Economic Systems

Terms to Know

• Free Market

• Command

• Traditional

• Mixed

• Capital

• Land

• Labor

• Natural Resources

• Entrepreneur

• Trade Barriers

• Tariffs

• Quotas

• Embargo

• Currency Exchange

• Specialization

Why Do We Study Economics?

• A society needs to set rules for distrubuting resources to people due to a limited amount of resources.

Three Basic Economic Questions

• In every nation, no matter what the form of government, what the type of economic system, who controls the government, or how rich or poor the country is, three basic economic questions must be answered.

Three Basic Economic Questions

1. What and how much will be produced?

• Literally, billions of different outputs could be produced with society's scarce resources.

2. How will it be produced?

• There are many ways to produce a desired item. It may be possible to use more labor and less capital, or vice versa. It may be possible to use more unskilled labor to substitute for fewer units of skilled labor.

3. For whom will it be produced?

• Once a commodity is produced, some mechanism must exist that distributes finished products to the consumers of the product. The mechanism of distribution for these commodities differs by economic system.

Types of Economic Systems

• Market

• Command

• Mixed

• Traditional

Market Economy

• Also known as free enterprise or capitalism.

• An economic system in which the individuals own and operate the factors of production.

Command Economy

• Also known as socialism or communism.

• An economic system in which the government owns and operates the factors of production.

Mixed Economy

• An economic system that has features of both market and command economies.

Market and Command

• In reality there are no pure market economies, nor are there any pure command economies.

• For example, even in the United States, where free enterprise reigns, the government plays a major role in the economy.

• What are some examples of government involvement in the economy?

Mixed can be Misleading

• While we could say that both the United States and China are mixed economies because they contain both market and command economic features, to do so would be misleading because the role that the respective governments play in the economies is quite different.

• In China, for example, some private ownership of businesses is allowed, however the government still maintains tight control over the factors of production and prices.

Traditional Economy

• Found in non-industrialized or agrarian societies.

• An economic system in based upon customs and traditions, agriculture and hunting.

Gross Domestic Product (GDP)

• One measure of national income and output for a country's economy.

• Total market value of all final goods and services produced within the country in a year.

Sourcehttp://www.imf.org/external/Datamapper/index.php

Gross Domestic Product (GDP) Per Capita

• GDP divided by total population of a country.

Source

http://www.imf.org/external/Datamapper/index.php

Factors of Production

• Land

• Labor

• Capital

• Resources

• Entrepreneur

Land

• All naturally occurring resources whose supply is inherently fixed such as mineral deposits.

Natural Resources

• Two types: renewable and non-renewable.

• Include soil, timber, oil, minerals, and other goods taken more or less from the Earth.

• Often determine a country's wealth in the world economic system and its political influence.

• In recent years, the depletion of natural resources has become a political and economic issue.

Labor (Human Capital)

• A measure of the work done by human beings.

• Human capital refers to the skills that workers possess. (The education and training the workers have had).

Capital

• Capital or capital goods or real capital refers to items of extensive value, or the amount of wealth a person controls or is capable of controlling.

• Goods with the following features are capital:

• It can be used in the production of other goods (this is what makes it a factor of production).

• It was produced, in contrast to "land," which refers to naturally occurring resources such as geographical locations and minerals.

Entrepreneur

• A person who owns a company, enterprise, or venture, and assumes accountability for the risks and the outcome.

Trade Barriers

•Government policy or regulation that restricts international trade.

• Typically the end result raises the price of the imported product to protect the domestic producer.

Quotas

• Sets a limit on the quantity of a good that can be imported into a country in a given period of time.

• For example, a country might limit sugar imports to 50 tons per year. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.

Tariffs

• A tax on goods when they cross a national border. Inflates prices of imports and "protects" domestic industries from foreign competition.

• For example, a 50% tax on an imported machine raises the price from $100 to $150. Without a tariff, the local manufacturers could only charge $100 for the same machine; now they can charge $149 and make the sale.

Embargo

• Prohibiting trade with a country, as a political punishment for disagreement on policies or acts.

Currency Exchange

• Every country has a different kind of currency, or monetary system. Therefore, we need an EXCHANGE RATE. This is the price that one country’s currency has compared to another country’s currency. Without an exchange rate, global trade would be impossible to conduct.

• For example, one U.S. dollar is worth over one hundred Nigerian naira. Exchange rates change daily. The changes are based on factors like government stability and the strength of a country’s market.

Specialization

• Specialization encourages trade and can be a positive factor in a country’s economy. Specialization focuses on the development and production of one product or service.

Bibliography

• Everything You Need to Teach, The Middle East. InspirEd. 2000.

• Georgia Department of Education. Types of government Worksheets for Unit 2. 06/30/2007.

• Grade Seven GPS. Georgia Department of Education. September 2, 2008.