ECONOMY STUDY GUIDE

SS6E5 The student will analyze different economic systems.

WHAT IS ECONOMY?

All of the activities people do to earn a living are a part of a system called the economy

Economy =

What does economy include?

Going to work

Making goods (things)

Buying and selling

Trading services

How do YOU participate in the economy?

Anything you buy, sell, tradeSelling baked goods Buying ice cream, juice, water

ECONOMICS IS . . .

THE STUDY OF THE PRODUCTION, DISTRIBUTION, AND USE OF GOODS AND SERVICES

Because a country does not have everything they want or need they must develop an economic system to figure out how to use its limited resources to answer three basic questions.

3 BASIC QUESTIONS

(1) WHAT TO PRODUCE?

(2) HOW TO PRODUCE?

(3)FOR WHOM TO PRODUCE?

TRADITIONAL ECONOMY

Exchange of goods and services based on custom and tradition

Traditional Economy

In a traditional economy, the customs and habits of the past are used to decide what and how goods will be produced, distributed, and consumed.

Jobs are handed down from generation to generation and there is little change over the years.

Traditional Economy

There is no government leader to tell the people what to do. The people realize their needs and do the work.

The people in this society produce what they need to survive.

Traditional Economy

Types of work in a traditional economyFarmingHunting and gatheringCattle herdingPottery or other crafts

Example of traditional economy

The Yanomamo Indians in the Amazon rain forest have a traditional economy.

Each village meets its own needs by raising food and finding resources in the forest.

Traditional Economy

Based on traditional economy who answers these questions?WHAT TO PRODUCE?

What they need to surviveHOW TO PRODUCE?

Farming and hunting and gatheringFOR WHOM TO PRODUCE?

The people.

COMMAND ECONOMY

An economy in which the government owns the industries and makes the economic decisions.

Command Economy

The government makes the basic economic decisions. The GOVERNMENT determine what goods and services to produce, the prices, and the wages workers will be paid.

Problem with command economy

One problem with the command economy system is trying to predict exactly what goods people will need.

For example, the government may think that building tractors is important. More tractors mean more crops. However, if the factories are busy making tractors, they may not make enough shoes. The people may have enough food, but no shoes to wear.

Benefit of command economy

One benefit of command economy is that prices are controlled. The government decides the cost of food and other goods.

Example of Command Economy

Cuba The government owns all factories and

most farms. The government makes decisions about

what to produce and the prices.About 90% of Cubans work for the

government.

Command Economy

In a command economy who answers these questions?What to produce?

The governmentHow to produce?

The governmentFor whom to produce?

The government

MARKET ECONOMY

An economy in which individual business owners make economic decisions based on what the consumers buy.

Consumer=customer

Other names for market economy

Free enterpriseCapitalism laissez-faire

Market Economy

Most businesses and farms are owned by individual owners or corporations (groups of people).

The owners/people decide what to produce.

Law of supply and demand

The law of supply and demand determines the price people pay for things.

Supply- amount of good availableDemand- how many consumers

want the goodsExamples: Nikes, I-phones

Benefits of market economy

Consumers can usually find the products they want.

People are free to work and earn as much money as possible to buy the things they want and need.

Businesses are free to find new ways to make better products and lower prices.

Problems with market economy

If there is a great demand for goods or services the price may go up so much that people cannot afford to purchase it.

If a company does not manage its money well, it can go out of business and the worker lose their jobs.

Example of Market Economy

Mexico Individuals and corporations own most

businesses. They make the decisions about what to produce and sell.

The government does not set prices or own businesses or farms.

Market Economy

In a market economy who answers these questions?What to produce?

The people (supply and demand)How to produce?

The owners/peopleFor whom to produce?

The people

MIXED ECONOMY

An economy that has characteristics of both command and market economies

Mixed Economy

There are no pure (totally) command or pure (completely) market economies.

All modern economies have characteristics of both command and market and are referred to as MIXED.

Mixed Economy

Cuba is considered a command economy. However the government does allow some farmers to sell extra produce and keep the money for themselves after the government quotas (amount required) have been met.

Mixed economy

Mexico is considered a market economy. However, the government owns the energy companies.

Brazil uses the market economy, but the government owns the steel industry.

Mixed economy

In the United States we have a mixed economy. Individual ownership is encouraged (market economy) but the government (command economy) is involved.

For example, the government makes laws to protect workers from unfair bosses.

Also the U.S. government makes rules for businesses such as how much pollution a factory can produce.

Mixed Economy

Although there are no countries with a pure (totally) command or pure (totally) market economy, most countries are closer to one type of economic system than another.

Look at the economy continuum on the next slide.

Watch the continuum link.

http://www.econedlink.org/interactives/index.php?iid=187&type=educator

You try!

Which statement describes the economy of Brazil?

