economic systems business economics. objectives three economic questions the economic systems...
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Economic Systems
Business Economics
Objectives
Three Economic Questions The Economic Systems Examples of Countries Research Project
Three Economic Questions
All economies must answer these three questions:
1.1. What goods and services will be produced?
2.2. How will they be produced?
3.3. For whom will they be produced?
Country use & distribution of scarce resources
History Culture Geography Political Situation Various of factors
Economic System
An economic system is the method used by a society to produce and distribute goods and services.
Some questions to ask: Who owns the resources? What decision-making process is
used to allocate resources and products?
What types of incentives guide economic decision makers?
Communism
The gov’t, usually authoritarian, controls the factors of production
No private ownership of property or capital The theory is that goods owned in common are available
to a classless society on an as needed basis
People are given jobs based on their abilities They are given the goods that fit their needs
Characteristics
All people who are able to work are assigned jobs Theoretically, there is no unemployment Employees who do not go to work continue to get paid
The gov’t decides the type of schooling everyone gets and tells people where to live
Housing accommodations are assigned according to need
Characteristics
Food & housing subsidies (aids) keep prices low so everyone has a place to live and food to eat
Medical care is free Little or no economic freedom No financial incentive for people to increase
productivity Want to be entrepreneurs cannot start their own
business
Strong Command Economy
The gov’t owns and controls Factories,
equipment, land Leaders answer the
3 basic questions Political structure
Communism
Command Economy
Influenced by commands, directives or central authority One person, small group who control
society Members of society carry out demands
Kim Jong II
Fidel Castro
Economies in Transition
Prior to the Soviet Union breakup, Poland owned approx 80% of the country’s productive assets After the breakup, it owned only 55%
Poland welcomed private investors that wanted to buy its state-run factories, which were inefficient & non productive
Privatization vs. Nationalization
Privatization – the processes of gov’t selling gov’t-owned businesses to private individuals/businesses Generates much needed revenue Demonstrates a high level of commitment to
making the transition to a market system Can help balance budgets
Privatization vs. Nationalization
Nationalization – the gov’t takes over private-held companies Transfer of ownership may be due to an
economic crisis, a political upheaval, or a change in gov’t policy
Developing Economies
Mostly poor countries with little industrialization Trying to become more prosperous & develop infrastructure Success depends on the education of the labor force Chad, an African Country, is a developing country
Traditional economy based on agriculture & livestock farming Cotton, cattle, & gum arabic are its primary exports
An oilfield & pipeline project paid by foreign investors has helped Chad develop its oil reserves for export This will help Chad with much needed funds for this poor nation
Traditional Economy Shaped largely by
custom or religion Family relations
play significant roles in economic activity
Same methods of production are used
Roles are narrowly defined
Traditional Economy
AdvantageEveryone has a role in it
DisadvantageDiscourage new ideas and way of doing things
Rain forests of Latin America
Parts of Africa Middle East
Socialism
Originally referred to a system on its way to the communist ideal of a classless society
Today, most countries that are defined as this, have democratic political institutions
They differ from capitalist nations because of the increased amount of gov’t involvement
Main goal is to meet basic needs for all & to provide employment for many
Characteristics
Tend to have more social services to ensure a certain standard of living for everyone
Medical care & education are free or inexpensive Systems for pensions and elderly care Businesses & individuals pay much higher taxes
than those in capitalist countries Taxes contribute to financing the gov’t
Examples of Socialist Countries
The gov’t runs key industries & makes economic decisions
State-controlled, noncompetitive companies are often found in industries such as: telecommunications, natural resources (such as gas,
water, & power), transportation, & banking
Canada, Germany, & Sweden are generally characterized have having socialist elements in their economies
Moderate Command Economy
Political structure = Socialism
Gov’t owns major industries Railroads, steel &
iron industry Limited opportunities
for private ownership
Sweden
France
Problems with Centrally Planned Economies
Consumers get low priority
Little to No freedom of choice
No reward for innovation How much should be
produced? Typically results in
surpluses and shortages
Invisible Hand of Markets
According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.”
