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Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani

Marietta College, Spring 2011. Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani. Week One Lecture Slides Source: Chapter 1 (pp 3 -15). What is an economy?.

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Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani

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  1. Marietta College, Spring 2011 Welcome to ECON 372: Comparative Economic SystemsBy: Dr. Jacqueline Khorassani Week One Lecture Slides Source: Chapter 1 (pp 3 -15)

  2. What is an economy? • A group of people who live, consume and produce in a political entity with certain geographic characteristics and institutional framework.

  3. What are the 3 basic questions that every economy has must answer? • What to produce? • How to produce? • For whom to produce?

  4. Classification of economic systems based on 6 institutional frameworks • Allocation Mechanism • How to answer the 3 basic questions • How to allocate factors of production among production of different goods and services • How to allocate goods and services among people

  5. There are 3 basic allocation mechanisms • Traditional • Allocation decisions are made based on customs, religions, habits • Market • Allocation decisions are made by individuals on the basis of the price signals • Command • Allocation decisions are made by government

  6. Examples of allocation mechanisms • US • Mostly market • Little command • Iran • Some religion  traditional • Some command • Some market • India • Some market • Some custom  caste system traditional

  7. Classification of economic systems based on 6 institutional frameworks 2) Forms of ownership of land and capital • Capitalism • Resources are owned by private individuals or group of individuals • Socialism • Resources are owned by government (local or central) • If local then allocation is mostly market based • If central  then allocation is mostly command based • Resources are owned by religious groups

  8. There are also two intermediate forms of ownership of resources • Cooperative or worker ownership • Closer to socialism or capitalism? • Example:Kantega ,a Norwegian software corporation founded in 2003. • State capitalism (several forms) • A private capitalist economy under state control • A system where state is intervening in the markets to protect and advance interests of big business. • A system where the productive forces are owned and run by a state in a capitalist way, even if such a state chooses to call itself socialist.

  9. Possible combinations of forms ownership and allocation • Usually if capitalism then market • USA • Usually if socialism then command • Soviet Union • Rarely market socialism • Yugoslavia • Rarely command capitalism • Nazi Germany

  10. Classification of economic systems based on 6 institutional frameworks 3) Role of planning • Usually if command then central planning • Usually if market then nocentral planning • Rarely command without planning • Rarely planned market economy (indicative planning)

  11. Classification of economic systems based on 6 institutional frameworks 4) Types of incentives • Material • Profits/ interest • Market capitalism • Moral • Traditional • During certain periods

  12. Classification of economic systems based on 6 institutional frameworks 5) Income Redistribution • Extreme Austrian school of thought • If free market • If Well defined property rights • If equal opportunity • Note: equal opportunity does not mean people get the same thing. • Then the outcome is a fair income distribution • No need for redistribution

  13. 2. Extreme Rawlsian school of thought • Fairness = the poorest individual being well off • Requires substantial redistribution of income • Problem? 3. Extreme Marxian school of thought • Fairness = distribution based on need • Problem?

  14. Classification of economic systems based on 6 institutional frameworks 6) Role of politics • capitalism = freedom? • socialism = dictatorship?

  15. Economic Freedom • Characteristics • Free to control one’s own labor and property. • Free to work, produce, consume, and invest in any way an individual pleases. • Freedom is both protected by the state and unconstrained by the state.

  16. Reports various nations’ index of economic freedom in 2010 at http://www.heritage.org/index/Ranking.aspx

  17. Political Freedom: Determinants • Election of head of government • Election of parliament • Fairness of electoral laws • Right to organize political parties • Power of elected representatives • Presence of an opposition • Transparency • Minority participation • Level of corruption • Freedom of assembly • Independence of the judiciary • Press freedom • Religious freedom • Rule of law • Property rights Source: EIU

  18. Index of Political Freedom in Middle East The Economist Intelligence Unit (EIU) ranked 20 Middle Eastern countries on 15 indicators of political and civil liberty. See the ranking here http://news.bbc.co.uk/2/hi/middle_east/4450582.stm

  19. Political freedom around the world http://www.freedomhouse.org/template.cfm?page=363&year=2009 Is there a correlation between economic freedom and political freedom?

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