Economic Systems

1. EconomicSystems EconomyBasicstoUnderstandHowGovernmentsWork AP ComparativeGovernment and Politics

2. WhatisEconomy? From the Greek word oikonomos, meaning "one who manages a household,"  Economy is the organized system of human activity involved in the production, consumption, exchange, and distribution of goods and services. Economy also refers to the way in which resources, especially those in shortage, are managed in a competent and appropriate manner.

3. There are fourbasicEconomicSystems

4. Traditional Economic System A traditional economic system is based on goods and services that are directly related to the country’s beliefs, customs, and traditions. It relies heavily on individuals and does not usually show a significant degree of specialization and division of labor. In this type of economic system, there is almost no surplus. Each member of a traditional economy has a more specific and pronounced role, and these societies tend to be very close-knit and socially satisfied. However, they may lack access to technology and advanced medicine.

5. Many parts of the world still qualify as traditional economies, especially rural areas of developing countries, where most economic activity revolves around farming and other traditional activities.  These economies often suffer from a lack of resources, because those resources don’t naturally occur in the region or because access to them is highly restricted by other, more powerful economies.

6. Hence, traditional economies are usually not capable of generating the same amount of output or surplus that other types of economies can produce.  However, the relatively primitive processes are often much more sustainable and the low output results in much less waste than we see in any command, market, or mixed economy.

7. Command Economic System Most of the economic system is controlled by a centralized power. Since the government is such a central feature of the economy, it is often involved in everything from planning to redistributing resources. A command economy is capable of creating a healthy supply of its resources, and it rewards its people with affordable prices. This capability also means that the government usually owns all the significant industries like utilities, transportation, and communications. An example is the USSR where most decisions were made by the central government. This type of economy was the core of the communist philosophy.

8. In a Command Economy, it is theoretically possible for the government to create enough jobs and provide goods and services at an affordable rate. However, in reality, most command economies tend to focus on the most valuable resources, like oil. China or D.P.R.K. (North Korea) are examples of command economies. Advantages of Command Economic Systems If executed correctly, the government can mobilize resources on a massive scale. This mobility can provide jobs for almost all of the citizens. The government can focus on the good of the society rather an individual. This focus could lead to a more efficient use of resources.

9. Disadvantages of Command Economic Systems It is hard for the central planners to provide for everyone’s needs. This forces the government to ration because it cannot calculate demand since it sets prices. There is a lack of innovation since there is no need to take any risk. Workers are also forced to pursue jobs the government deems fit.

10. Market Economic System A market economic system relies on free markets and does not allow any kind of government involvement in the economy. In this system, the government does not control any resources or other relevant economic segments. Instead, the entire system is regulated by the people and the law of supply and demand. This is opposite to how a command economy works, where the central government gets to keep the profits. There is no government intervention in a pure market economy (“laissez-faire“). However, no truly free market economy exists in the world. While America is a capitalist nation, our government still regulates (or attempts to control) fair trade, government programs, honest business, monopolies, etc.

11. In this type of economy, there is a separation of the government and the market. This separation prevents the government from becoming too powerful and keeps their interests aligned with that of the markets. Hong Kong is an example of a free market society. Advantages of a Free Market Economy Consumers pay the highest price they want to, and businesses only produce profitable goods and services. There are incentives for entrepreneurship. This leads to the most efficient use of production since businesses are very competitive. Businesses invest heavily in research and development. There is constant innovation as companies compete to provide better products for consumers.

12. Disadvantages of a Free Market Economy The market economic system is a theoretical concept. That means, there is no real example of a pure market economy in the real world. The reason for this is that all economies show characteristics of at least some kind of government interference. For example, many governments pass laws to regulate monopolies or to ensure fair trade and so on. Due to the fiercely competitive nature of a free market, businesses will not care for the disadvantaged like the elderly or disabled. Since the market is driven solely by self-interest, economic needs have a priority over social and human needs like providing healthcare for the poor. This leads to higher income inequality. Consumers can also be exploited by monopolies.

13. Mixed Economic System A mixed economy is a combination of different types of economic systems. This economic system is a cross between a market economy and command economy. In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas like transportation or sensitive industries like defense and railroad. However, the government is also usually involved in the regulation of private businesses. The idea behind a mixed economy was to use the best of both worlds – incorporate policies that are socialist and capitalist. To a certain extent, most countries are mixed economic system. For example, India and France are mixed economies.

