must answer 3 basic economic questions.
Summary When completing your notes you need to write a 3-5 sentence summary of the lecture. This is a part of your notes grade!
CLASS WORK/HOMEWORK In Class do workbook pages 15 & 16 on page 15 in your notebooks! Read p. 32-51 quiz on 2/14 or 2/15 16. HW: p.52-53 in text: Econ Vocab 1-11 & Main Ideas 1-10, Math 1-2, & Econ Prob. 1-3 due 2/14 or 2/15