Comparing Economic Systems AP COMPARATIVE GOVERNMENT

Economic Change: Trends & Types Nationalization A process in which the government takes over existing companies and runs them as state owned enterprises, or it’s own enterprises, often with monopoly status in a major sector of the economy. Privatization The tansfer of state owned enterprises and property to private ownership.

4 Main types of Economies

Command Economies (Socialism) an economy in which production, investment, prices, and incomes are determined centrally by a government. Government owns all industrial enterprises and retail sales outlets The economy is managed by a state party planning committee The right to own property is greatly restricted Competition and profit are prohibited Examples: Former Soviet Union Government regulates all aspects of life Black Markets can emerge Entrepreneurship is discouraged because markets are highly regulated Positive - Everyone has a guaranteed minimum quality of life Large potential for government corruption No competition in the economy Limits growth This system could ultimately fail if the Government does not plan the needs of its citizens appropriately Production can quickly change as the government has complete control Very low to no unemployment

Market Economies (Free Market Capitalism) a capitalistic economic system in which there is free competition and prices are determined by the interaction of supply and demand. Most industry is owned by private individuals The right to own property is accepted and guaranteed Competition and profit are not controlled by the government Example: United States & Germany Entrepreneurship is encouraged Economic growth occurs The “market” corrects itself instead of the government intervening Wage discrepancies and standards of living can exist Fluctuations in the market can lead to depressions or recessions causing unemployment rates to increase The United States is a market economy but could be argued as a mixed economy due to the taxation of profits

Mixed Economy (State Capitalism) an economy in which there are elements of both public and private enterprise. a form of capitalism in which the central government controls most of the capital, industry, natural resources, etc. Industry is owned by both public and private sectors The right to own property is accepted Competition and profit are controlled by the government Example: China & Mexico The Government regulates a combination of resources, production, products, and or profits Government control can be in varying forms and in multiple aspects

Laissez Faire policy of minimum governmental interference in the economic affairs of individuals and society All industry is owned by private individuals The right to own property is guaranteed and protected Competition and profit are not controlled by the government No current examples. The government's sole purpose is to protect property rights and enforce contracts, there is no other regulation as to production, consumption, or taxation This is the ultimate free market “The invisible hand” - markets will auto correct for the good of society

Comparing Economic Systems Command State Capitalism Free Market Capitalism Laissez Faire Most Government Control Least Government Control

Discussion Questions Explain what would cause a government to shift from a command economy to a market economy. Explain what would limit a government to shift from a command economy to a market economy? Identify and explain some of the drawbacks of a free market economy. Identify and explain some of the drawbacks of a command economy. Justify which economic system leads to more growth. 1 - Society feels that the government is too big, decentralization of government, “Anti-big Government”, a reduction in the scale of government / Ronald Reagan type economics Lack of success in a command Economy - Collapse of the Soviet Union - poor planning or difficulties in planning by the government for its citizens consumption 2 - Central government control and potential for corruption would limit the economy to go towards a market economy, the society wanting socialist views 3- market fluctuations can cause scarcity as well as prosperity, recessions and depressions occur but teh market will eventually correct itself, the time frame of this is undetermined, market downturns can be devastating 4 - limited growth, if the government does not plan appropriately, the citizens could lack necessities, lack of ingenuity and invention from its citizens as they are not rewarded for working harder 5- Market economies lead to more growth as they reward those who work harder and create new ideas and products, market economies have led to more efficient ways of producing goods, and globalization has increased the economies of scale and the ability to produce new goods in the marketplace and open up new product markets and allow people the freedom to choose which goods they want to purchase and encourages people to move up the economic ladder to be able to purchase more than just the basic necessities