CH. 26 ECONOMIC SYSTEMS

STANDARD EE 1.1, 1.2, 2.3

TYPES OF ECONOMIC SYSTEMS

• MARKET ECONOMY – FREE MARKET SYSTEMS WHERE DECISIONS ARE BASED ON SUPPLY & DEMAND

• INDIVIDUAL FREEDOM, COMPETITION, GOVERNMENT INTERVENTION TO DEAL WITH EXTERNALITIES, GENERALLY HIGHER PER CAPITA GDP

• GOVERNMENT MAY PROVIDE SOME GOODS/SERVICES AND MAINTAINS FAIR COMPETITION AMONG BUSINESSES

• EX. UNITED STATES

TYPES OF ECONOMIC SYSTEMS• COMMAND ECONOMY – CENTRAL GOVERNMENT MAKES DECISIONS FOR

PRODUCERS

• SOCIALISM (MEANS OF PRODUCTION OWNED BY SOCIETY) OR COMMUNISM (CLASSLESS SOCIETY IN WHICH ALL PROPERTY IS HELD IN COMMON)

• GOVERNMENT CONTROL, GENERALLY SLOW GROWTH, LOWER PER CAPITA GDP

• EX. NORTH KOREA, CUBA

DEVELOPED VS. DEVELOPING COUNTRIES

• DEVELOPED COUNTRIES HAVE MODERN, INDUSTRIALIZED ECONOMIES, HIGH GDP, AND HIGH STANDARDS OF LIVING

• EXAMPLES: US, CANADA, MOST OF EUROPE, JAPAN, AUSTRALIA

DEVELOPED VS. DEVELOPING COUNTRIES• DEVELOPING COUNTRIES HAVE MORE TRADITIONAL, AGRICULTURE BASED

ECONOMIES, LOW GDP, AND LOW STANDARD OF LIVING

• EXAMPLES: AFGHANISTAN, MEXICO, INDIA, RWANDA

INTERNATIONAL TRADE• EXPORTS AND IMPORTS GIVE ACCESS TO PRODUCTS WE MIGHT NOT

OTHERWISE HAVE DUE TO SCARCITY

• EXPORTS – THINGS SOLD TO ANOTHER COUNTRY

• IMPORTS – THINGS BOUGHT FROM ANOTHER COUNTRY

FREE TRADE• FREE TRADE – THE ELIMINATION OF PROTECTIVE TRADE BARRIERS (TARIFFS,

QUOTAS) TO ENCOURAGE TRADE BETWEEN NATIONS

FREE TRADEBENEFITS COSTS

LOWER PRICES FOR GOODS LOSS OF LOW SKILL JOBS TO DEVELOPING COUNTRIES

WIDER SELECTION OF GOODS INCREASED FOCUS ON MANUFACTURING IN DEVELOPING COUNTRIES

CREATES JOBS IN SKILLED INDUSTRIES IN DEVELOPED COUNTRIES

INCREASED POLLUTION AND POOR WORKING CONDITIONS IN DEVELOPING COUNTRIES

FREE TRADE ORGANIZATIONS• EUROPEAN UNION (EU) – EUROPEAN COUNTRIES TRADE WITH NO BARRIERS

AND SHARED CURRENCY (THE EURO)

FREE TRADE ORGANIZATIONS• NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) – ELIMINATES TRADE

BARRIERS AMONG CANADA, US, AND MEXICO

FREE TRADE ORGANIZATIONS• WORLD TRADE ORGANIZATION (WTO) – INTERNATIONAL ORGANIZATION

OVERSEES TRADE NEGOTIATIONS TO ENCOURAGE FREE TRADE

MEASURING TRADE

• BALANCE OF TRADE – DIFFERENCE BETWEEN THE VALUE OF EXPORTS AND IMPORTS

• MORE EXPORTS THAN IMPORTS = TRADE SURPLUS

• MORE IMPORTS THAN EXPORTS = TRADE DEFICIT

• EXTREME TRADE DEFICITS CAN LEAD TO LOWER VALUE CURRENCY

• IMPORTS BOUGHT ON CREDIT THAT MUST BE REPAID BY EARNING MONEY THROUGH EXPORTS (DOLLAR DECLINES, MAKING US GOODS CHEAPER)