Economic Systems and Development

1. Chapter 24, Lesson 2 Economic Systems and Development

2. Market Economies • In a market economy, individuals make the economic decisions. • Private individuals, not the government, own the factors of production including natural resources, capital, labor, and entrepreneurship. • In a way, a market economy runs itself. • Supply and demand combine to set the prices of goods and services.

3. Characteristics of a Market Economy • Market economies give people a lot of freedom. • People are free to own property, control their own labor, and make their own decisions. • Sellers compete with each other to attract the most buyers, and buyers compete with each other to find the best prices. • Most countries with high GDPs per capita have a market economy, so individuals tend to make more money.

4. Disadvantages of Market Economies • Although market economies enjoy a high degree of success, they do not grow at a steady rate. • While periods of growth are much longer than the periods of decline, people can hurt in the down times. • Some even lose their jobs. • Another problem is that businesses, driven by profit, might not give workers good working conditions or high wages. • The profit motive can also result in neglect in other areas, like being environmentally conscious.

5. Command Economies • The opposite of a market economy is a command economy. • In a command economy, the government owns the factors of production. • It has powerful planning agencies that make the major economic decisions like what goods will be produced, how they will be produced, and to whom they will go. • Most command economies have their roots in a system known as socialism, the belief that the means of production should be owned and controlled by society. • They feel that this system distributes wealth more equally among all citizens.

6. Switch to a Market Economy • Command economies are not very efficient. • For instance, Cuba and North Korea, both of which have command economies, have low GDPs per capita. • People face shortages of goods and services as well as poor quality products. • In recent years, several former command economy in Eastern Europe and Russia have decided to make the switch to market economies. • Privatization is the process of changing state-owned businesses, factories, and farms into ones owned by private citizens. • Although many of these countries struggled with the change, China’s gradual approach has brought them much economic success.

7. Mixed Economies • The U.S. economic system today is not a pure market economy. • Although it is more oriented toward a market economy, it combines elements of both. • For instance, the government does provide some goods and services such as roads, bridges, and schools. • The government also regulates some businesses to ensure competition and to make sure workers and consumers are protected.

8. Developed and Developing Countries • Standard of living is measured by such things as having plentiful goods and good health care. • Countries with high standards of living are called developed countries, and only about 35 of them exist in the world today. • Some countries have taken steps to join this group such as building export industries, but they have not yet reached the level of output of developed countries. • They are called newly industrialized countries, and examples include China, India, and Mexico. • A large number of countries, however, do not have advanced economies and therefore have low GDPs per capita. • They’re called developing countries

9. Obstacles to Development • One major obstacle is population. • When the population grows faster than the GDP, GDP per capita goes down. • Countries with the fastest population growth tend to have the lowest GDP. • Another challenge, more people means more jobs need to be created. • This leads to a rise in trade barriers in order to protect domestic jobs. • Developing countries often lack the ability to extract, use and sell their resources. • Lack of access to the sea also hinders the ability to export goods. • In a single resource economy, a nation depends on a single export for economic growth. • War is another challenge faced by developing countries. • Fighting damages resources, kills and scares away the populace, causing productivity to stop. • As a result more countries have difficulty investing in their economies.

10. Developing Countries Cont. • Many developing countries face debt. • Many borrowed large sums of money to encourage economic growth. • They have to use their income to pay back the debt. • Corruption is also a big challenge. • Leaders stole money that was meant to pay for the economic development projects or other projects to help their people. • Corrupt leaders make decisions for themselves not the country. • Many developing countries have to deal with two or three serious problems at the same time. • As a result, economic progress has been difficult for them to achieve.