Ch. 26 Comparing Economic Systems Section 2 Economic Systems

Ch. 26 Ch. 26 Comparing Economic Comparing Economic

SystemsSystems

Section 2Section 2

Economic SystemsEconomic Systems

Market EconomiesMarket Economies

The way a society answers the basic economic The way a society answers the basic economic questions of questions of What, How,What, How, and and For WhomFor Whom to to produce determines its economic system.produce determines its economic system.

In a In a pure market economypure market economy, decisions are made , decisions are made in free markets by the interaction of supply and in free markets by the interaction of supply and demand; DOES NOT EXISTdemand; DOES NOT EXIST

Private citizens—not the government—own the Private citizens—not the government—own the factors of production (natural resources, capital, factors of production (natural resources, capital, labor, and entrepreneurship)labor, and entrepreneurship)

Market Economies (cont.)Market Economies (cont.)

The desire to earn a profit is what drives The desire to earn a profit is what drives businesses to make decisionsbusinesses to make decisions about 3 basic about 3 basic economic questions; at the same time economic questions; at the same time consumers make decisionsconsumers make decisions about what to buy. about what to buy.

Supply and Demand interact in the markets to set Supply and Demand interact in the markets to set prices; decisions are made by producers and prices; decisions are made by producers and consumers based on price.consumers based on price.

A market economy is A market economy is decentralized—decentralized—decisions decisions are made by all the people, not just a few; no are made by all the people, not just a few; no coordination of decisionscoordination of decisions


In the U.S., the government plays several In the U.S., the government plays several important roles in the economy.important roles in the economy.

1.1. Provides Public GoodsProvides Public Goods

2.2. Regulates businesses to maintain Regulates businesses to maintain competitioncompetition

3.3. Works to reduce negative externalities Works to reduce negative externalities and increase positive externalitiesand increase positive externalities

Externality—Externality—unintended side effects that have unintended side effects that have an influence on third partiesan influence on third parties


Most of the largest economies of the world are Most of the largest economies of the world are market economies.market economies.

GDP explains the value in dollars of all final goods GDP explains the value in dollars of all final goods and services produced in a country in a year; it and services produced in a country in a year; it can be expressed in terms of each person within can be expressed in terms of each person within that country.that country.

Per Capita GDP—Per Capita GDP—dividing GDP by a country’s dividing GDP by a country’s populationpopulation


By using Per Capita GDP, we can compare one By using Per Capita GDP, we can compare one nation’s economic success to another without nation’s economic success to another without regard to the size of the two economies. regard to the size of the two economies.

Most countries which have high per capita Most countries which have high per capita GDP, including the U.S., have market GDP, including the U.S., have market economies.economies.

Page 718 has a map comparing countries per Page 718 has a map comparing countries per capita GDP capita GDP

Command EconomiesCommand Economies

In a pure In a pure Command Economy, Command Economy, the the central government makes the major central government makes the major economic decisions. economic decisions.

Individuals have few choices and little Individuals have few choices and little influence over the economyinfluence over the economy

Also referred to as a controlled economy, Also referred to as a controlled economy, socialism, or communismsocialism, or communism

Command Economies Command Economies (cont.)(cont.)

Socialism—Socialism—the belief that the means of the belief that the means of production should be owned and controlled by production should be owned and controlled by society, either directly or through government.society, either directly or through government.

Socialists feel that wealth should be distributed Socialists feel that wealth should be distributed equally among all citizens.equally among all citizens.

Karl Marx, a German philosopher and socialist, Karl Marx, a German philosopher and socialist, believed that industrialized nations would believed that industrialized nations would eventually succumb to a violent revolution.eventually succumb to a violent revolution.


Karl Marx believed that that industrialized Karl Marx believed that that industrialized nations were divided into two types of peoplenations were divided into two types of people

1.1. Bourgeoisie – Bourgeoisie – capitalists who owned the capitalists who owned the means of productionmeans of production

2.2. Proletariat – Proletariat – workers who produce the workers who produce the goodsgoods

Marx saw history as a class struggle in which Marx saw history as a class struggle in which workers would eventually overthrow the workers would eventually overthrow the capitalistscapitalists


In time socialism would evolve into In time socialism would evolve into communism– communism– one class exists in which property would all be held one class exists in which property would all be held in common and there would be no need for in common and there would be no need for governmentsgovernments

In a command economy, the government owns most In a command economy, the government owns most productive resources, especially land and capital.productive resources, especially land and capital.

Government answers all 3 of the basic economic Government answers all 3 of the basic economic questionsquestions

Government is responsible for fixing wages of Government is responsible for fixing wages of workers and setting prices for goods.workers and setting prices for goods.


Governments in nations with command Governments in nations with command economies have planning agencies which control economies have planning agencies which control different parts of the economydifferent parts of the economy AgricultureAgriculture Steel productionSteel production

Command economies can be very inefficient Command economies can be very inefficient which results in slower growth and lower per which results in slower growth and lower per capita GDPs than market economiescapita GDPs than market economies

Ex. Former Soviet Union, Cuba, North KoreaEx. Former Soviet Union, Cuba, North Korea

Mixed Economies Mixed Economies

Have the basic elements of a pure market Have the basic elements of a pure market economy and a command economy.economy and a command economy.