Laissez Faire
18th century economic theory “Let it be economics” Stands for “Leave Alone”
Strongly oppose government intervention in business affairs Against minimum wage, duties (taxes on
certain goods) & trade restrictions
Capitalism
Characterized by marketplace competition and private ownership of businesses Same as free enterprise or private enterprise
An advantage is that successful employers & employees prosper
Characteristics
Government is concerned about its people and cares for those who cannot care for themselves
The gov’t also has some involvement in the free market Policies and laws that affect the market Must keep a balance between too much and too
little regulation
Political Foundations of Capitalism
The political system most frequently associated is democracy These nations believe that political power should be in the
hands of the people
Usually more than one political party from which to choose representatives to run the gov’t
People are free to elect those candidates who agree with their philosophy on how the gov’t & economy should be run
Political Foundations of Capitalism
The US and Japan are 2 examples of countries that are classified as capitalist and have a democratic form of government
Market Economy
Regulation by government is minimal
Economic activity based on the prices generated
in free, competitive markets Economic questions
Buyers & sellers Referred to as Capitalism
Market Economy
Economic decisions are based on
Buyers & Sellers
• Produce goods & services that will provide profit
Sellers & Producers
Plusses & Minuses of Market Economies
Difficulty enforcing property rights
Some people have few resources to sell
Some firms try to monopolize markets
“You need money to make money”
Freedom for everyone to be involved
Adjusts as consumer wants & needs change
Essential Question
Why do most countries have a mixed economy?
What Do You Like on a Sundae? What toppings do
you like on an ice cream sundae? Plain Vanilla? Or absolutely
everything (and I mean everything)?
What Do You Like on a Sundae?
Chances are, you were somewhere between plain and everything.
When discussing economies, most countries are somewhere in between too.
When a country is not completely a command economy and not completely a market economy, but somewhere in between, it is called a Mixed Economy.
Mixed Economy – “In Between”
Most Countries Lie Somewhere in Between-However, they may be closer to one side than the other.
7 Roles of Government in a mixed economy
1. Establishing and enforcing rules of exchangea.Property rights
b.Contract law
7 Roles of Government in a mixed economy
2. Promoting competition/prevent anticompetitive practices
7 Roles of Government in a mixed economy
3. Regulating natural monopolies One firm that can serve the entire market at
a lower per- unit cost than can two or more firms
7 Roles of Government in a mixed economy
4. Provide public goods
Technical characteristics of public goods: Non rival
consumption High cost of
excluding those who do not pay
7 Roles of Government in a mixed economy
5. Dealing with externalitiesa. Externality is a cost or
benefit that falls on third parties and is therefore ignored by the two parties to the market transaction
6. Negative externality – cost imposed on others
7. Positive externality – benefit gained by others
Visibility Impairment from Air PollutionShenandoah National Park - Virginia
7 Roles of Government in a mixed economy
6. Redistribute income
President F.D. Roosevelt Signing the Social Security Act of 1935
7 Roles of Government in a mixed economy
7. Promote macroeconomic goals of:a. Full employment
b. Price stability
c. Economic growth
Fiscal policy pursued by the Federal government
Monetary policy pursued by the Federal Reserve
Examples of Economies
Traditional:
1. Philippines
2. Nigeria
3. Nicaragua
4. Sao Paulo
5. Mumbai
Command:
1. Cuba
2. North Korea
3. China
4. Russia
5. Iran
Mixed:
1. Canada
2. Germany
3. Netherlands
4. United Kingdom
5. Italy
In-Class Research Project
Objective of Project:
- For you to research and learn about the economy of a specific country.
You will research a country of your choosing.
The Instruction sheet will provide you with clear directions.
What is the G20?
Promotes international cooperation Global economic stability Prevent future financial crisis
Argentina Australia Brazil Canada
China France Germany India
Indonesia Italy Japan Mexico
Russia Saudi Arabia South Africa Republic of Korea
Turkey United Kingdom United States
CIA World Factbook
https://www.cia.gov/library/publications/the-world-factbook/