Chapter & 26.3 Objectives Economic Systems

 Measure of an economy’s size & success (monetary measure - $13.78 trillion in 2007)  Total value of all the final goods & services produced in a country during a single year  Used cars not counted in GDP because second hand sales are not counted  Used to measure standard of living (quality of life based on the possession of necessities and luxuries that make life easier ) in a country  Measures quantity not quality Gross Domestic Product (GDP)

 Per Capita GDP – total GDP divided by the country’s population (U.S. was $45,800 (2007 est.) )U.S. was $45,800 (2007 est  Compared yearly to check growth of country  Higher GDP from previous year = growing economy  Lower GDP from previous year = shrinking economy Gross Domestic Product (GDP) cont.

1. Where to produce? 2. Whom to produce for? 3. What to produce? 4. How to produce?

TRADITIONAL ECONOMIESCOMMAND ECONOMIES  Economic decisions made by customs  Hunting/farming/gathering  No technology  No global trade  Rural & non-industrialized  Africa, South America & Asia  Sometimes known as 3 rd World Countries  Government makes all economic decisions (3)  Productive resources are owned by the government  Prices are set by the Government & are typically low  No Competition  Shortages are common  No individual freedoms  North Korea, Cuba, China, former USSR

MARKET ECONOMIESMIXED ECONOMIES  Decisions made by market forces of supply & demand  Individual freedoms  Capitalism – Private citizens own the means of production  Free Enterprise – Freedom of businesses to compete without government interference  Any combination of economic systems

Traditional Economies

Command Economies – Former Soviet Union

Command Economies – North Korea Video Slideshow

Command Economies - Cuba

Capitalism & Free Enterprise  The U.S. economy is built on a market economy, but government still plays a role  Free Enterprise – minimum gov’t interference  Capitalism – private citizens own and use factors of production (land, labor, capital, & entrepreneurship) to make a profit

7 Characteristics of a Market Economy 1. Markets – exchanges here determine prices of goods & services 2. Consumer Sovereignty – the consumer is ‘king’ of the market They are the ones who determine what products will be produced It exists only in Market based economies 3. Economic freedom – freedom of choice with consequences Example - 4. Private Property Rights 5. Competition Capitalism thrives on competition Rewards the most efficient producers 6. Profit Motive Purpose is to raise the standard of living It is the reason for growth in a market system 7. Voluntary Exchange Both buyers & sellers must feel a benefit

The Rise of Capitalism  2 concepts developed  People work for economic gain  Government should have a limited role  1200s C.E. trade routes opened between Europe & the East  Silk Roads, Marco Polo  Throughout hundreds of years trade increased  Development of ideas of wealth  Adam Smith  Scottish Economist  Wealth of Nations  Basic Principles of Economics  Individuals who seek profit benefit all of society  Laissez-Faire – to leave alone  The government should not interfere in the market  Government’s only role should be to ensure free competition

Adam Smith and The Wealth of Nations

1. Traditional 2. Command 3. Market 4. Mixed

 Government regulations  Government provides some goods & services  At certain times government can take control of the means of production The U.S. is a Mixed Economy

 Socialism – belief that the means of production should be owned & controlled by society either directly or through the gov’t  Karl Marx  Wrote “The Communist Manifesto”  Socialist – believed industrialized nations divided into bourgeoisie (entrepreneurs) & proletariat (workers)  Predicted revolution of the proletariat  Believed socialism would develop into communism Socialism

Activity on Socialism  What type of job did you have?  What was your salary?  How did it make you feel interacting with the other members of society?  Did you like being equal with everyone else?  What are some major problems with socialism that became evident after this activity?

 Communism – one class would evolve where property would be commonly held & there would be no need for government  Built on the idea of socialism  Videos Communism

Transitioning Economies  Former Soviet Union & the Soviet BlocSoviet Union  Inefficiency of command economies led to no or very small growth  Transition of this type of economy led to transition from Communism to Democracies  Why would a transition be hard?

NAFTA  North America Free Trade Agreement (NAFTA) – agreement between Canada, Mexico, and the USA where tariffs were almost completely eliminated (“free trade”)  Began on Jan. 1, 1994  Video