Economic Systems

1. Mr. Townsend Woodstock Middle School Economic Systems

2. Lesson Objectives/Goals • Describe and compare the economic systems predominate in the world today. • Compare and contrast traditional, command and market economies. • Explain how mixed economies are a combination of other economic systems.

3. The fundamental economic problem in any society is to provide a set of rules for allocating resources and/or consumption among individuals who can't satisfy their wants, given limited resources.

4. 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. They are: • What and how much will be produced?Literally, billions of different outputs could be produced with society's scarce resources. (Scarcity- A limited amount of materials to supply an unlimited demand) • 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 unskilledlabor to substitute for fewer units of skilled labor. • For whom will it be produced?Once a commodity is produced, some mechanism must exist that distributes finished products to the ultimate consumers of the product. The mechanism of distribution for these commodities differs by economic system.

5. On the RIGHT side of your paper draw these circles, take up the whole page! What to Produce How much to produce Who to produce for

6. Interactive Notebook Question • Think-Pair-Share: • What are the three basic questions every economic system must ask?

7. While there are many terms that are used to describe the types of economies that exist in the world, most economists agree that there are four major types of economic systems.

8. On the RIGHT side of your paper draw this chart, take up the whole page!

9. Market economy • An economic system in which individuals own and operate the factors of production. • AKA: Free enterprise, Capitalism • United States, Great Britain, Japan

10. Market Economies • Resources are owned and controlled by individuals • Economic decisions are made by individuals competing to earn profits • Individual freedom is considered very important • Economic decisions are made by the basic principals of supply and demand • Profit is the motive for increasing work rather than quotas

11. Market Economies • Also called capitalist economies • There are many economic freedoms • There is competition among businesses • Competition determines price which increase the quality of the product

13. Command economy • An economic system in which the government owns and operates the factors of production. • AKA: Socialism, Communism • Cuba, China, Laos

14. Command Economies • The government or other central authority makes decisions and determines how resources will be used • Change can occur relatively easily • There is little individual freedom • There is no competition • Businesses are not run to create a profit

15. Command Economies • Consumers have few chooses in the market place • Factories are concerned with quotas • Shortages are common because of poorly run factories and farms • The government dictates the job in which you work

16. Command Economies • The government sets the prices of goods and services • Examples of command economies: Cuba, North Korea and the People’s Republic of China

18. Traditional economy • An economic system based upon customs and traditions. Economy is based upon agriculture and hunting. • Traditional economies are found in rural, non-developed countries • Some parts of Asia, Africa, South America and the Middle East have traditional economies • Customs govern the economic decisions that are made • Technology is not used in traditional economies. • AKA: Non-Industrialized, Agrarian societies • Chad, Haiti, Rwanda

19. Traditional economy • Farming, hunting and gathering are done the same way as the generation before • Economic activities are usually centered toward the family or ethnic unit • Men and Women are given different economic roles and tasks

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

22. Mixed Economies • Government and individuals share the decision making process • Government guides and regulates production of goods and services offered • Individuals own means of production • Protects consumers and workers from unfair policies • Most effective economy for providing goods and services

23. 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. Minimum wages, social security, and regulatory policies are examples of government involvement. • 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. • 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 economy are quite different.

25. The Differences Between Market and Command Economies

26. Gross domestic product (GDP) b • is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year).

27. Map of countries by 2007 GDP (nominal) per capita (IMF, April 2008).

28. Factors of Production • Human Resources (Human Capital) • Capital ($$$) • Natural Resources • Entrepreneur

29. Human Resources (Human Capital) • The health, education, experience, training, skills and values of people. • Employees-humans needed because machines cant to the job.

30. Building a Workforce • How a country manages is productive resources makes a big difference in the strength of its economy. • Investing in HUMAN CAPITAL will pay off for years to come. • As humans increase their knowledge they are capable of completing more complex tasks which are more valuable to businesses.

31. Capital Resources • Resources made and used to produce and distribute goods and services: examples include tools, machinery and buildings

32. Natural resources • “Gifts of nature” that can be used to produce goods and services. • AKA: Land. • There are 2 types of natural resources: Renewable and Non-renewable. • Natural resources include soil, timber, oil, minerals, and other goods taken more or less from the Earth.

33. Pick one of the following country examples to analyze and determine if starting a business there would work, explain your theory • Country “A” has a very skilled labor force of college and trade school education, very few natural resources, and is in a financial depression with little capital. • Country “B” has a hard working labor force of traditional farmers, large amounts of natural resources, yet only has minimal capital for new businesses. • Country “C” has a somewhat skilled labor force of high school level education, extensive natural resources, and limited capital for new investment.

34. Entrepreneur • One who draws upon their skills and initiative to launch a new business venture with the aim of earning a profit. Often a risk-taker, see opportunity when others do not.

