Economic Systems

How Does An Economy Operate? Nations must answer three (3) basic Economic questions: What goods and services should be produced? How should the goods and services be produced? For whom should the goods and services be produced? The method in which a nation answers these questions defines their economy.

Types of Economic Systems All economic systems fall into one of two broad categories: Market (or Capitalist) System Command (or Planned) System No economy can be purely market or purely command Elements of both economies are found in all systems; thus, most economies are mixed

A Pure Market Economy There is no government involvement in economic decisions. The government lets the people answer the three basic economic questions: What? Customers decide through their purchases. How? Left up to the individual business, BUT a business must be profitable. Who? People who have money are able to buy more, encouraging hard work and investments.

A Pure Command Economy The Government controls the factors of production and makes all the decisions. The government is responsible for answering the following three (3) economic questions: What? One person ( a dictator) or a group of government officials (central planning committee) decide what is to be produced. How? The government owns all the factors of production and makes all the decisions about production. Who? The government decides who receives what is produced in the economy.

Mixed Economies Some government involvement through mandatory business laws and regulations. Labor Laws, Minimum Wage The government provides social programs for those who need assistance. Medicare, welfare All economies are mixed and are classified based on how much the government is involved in the process.

Capitalism An economic system characterized by private ownership of businesses and marketplace competition. The government is concerned about its people and provides assistance to those who cannot care for themselves. The political system is a democracy with leaders elected by the people. The United States and Japan are examples of a Capitalist Economy.

Socialism Increased government involvement in people’s lives and the economy is an objective. The main goal is to keep prices low for all people and to provide employment for many. The government runs key industries and makes economic decisions. More social services for all and free or low- cost medical care. Canada, Germany, Sweden, Australia and Great Britain are examples of socialist economies.

Communism The government runs everything (Totalitarian government). Only one political party, the Communist party, runs the government. All able-bodied people are assigned jobs – creating no unemployment. The government assigns housing, schools, and occupations. There is little economic freedom. Cuba, North Korea, and China are examples.

Continuum of Economic Systems Command Economy Communism On the far left Market Economy Capitalism On the far right Socialism Left of center, but right of communism

Economies In Transition The breakup of the Soviet Union is the best example of a country changing from a Command Economy to a Market Economy. State-owned industries have been privatized (government owned businesses are sold to private citizens). Today, even socialist countries are selling some of their government-owned businesses to individuals.