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COMPARING AND ASSESSING ECONOMIC SYSTEMS

COMPARING AND ASSESSING ECONOMIC SYSTEMS Comparing Real-World Systems Comparing real-world systems involves understanding the forces influencing systems how they operate how they perform Forces Influencing Economic Systems

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COMPARING AND ASSESSING ECONOMIC SYSTEMS

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  1. COMPARING AND ASSESSING ECONOMIC SYSTEMS

  2. Comparing Real-World Systems • Comparing real-world systems involves understanding • the forces influencing systems • how they operate • how they perform

  3. Forces Influencing Economic Systems • Operation and performance of systems affected by many factors such as • level of economic development • systems work differently at different levels of economic development • as economies develop, their systems change • social and cultural forces • traditions and customs • social stratification by sex, race, caste, religion, etc. • environment • climate, population, access to sea, natural resources, proximity to other systems

  4. How They Work • Determination of social preferences • voting at ballot box • voting with dollars • decisions of non-elected rulers • Institutions • fundamental organizational arrangements for undertaking economic activity • perfect competition • private ownership • central planning

  5. Policy Instruments tools used by the state to achieve social or political goals fiscal instruments taxes, transfers, government spending monetary instruments open market operations reserve requirements discount rates exchange rate manipulations

  6. Direct controls regulations production orders fixing prices and wages direct allocation of resources to factories Changes in the institutional framework property rights rules for operation of markets

  7. Resource allocation and income distribution complementary approaches stressing different aspects of the same process centralized versus decentralized decision making and information command versus exchange administrative orders versus market activity planning versus market manner and extent of state intervention in the economy

  8. How They Performance • Which system works best? • Two steps involved • select criteria to be used to compare performance • assign weights to these criteria • according to one’s own preferences • according to system’s preferences • weighting not a problem if one system superior in all respects; otherwise, weights are critical

  9. Commonly used criteria economic growth efficiency distribution of income economic stability economic development Qualitative criteria that cannot be measured statistically economic freedom economic security continuation of national existence

  10. Economic Growth • Economy grows when its production capacity increases (outward shift of production possibilities curve) • An increase in output may not be growth Growth Increased Output Without Growth Capital Capital 0 0 Consumption Goods Consumption Goods

  11. Economic Efficiency • No wasted resources • Getting the most output for given inputs • On production possibilities curve Capital Efficient Not efficient 0 Consumption Goods

  12. Measuring Efficiency • Ideal measure: distance to PPC • Practical measure: factor productivity PPCs represent two countries with same resources, both operating at point A. They are equally productive, but one is efficient, the other is not. Capital A 0 Consumption Goods

  13. Distribution of Income • How equally is income distributed? • The Lorenz Curve and Gini Coefficient • What is the ideal distribution? 100% Gini Coefficient = Area A (Area A+Area B) Percent income A Lorenz Curve B 0% 100% Households ranked by income

  14. Economic Stability • Various measures • volatility of business cycle • unemployment • inflation

  15. Economic Development • Stages of development • Which system best facilitates the structural changes needed for economic development

  16. Continuation of National Existence • Was the break-up of the Soviet Union and Yugoslavia an inevitable consequence of their economic systems? • Must the remaining planned socialist economies abandon planned socialism if they are to survive?

  17. Economic Freedom and Economic Security • Milton Friedman’s “Free to Choose” • freedom of occupational choice, consumption, ownership • The security of knowing where one’s next meal is coming from • certainty of employment and income • The importance of keeping straight the different values of the three systems

  18. Difficulties Assessing Systems • Some criteria easy to define but hard to measure • distinguishing growth from business cycle • measuring efficiency • flawed measures of unemployment and inflation, especially with planned socialism • Distribution of income easy to measure but hard to assess • what is the ideal distribution?

  19. Assigning weights is highly subjective Difficult to distinguish between effect of system on performance and effects of other determinants of performance such as level of development population differences educational differences climate politics proximity to other systems

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