35. Entrepreneur • Why start your own business? • Profit is a company's earnings after all expense are paid. • Profit provides incentive for entrepreneurs.

36. Entrepreneurs • Entrepreneurs invest personal resources and risks losing those resources if the business fails. • They share the risk when borrowing from banks or a wealthy investor. • Entrepreneurs are good for the economy since they create jobs. • Who are famous Entrepreneurs?

37. Trade Barriers • A trade barrier is a general term that describes any government policy or regulation that restricts international trade. The barriers can take many forms, including: • quotas • Tariffs • Embargo • Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results. • Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage.

38. Tariffs • A tariff is a tax on goods when they cross a national border. • A "protective tariff" is intended to artificially inflate prices of imports and "protect" 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.

39. Quotas • An import quota is a type of protectionist trade restriction that sets a physical 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.

40. Embargo • An embargo is the prohibition of trade with a certain country, in order to isolate it and to put its government into a difficult internal situation, given that the effects of the embargo are often able to make its economy suffer from the initiative. • The embargo is usually used as a political punishment for some previous disagreed policies or acts, but its economic nature frequently raises doubts about the real interests that the prohibition serves.

41. Specialization or Division of Labor • Each person specializes in one occupation, to become the best at that job as possible, while others do the same with other occupations. Basically, it's a working society that does many different jobs. Example: A few people do farming, a few people do pottery, and a few people are blacksmiths. The society works together to make the society wealthier and more efficient. • In Plato's Republic, "Well then, how will our state supply these needs? It will need a farmer, a builder, and a weaver, and also, I think, a shoemaker and one or two others to provide for our bodily needs. So that the minimum state would consist of four or five men...." (The Republic, Page 103, Penguin Classics edition.)

42. Specialization or Division of Labor • Geographical Specialization: land use is naturally suited to specific situation. • Labor Specialization: achieved when the population process is broken into tiny tasks. The idea is referred to as the division of labor.

43. Currency Exchange

44. Forms of Currency • Shells • Precious Metals • Silver • Gold • Bills or Notes • Paper $ (Dollars, Peso, Euro, and so on) • Plastic • Debit and Credit Cards • The Future?????? • Does every country have their own money???

45. Foreign Exchange Market: What Is It? • To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all over the world. • When Canadians buy oil from Saudi Arabia they may pay in U.S. dollars and not in Canadian dollars or Saudi riyals, even though the United States is not involved in the transaction. • The foreign exchange market, or the "FX" market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate.

46. The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens—there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions—United Kingdom, United States, and Japan. • The FX market is fast paced, volatile and enormous—it is the largest market in the world. In 2001 on average, an estimated $1,210 billion was traded each day—roughly equivalent to every person in the world trading $195 each day.

47. Currency Exchange • Most common contact with foreign exchange occurs when we travel or buy things in other countries. • Suppose a U.S. tourist travelling in London wants to buy a sweater. Price tag is 100 pounds (Symbol for pounds: £). • Current exchange rate Price of sweater in dollars • $1.45 to £1 100 x 1.45 = $145.00 • $1.30 to £1 100 x 1.30 = $130.00 • $1.60 to £1 100 x 1.60 = $160.00 • $2.00 to £1 100 x 2.00 = $200.00 • For businesses or governments that trade billions of dollars, even small changes in the exchange rate become significant.

48. How does FX affect an economy? • When the United States dollar (symbol: USD) becomes stronger, then foreign goods and services become cheaper, and goods and services from the United States will become more expensive. Consequently, imports to the United States will increase and exports will decrease. • When the dollar becomes weaker with respect to other currencies, then the opposite happens: goods and services from the United States become cheaper, thereby increasing exports, and foreign goods and services will become more expensive, thereby lessening imports.

49. Currency Exchange • Exchange rates are an important consideration when making international investment decisions. The money invested overseas incurs an exchange rate risk. • When an investor decides to cash out, or bring his money home, any gains could be magnified or wiped out depending on the change in the exchange rates in the interim. Thus, changes in exchange rates can have many repercussions on an economy: • Affects the prices of imported goods. • Affects the overall level of price and wage inflation. • Influences tourism patterns. • Will influence consumers’ buying decisions and investors’ long-term commitments.

50. Sources for currency demand on the FX market • The currency of a growing economy with relative stability and a wide variety of competitive goods and services will be more in demand than that of a country in political turmoil, with high inflation and few marketable exports. • For example: • News of political instability in a country drives down the demand for its currency • A country’s interest rates rise and its currency appreciates as foreign investors seek higher returns than they can get in their own countries. • Developing nations undertaking successful economic reforms may experience currency appreciation as foreign investors seek new opportunities.