14. Advantages of Mixed Economies There is less government intervention than a command economy. This means that private businesses can run more efficiently and cut costs down than a government entity might. The government can intervene to correct market failures. For example, most governments will break up large companies if they abuse monopoly power. Another example could be the taxation of harmful products like cigarettes to reduce a negative externality of consumption. Governments can create safety net programs like healthcare or social security. In a mixed economy, governments can use taxation policies to redistribute income and reduce inequality.

15. Disadvantages of Mixed Economies There are criticisms from both sides arguing that sometimes there is too much government intervention and sometimes there isn’t enough. A common problem is that the state run industries are often subsidized by the government and run into large debts because they are uncompetitive.

16. Who owns the means of production in economic systems? An economy's means of production are its capital: factories, farms, shops, mines, and machinery. The means of production are used to produce other goods and services. If the government owns and operates almost all of the nation's means of production, then that nation's economic system is called communism. China has a communist economic system. Almost all of the means of production are owned by the government. Government planners decide the answers to the basic economic questions. Farming on private plots of land is sometimes allowed. In recent years, the Chinese government has been allowing more and more private businesses to operate.

17. If the government owns and operates many of the nation's major industries, such as banks, airlines, railroads, and power plants, but allows individuals to own other businesses, including stores, farms, and factories, that nation's economic system is called socialism. Sweden is a country whose economic system is often described as socialist. Most of its major industries, such as coal mining, electric power, gas, telephone, and railroads, are owned by the government. Under Sweden's national health insurance system, the people receive free medical services all their lives. If almost all the stores, factories, and farms in a nation are owned and operated by private individuals or businesses, then its system is called free enterprise, or capitalism. The U.S. has a free enterprise, or capitalist, economic system.

19. No country has an economic system that is 100 percent communism, socialism, or capitalism. Almost all countries today have mixed economic systems or mixed economies, with some free enterprise and some government ownership. In the United States, as in most capitalist countries, there are many examples of government ownership. Public colleges, high schools, and elementary schools, for example, are owned and operated by state or local governments. Other publicly owned enterprises are the postal service, many municipal bus lines and trains, a few electric power plants, and housing projects.

20. Basic EconomicConcepts Wants - Simply the desires of citizens. Wants are different from needs. Wants are a means of expressing a perceived need. Wants are broader than needs. Needs - These are basic requirements for survival like food and water and shelter. In recent years we have seen a perceived shift of certain items from wants to needs. Telephone service, to many, is a need. I would argue, however, that they are wrong. Scarcity - The fundamental economic problem facing all societies. Essentially it is how to satisfy unlimited wants with limited resources. Good - Tangible commodity. These are bought, sold, traded and produced. Consumer Goods - Goods that are intended for final use by the consumer. Capital Goods - Items used in the creation of other goods; factory machinary, trucks, etc.

21. Factors of Production/Resources - These are those elements that a nation has at its disposal to deal with the issue of scarcity. How efficiently these are used determines the measure of success a nation has: • Land - natural resources, etc. • Capital - investment monies. • Labor - the work force; size, education, quality, work ethic. • Three Basic Economic Questions - These are the questions all nations must ask when dealing with scarcity and efficiently allocating their resources. • What to produce? • How to produce? • For whom to produce?

22. Economic Indicators The economy is visualized as an animate object. An economy may be healthy, productive or efficient. Likewise, an economy may be weak, slow or inefficient. The question is, how do we know how to classify our economy? GNP - GROSS NATIONAL PRODUCT Economists have devised numerous statistics designed to ascertain the overall health of an economy. Historically, the most quoted measure of economic activity is what is called the Gross National Product. The Gross National Product (GNP) is a nation's total output of goods and services produced by a country in one year. In obtaining the value of the GNP, only the final value of a product is counted (e.g. homes but not the construction materials they were built with). The three major components of GNP are consumer purchases, government spending, private investment and exports. The formula is thus: C + G + I + X = GNP

23. GDP - GROSS DOMESTIC PRODUCT The Gross Domestic Product (GDP), is the monetary value of all goods and services performed in a nation in one year. GDP measures the economic strength of a nation. It is computed by multiplying the quantity of all goods and services by its price. When this is done for all three categories, Consumer spending, Government Spending and Investments, the results are added to give us the GDP. C + G + I +F = GDP In the last several years GDP has gained favor as a more accurate barometer of the state of the economy. With growing globalization, a nation’s economy is increasingly reliant on goods it produces beyond the national borders. While GNP does not calculate this, GDP does.

24. REFERENCES: https://www.intelligenteconomist.com/types-of-economies/ https://blog.udemy.com/types-of-economic-systems/ http://www.socialstudieshelp.com/Eco_indicators.htm