Most countries in the world have a mixed Most countries in the world have a mixed economyeconomy

Private ownership and individual decision making Private ownership and individual decision making + government intervention and regulation+ government intervention and regulation

The U.S. is a mixed economy; Actually it is market The U.S. is a mixed economy; Actually it is market economy with government regulations.economy with government regulations.

Section 3Section 3Economies in TransitionEconomies in Transition

Many nations of the world today are changing Many nations of the world today are changing economic typeseconomic types

Some are shifting from command economies to Some are shifting from command economies to market economies; others are moving from market economies; others are moving from traditional economies to more developed onestraditional economies to more developed ones

Toward the end of the Cold War, command Toward the end of the Cold War, command economies were unable to achieve the economic economies were unable to achieve the economic growth that the West was able to reach.growth that the West was able to reach.

Failure of Command Failure of Command EconomiesEconomies

By 1991, Eastern Europe began the gradual change By 1991, Eastern Europe began the gradual change both economically and politically. both economically and politically.

In the Soviet Union, the GOSPLAN, planned the In the Soviet Union, the GOSPLAN, planned the production and distribution of thousands of production and distribution of thousands of products. products.

Mistakes were made by those who had no economic Mistakes were made by those who had no economic knowledgeknowledge

Too many instances of shortage or surplus of Too many instances of shortage or surplus of supplysupply

Supplies not shipped to where they were neededSupplies not shipped to where they were needed

Failure of Command Failure of Command Economies (cont.)Economies (cont.)

When the Soviet Union broke into smaller When the Soviet Union broke into smaller countries in 1991, Communist leaders could not countries in 1991, Communist leaders could not keep the economy afloatkeep the economy afloat

Russian leaders called for a conversion to a Russian leaders called for a conversion to a market economy, but there were problems:market economy, but there were problems:

1.1. State owned factories had to be switched State owned factories had to be switched to private ownershipto private ownership

2.2. Stock markets had to be createdStock markets had to be created3.3. Let the forces of supply and demand guide Let the forces of supply and demand guide

the market naturallythe market naturally


China was in the same situation but their transition China was in the same situation but their transition has been a smoother process and somewhat of a has been a smoother process and somewhat of a head start.head start.

1980’s, began to introduce market reforms due to 1980’s, began to introduce market reforms due to falling behind Asian countries such as South Korea falling behind Asian countries such as South Korea and Taiwan.and Taiwan.

China’s economy has grown 10% every year for the China’s economy has grown 10% every year for the past 20 yearspast 20 years

People have access to goods and services they People have access to goods and services they could have never had with the old economy could have never had with the old economy


Even though some success has been Even though some success has been achieved, serious problems remainachieved, serious problems remain

Global interdependence has caused Global interdependence has caused domestic farmers difficulty competing with domestic farmers difficulty competing with cheaper foreign food. cheaper foreign food.

160 million unemployed in the country 160 million unemployed in the country with limited skills and starving with limited skills and starving

Developing CountriesDeveloping Countries

Developing countries – Developing countries – country whose average country whose average per capita income is only a fraction of that in more per capita income is only a fraction of that in more industrialized countries.industrialized countries.

These countries often have These countries often have traditional traditional economies – economies – economic decisions are based on economic decisions are based on customcustom or habit. or habit.

The way of life is passed down from generation to The way of life is passed down from generation to generation with little changing; little to no generation with little changing; little to no technologytechnology

Developing Countries (cont.)Developing Countries (cont.)

Developing countries are often poor and Developing countries are often poor and want to convert to a market economy but want to convert to a market economy but there are 5 problems they may face:there are 5 problems they may face:

1.1. High Rate of Population GrowthHigh Rate of Population GrowthIf population grows faster than a nations If population grows faster than a nations GDP, per capita GDP declinesGDP, per capita GDP declines

What you are left with is a smaller share What you are left with is a smaller share of what the country produces for each of what the country produces for each person.person.


2.2. LandlockedLandlocked

Some countries may not have access to ocean Some countries may not have access to ocean trade routes; lack of natural resourcestrade routes; lack of natural resources

3.3. WarWar

Destroys a countries infrastructure—roads, Destroys a countries infrastructure—roads, bridges, factories, hospitals etc. Human bridges, factories, hospitals etc. Human resources are lost (only the very young and very resources are lost (only the very young and very old are left); skills are lost or are not efficiently old are left); skills are lost or are not efficiently used; agriculture disrupted (land mines)used; agriculture disrupted (land mines)


4.4. DebtDebt

Countries borrow large sums to spark economic Countries borrow large sums to spark economic growth, but GDP is less per year than the growth, but GDP is less per year than the money they owe; interest alone is too much for money they owe; interest alone is too much for third world nation to pay back.third world nation to pay back.

5.5. Corruption in governmentCorruption in government

Delays development because resources or Delays development because resources or money is horded or used inefficiently (civil wars)money is horded or used inefficiently (civil wars)

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Ch. 26 Comparing Economic Systems Section 2 Economic Systems