A. Brazil has a pure market economy.

B. Brazil has a pure command economy.

C. Brazil is mostly a market economy, but the government does control some businesses.

D. Brazil is mostly a command economy, but the government allows some farmers to sell some of their goods on their own.

COMMANDECONOMY

MARKETECONOMY

Cuba Venezuela Brazil Canada

An economy that is a blend between a command economy and a market economy is said to be

A. hybrid

B. mixed

C. centralized

D. decentralized

COMMANDECONOMY

MARKETECONOMY

Cuba Venezuela Brazil Canada

Which country in the diagram has the economic system closest to a pure market economy?

A. Brazil

B. Canada

C. Cuba

D. Venezuela

COMMANDECONOMY

MARKETECONOMY

Cuba Venezuela Brazil Canada

Standards

• SS6E2 The student will give examples of how voluntary trade benefits buyers and sellers in Latin America and the Caribbean and Canada.

• A. Explain how specialization encourages trade between countries

• B. Compare and contrast different types of trade barriers such as tariffs, quotas, and embargos

• HOW DO COUNTRIES GET THE OTHER GOODS THEY NEED?

THEY TRADE!

What is trade?

• Trade is the voluntary exchange of goods and services among people and countries.

• Have you ever traded something?

Trade

• Sixth graders often trade money for things they want to purchase at school.

• Give an example.

• Trade occurs when buyers and sellers willingly participate in market transactions.

TRADE BARRIERS• What is a barrier?

Trade Barriers

• Countries sometimes try to limit trade by creating trade barriers.

• Countries try to stop, block, or slow down the amount of goods coming into their borders.

• Examples of trade barriers:1. tariff

2. quota

3. embargo

TARIFF

• Tariff- a tax (money) on imports

• Imports- goods purchased from other countries

• Example- Norway imposed a fee of 29% on lumber imported from Canada

QUOTA

• Quota- specific limit placed on the number of imports that may enter a country

• (sounds like quotient (a number in math) and a quota is a limit or NUMBER of goods)

• Once the quota (amount) has been reached no more imports will be allowed into a country.

• Example- a country may limit sugar imports to 50 tons per year

EMBARGO

• Embargo- government order to stop trading with another country. The military is usually involved.

• (EMbargo--- M for military)• The embargo might be enacted to put pressure on

another country. • Example- The United States put an embargo

against Cuba hoping that Cuba would change from a communist country to democratic one.

EMBARGO• Another example of an embargo was in

1998. Australia put an embargo on weapons being shipped to Yugoslavia. There was a war in Yugoslavia and Australia stopped selling weapons to both sides.

• Australia wanted to help end the fighting.

LET’S LOOK AT TRADE IN SOME OF THE AREAS OF THE WORLD WE STUDY…

Europe

• In Europe the European Union (EU) is a free trade zone. There are no tariffs between the countries in the EU.

• Russia is not a member of the EU. Russia places a tariff on imported goods which increases the prices.

• Russia hopes that the higher prices on imports encourage Russians to buy products made in Russia.

Australia

• In Australia there are few trade barriers.

• Australia wants to encourage imports and exports.

• Australia has natural resources such as coal and iron ore. Australians trade these resources with China. In return China sends manufactured goods like televisions, computers, washing machines to Australia.

• In 1994 Canada, Mexico, and the United States signed the North American Free Trade Agreement (NAFTA).

• NAFTA took away all tariffs on goods traded among the three countries.

• Leaders believed that trade would increase between the three countries.

• NAFTA created the world’s largest free-trade zone.

Canada and Mexico

What is specialization?

• When a person in a factory does one job or part of the process they become an expert at that job. The person can improve at their machine and learn the best way to complete their job. This worker is able to save time and money while being productive.

Specialization

• Countries may specialize in the production of certain goods. Most countries do not make all of the goods (stuff) they need. Instead they focus on producing certain goods.

You try! 1. Which type of trade barrier involves a limit on goods brought into the country?

• A. embargo

• B. quota

• C. tariff

• D. voluntary exchange

2. What might make an embargo against a country successful?

• A. Merchants are able to continue doing business.

• B. People in the country are not affected by the embargo.

• C. The country does not need to trade with other countries.

• D. The citizens in the country suffer because of the embargo and demand a change from their government.

3. Which is an example of specialization?

• A. A business makes and sells goods for a profit.

• B. Two people come to an agreement to trade goods they produced.

• C. A factory builds only one product and finds ways to build it better and less expensively.

• D. A country buys all the goods it need from other countries and does not produce any of its own.

4. Why do businesses specialize?

• A. because they can sell more types of goods

• B. so they can produce goods at a slower pace

• C. so the workers will not become experts in their jobs

• D. because they can produce more goods in less time and for less money

5. In order to help U.S. car companies sell more cars, some people want to put a limit on the number of cars that can be imported from other countries. This is an example of a(n): • A. embargo

• B. quota

• C. tariff

• D. voluntary trade

6. What action did Australia take to try to stop the fighting in Yugoslavia?

• A. embargo

• B. quota

• C. tariff

• D. trade

7. Which type of trade barrier involves adding a special tax onto goods brought into the country?

• A. embargo

• B. quota

• C. tariff

• D. voluntary trade

STANDARDS:

SS6E6 The student will analyze the benefits of and barriers to voluntary trade.

