Economic Systems

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Economic Systems

• ECON 216 Dr. Lou Pantuosco

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The Macro picture

• What is an economy? The large set of
  inter-related economic production and
  consumption activities which aid in determining
  how scarce resources are allocated.
• What is economics? The allocation of scarce
  resources among competing uses.
• What are the resources that are considered
  scarce?
• Land, labor capital and entrepreneurial spirit

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Types of Economic Systems

• North Korea choose to spend 33 of GDP on
  military!
• Canada spends 1 of their GDP on military!
• The question that each economy faces is whether
  they want prices, quantities, distribution of
  goods and services, and distribution of income to
  be determined by the private sector or the public
  sector.
• Private sector made up of consumers and
  businesses.
• Public sector is the government. There are
  different levels of government local, state and
  federal.
• Some services are produced by both private and
  public agencies such as education, trash
  collection, and security.
• The groups in the economy are consumers,
  businesses, and government.

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Economic Development from above
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The Earth at Night
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Types of Economies

• Who makes the decisions?
• Traditional System decisions are made by the
  elders
• Command System decisions are made by central
  government
• Communist
• Socialism 
• Market Economy decisions are made by individuals
• Mixed Economy individuals make some decisions the
  central authority make some decisions

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US Government spendingthe U.S. is a MIXED
ECONOMY
http//www.usgovernmentspending.com/
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Foundational Tenets of Capitalism

• Addressing the Issues of
• Resource Ownership
• Property Rights
• Free Trade
• The Five Foundation Questions

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Resource Ownership

• Who owns the property?
• Communism communal ownership
• Socialism government ownership
• Capitalism private ownership
•  

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Property Rights are a key component of each
economic system

• The definition, allocation, and protection of
  property rights comprise one of the most complex
  and difficult sets of issues that any society has
  to resolve, but one that must be resolved in some
  fashion. For the most part, social critics of
  property rights do not want to abolish those
  rights. Rather, they want to transfer them from
  private ownership to government ownership. Some
  transfers to public ownership (or control, which
  is similar)
  make an economy more effective. Others
  
  make it less effective. The worst outcome
  
  by far occurs when property rights really
  
  are abolished. The Tragedy of the Commons
  
  is an example of the value of property
  rights.

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Trade Options in a Capitalistic Economy

• Another key component is each countrys policy
  regarding trade.
• Free Trade - The theory of comparative advantage
  supports the concepts of specialization and
  exchange
• Fair Trade evaluates trade policies between
  countries to insure a level playing field.
• Protectionism isolates a country in a world
  economy. The objective is to protect domestic
  jobs.

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The impact of trade on consumer prices

• Prices will differ in each of the trade
  approaches.
• Free trade low prices, products made in low
  wage/ high productivity plants
• Fair trade price most likely higher,
  government subsidies will be offset by tariffs or
  taxes placed on foreign goods
• Protection higher prices, more American jobs

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Within the developed countries there is a
progression towards specialization and exchange.

• Specialization each person concentrates on a
  limited number of tasks or activities
• Exchange trading with others to obtain our desires

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Theory of Comparative Advantage

• This theory has worldwide implications, because
  some countries have sectors that have to
  sacrifice for the good of the world i.e. US
  television or apparel producers.
• This theory also promotes world trade.
•  
• An absolute advantage is the ability to produce
  a good or service using fewer resources than
  other producers use.
•  
• Those who make economic decisions must decide
  how to allocate the resources within the economy
  (land, labor, capital, entrepreneurial spirit).

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Theory of Comparative Advantage

• A basic tenet of free trade
• The Theory of Comparative Advantage claims that
  the country (economy) with the relatively lower
  opportunity cost should produce the goods.
• For example
• The US can produce corn for 100 per ton, and
  televisions for 25 per set.
• Japan can produce corn for 200 per ton, and
  televisions for 15 per set.
• What should each country produce?
•  
• The US can produce corn for 100 per ton, and
  televisions for 10 per set.
• Japan can produce corn for 200 per ton, and
  televisions for 15 per set.
• What should each country produce?
• The US can produce corn for 100 per ton, and
  televisions for 5 per set.
• Japan can produce corn for 200 per ton, and
  televisions for 15 per set.
• What should each country produce?

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Resource Allocation

• Basic Economic Questions
• We will answer the following five questions from
  a market economy/ capitalist perspective.
• How much should the economy produce?
• What should be produced?
• How should the output be produced?
• Who should receive the output that is produced?
• Can the system adapt to change?

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1. How much should the economy produce?

• It depends on their resources. A given economy
  can only produce as much as their resources allow
  them to. At this point Mexico can not produce as
  much as the US.

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1. How much should the economy produce?

• The Production Possibility Frontier
• medicine
  tanks
• Combination A 200 0
• Combination B 150 50
• Combination C 100 75
• Combination D 50 90
• Combination E 0 100
•   
• 1. Graph the combinations. 
• 2. Starting at 150 combination B, in terms of
  tanks, how many tanks does it cost the government
  to purchase 50 units of medicine?
• 3. If the government becomes better at producing
  both medicine and tanks, what will happen to the
  production possibility frontier? 
• 4. If the government becomes better at producing
  tanks, but not medicine what happens to the
  production possibility frontier?
• 5. How will it be shown of the PPF, if the
  government has to use some of their money to pay
  the interest on their debt, or uses their money
  inefficiently?

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1. How much should the economy produce?

• The Production Possibility Frontier

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2. What should be produced?

• Leave it up to the individuals in society. Let
  the demand of the consumers determine what should
  be supplied. Adam Smith, the founder of
  economics, referred to the above philosophy as
  the "invisible hand".

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3. How should the output be produced?

• Internationally, the country that should produce
  the goods or services is the one(s) with the
  relatively lower opportunity cost (this is known
  as Theory of Comparative Advantage)
•  
• Within a given country, the companies that
  produce the goods are the ones that are the most
  profitable and efficient. (Survival of the
  fittest)
•  

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4. Who should receive the output that is produced?
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Income Growth by Quintile
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4. Who should receive the output that is produced?

• In the United States, the goods and services
  produced are distributed to those who can pay for
  them.
• In Europe there is more government involvement to
  keep incomes closer between classes. The Closer
  the dots the more evenly distributed the income.

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Income Distribution in Europe
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5. Can the system adapt to change?

• How have cars changed in the past ten years?
• How have clothes changed in the last decade?
• Changing structure of the American economy.
• Flaws of each system ?.. 
• Should everyone be paid the same? 
• If the government becomes too strong who will
  they be accountable to?
• If the rich become too wealthy will class warfare
  result?

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What we wear, how we listen to music
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What we drive and how we communicate on the
phone, all adapt to changes in preferences
and technology!
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The Choice of a Country

• As a country, we have a choice of which economic
  system that we want to choose.
• In the 1950s, the government investigated
  millions of federal and state employees to test
  their allegiance toward capitalism and against
  communism.
• Now the battle has moved more toward, what the
  government can and should do for their citizens.
  Should they provide jobs, income, education,
  health care or should individuals be responsible
  to provide for themselves?