ECONOMIC FOUNDATIONS

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ECONOMIC FOUNDATIONS
3.04 Compare and contrast the types of economic
systems
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Economic Systems

• Market economies
• Command economies
• Mixed economies

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Market Economy

• The market answers the 3 economic questions.
• Consumers decide what should be produced
  businesses determine how products should be
  produced people with the most money are able to
  buy goods and services.
• United States and Japan have market economies.

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Command Economies

• Government answers the three basic economic
  questions
• Socialism and Communism

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Communism

• Most of the means of production and distribution
  are owned and controlled by the government
• All people who are willing to work are assigned
  jobs
• Government decides the type of schooling people
  will receive
• Government tells people where to live

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Communism (cont.)

• Medical care is free
• Today, most communist economies have begun to
  collapse because there is no incentive to
  increase productivity
• North Korea, China, and Cuba

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Socialism

• Government owns part of the means of production
  and determines how products are distributed
• Private ownership of economic resources is
  allowed
• People pay high taxes to pay for government
  services
• Welfare states
• Germany, France, Great Britain

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Mixed Economies

• Capitalist Model
• Socialist Model
• Communist Model
• Economies in Transition

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Capitalist Model

• More than one political party
• Election of government officials
• Private ownership of businesses and marketplace
  competition
• Government is concerned about the people and
  cares for those who cannot care for themselves

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Socialist Model

• Most socialist countries today have democratic
  political institutions
• Key industries are run by the government in order
  to keep prices low and provide employment
• Great number of social services to ensure a
  certain standard of living for everyone
• Higher taxes than in capitalist countries

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Communist Model

• Totalitarian form of governmentone political
  party
• Very few totally communist countries left in the
  world today
• China is liberalizing its economic practices and
  is moving toward a more capitalist economy

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Economies in Transition

• Breakup of the Soviet Union is an example of an
  economy moving from command to market economy
• Most European countries that were once communist
  are now moving towards a democratic form of
  government
• Many state-owned industries are becoming
  privatized

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When is an economy successful?

• Economic measurements
• PRODUCTIVITY
• GROSS DOMESTIC PRODUCT (GDP)
• GROSS NATIONAL PRODUCT (GNP)
• STANDARD OF LIVING
• INFLATION RATE
• UNEMPLOYMENT RATE

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PRODUCTIVITY

• Output per worker hour
• Measured over a defined period of time such as a
  week, month, or year

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GROSS DOMESTIC PRODUCT (GDP)

• A measure of the goods and services produced
  using labor and property located in this country
• Everything produced in this country in a year

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GROSS NATIONAL PRODUCT (GNP)

• Everything produced by US citizens here or abroad
• Was the principal way of measuring productivity
  in the US until 1991

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STANDARD OF LIVING

• A measurement of the amount of goods and services
  that a nations people have
• Reflects peoples quality of life
• GNP/Population

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INFLATION RATE

• Rising prices
• Low inflation rate stable economy
• High inflation rate (10) means less buying
  power for consumers

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UNEMPLOYMENT RATE

• When unemployment is high, the economy is slowing
  down
• When unemployment is low, the economy is expanding

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• Prosperity
• Recession
• Depression
• Recovery

BUSINESS CYCLE
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Prosperity

• Period of economic growth
• Low unemployment
• Increase in output of goods and services
• High consumer spending

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Recession

• Period of economic slowdown
• Rising unemployment
• Fewer goods and services are being produced
• Consumer spending decreases

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Depression

• Prolonged and deep recession
• Very low consumer spending
• Very high unemployment
• Very low production of goods and services
• Poverty is the result of depression

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Recovery

• Renewed economic growth following a recession or
  depression
• Reduced unemployment
• Increased consumer spending
• Moderate expansion by business