1. Lecture #6: Economic Systems

2. 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!

3. 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?

4. 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?

5. 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

6. 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.

7. 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.

8. 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

9. 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.

10. 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

11. 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!

12. 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!

13. 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 1.005.00 More Economic Freedom Less Economic Freedom Source: 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?

14. 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

15. 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

16. 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!

17. Vision Vision A sense of how the world works.
Free Enterprise & Socialism are the products of certain visions

18. 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

19. Karl Marx
Karl Marx ( )
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.

20. 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.

21. 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!

22. CLASS WORK/HOMEWORK
In Class do workbook pages 15 & 16 on page 15 in your notebooks!
Read p quiz on 2/14 or 2/15
16. HW: p in text: Econ Vocab 1-11 & Main Ideas 1-10, Math 1-2, & Econ Prob. 1-3 due 2/14 or 2/15