Explain why international trade requires a system for exchanging currencies between nation.

INTERNATIONAL TRADE REQUIRES A SYSTEM FOR EXCHANGING CURRENCIES BETWEEN NATIONS.

Mexican PesosBrazilian Reals

Currency

• Currency is the money people use to make trade easier. In the United States we use U.S. dollars (USD or $) to buy goods and services.

• In other countries different currencies are used.

Examples of Different Currencies:

• 1. Canada- Canadian dollar• 2. Mexico- peso• 3. United States- American dollar• 4. Cuba- peso• 5. Brazil- real• 6. Russia- ruble• 7. Australia- Australian dollar• 8. members of the European Union- euro

CURRENCY

• Most of the time when you are in different country, you cannot buy goods and services with currency from your own country. So, what do you do? You trade it in, or exchange it. Exchange rate is a fee that you pay the bank each time you exchange money/buy something.

Economic Standard

• SS6E7 The student will describe factors that influence economic growth and examine their presence or absence in the areas of the world we study.

• Explain the relationship between investment in human capital (education and training) and GDP.

• Explain the relationship between investment in capital (factories, machinery, and technology) and GDP.

What is GDP?

• The Gross Domestic Product (GDP) of a country is the total value of all the goods and services produced in a country in one year.

• The GDP is one way of telling how rich or poor a country is.

• The GDP is a good way to compare the wealth of different countries.

GROSS DOMESTIC PRODUCT

High GDP = High Standard of Living

Low GDP = Low Standard of Living

GDP • Raising the GDP of the country can mean higher standard of living or better economic level for the people.

• One way to increase the GDP is to invest in human capital (people).

• Human capital is the money a country spends on education, training, improving the skills and health of the workers/people.

HUMAN CAPITAL• Russia, Germany, and the UK have made

large investments in human capital. • The literacy rate (percentage of people who

can read and write) of each country is nearly 100%.

• Russia has the most poverty of the 3 countries. The Russian government is investing (spending large amounts of money) to train workers and educate the youth.

• In the former Soviet Union, workers were assigned jobs. Today, in Russia, workers must show their skill and value to the business in order to keep their jobs.

PHYSICAL CAPITAL• Another way to raise the GDP is to

invest in physical capital.• Physical capital is the factories,

machines, technologies, buildings, and property needed by businesses to operate.

• If a business is going to be successful, it must keep the buildings in good condition and the equipment up to date.

• CAN YOU GUESS WHICH EUROPEAN COUNTRY IS BEHIND IN INVESTING IN PHYSICAL CAPTIAL?

RUSSIA !

• Russia is behind because the former Soviet Union did not do a good job of investing in physical capital.

• Russia’s workers are not as productive as workers in the EU.

• The highways and buildings are in need of repair. The equipment and technology are out of date.

• To solve this problem, the Russian government has plans to invest ONE trillion dollars over the next few years in capital improvements.

• Human resources are the education and skills that people have to produce goods and services.

• Capital resources are things like machines and equipment that people need to produce goods and services.

• Natural resources are “gifts of nature” such as forests, water, minerals, and fertile soil.

NO ONE HAS EVERYTHING

Scarcity is the limited supply of something.

No country has everything the people need and want.

The Role of Natural Resources in a Country’s Economy

• Natural resources are important to countries.• Without natural resources of their own,

countries must import the natural resources that they need, which adds to the cost of goods and services.

• A country is better off if it can use its own resources to supply what it needs.

• If a country has many natural resources, it can trade with other countries for goods and services it needs.

REVIEW QUESTIONS1.What is the currency people use in much of the EU called?• A. dollar

• B. euro

• C. pound

• D. ruble

2. What is a problem with exchanging currency?

• A. People make more money by trading currency.

• B. Most people want to use American dollars to trade.

• C. Banks do not like to exchange their money for other currencies.

• D. It costs more to do business because banks charge fees for exchanges.

3. Which is an example of investing in human capital?

• A. cash

• B. education

• C. factories

• D. highways

4. What is human capital?

• A. a country’s standard of living• B. the cash a business has to

spend• C. investment in the workers of a

business or country• D. the buildings, equipment, and

property owned by a business

Entrepreneurship

• The person who takes a risk and provides the money to start and own a business is called an entrepreneur.

• An entrepreneur has an idea and is willing to take a risk to make their business a success.

Entrepreneurs help the economy of their country by:

•

• 1. Giving people jobs

• 2. Paying tax money

• 3. Producing goods and

services to trade

No country has everything it needs.