1. TOPIC 2 ECONOMIC SYSTEMS

2. ECONOMIES BASED ON TRADITION In a traditional economy, resource use and social behavior are dictated by ritual, habit, or custom. Examples of traditional economies include the central African Mbuti, the Australian Aborigines, and the Inuit of Northern Canada. The main advantage of a traditional economy is that the answers to WHAT, HOW, and FOR WHOM to produce are determined by customs and tradition. The main disadvantage of a traditional economy is that it tends to discourage new ideas and new ways of doing things.

3. ECONOMIES BASED ON COMMAND In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce. Socialism is a modern, somewhat more liberal version of a command economy. The main advantages of a command economy are that it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford. Disadvantages include the loss of individual freedom to choose, the production of low- quality goods, a large decision making bureaucracy, and lack of individual initiative.

4. ECONOMIES BASED ON MARKETS A market economy is based on capitalism. Supply, demand, and the price system help people make decisions and allocate resources. People can spend money on what they want and can own resources privately. Advantages of a market economy include a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, and decentralized decision making. Disadvantages include not providing for basic needs of everyone, a shortage of some services, and a high degree of uncertainty.

5. CHARACTERISTICS OF FREE ENTERPRISE CAPITALISM A free enterprise economy has both capitalism and free markets. Characteristics of a capitalistic free enterprise economy include economic freedom, voluntary exchange, private property rights, the profit motive, and competition. Economic freedom allows you to choose your occupation, employer, and job location. Capitalism allows voluntary exchange between buyers and sellers. Private property rights allow people to own and control possessions, which gives them the incentive to work, save, and invest. The profit motive is largely responsible for the growth of a free enterprise system. Competition benefits both consumers and the economy.

6. DISADVANTAGES OF FREE ENTERPRISE CAPITALISM Periods of uneven economic growth are one of the disadvantages of free enterprise capitalism. In free enterprise capitalism, the gaps between rich and poor citizens seem to increase. In free enterprise economies, suppliers tend to combine to avoid competition, which results in fewer participants on the supply side of the market. Businesses such as corporations have most of the same rights as individuals, but they also have many responsibilities as a result of government-imposed regulations.

7. BENEFITS OF FREE ENTERPRISE CAPITALISM Individual freedom is closely related to economic freedom. Market economies produce a huge variety of goods. Market economies adjust daily, mainly through the ever-changing prices of goods and services. Intense competition in a free market capitalist economy promotes economic progress in the form of a continuing supply of newer and better products. When more and better products are produced in a free market capitalistic system, wealth is created.

8. PROBLEMS OF TRANSITION The transition of communist and socialist economic systems to capitalism has been the dominant economic trend of our lifetime. Privatization is necessary for the conversion of state-owned property to private ownership. The ruling party in a communist or socialist economy fears the loss of political power during a transition to capitalism. Citizens have to learn to make their own decisions, take initiative, interpret prices, and fend for themselves in free markets. Many countries underestimate the costs of converting to capitalism.

9. COUNTRIES AND REGIONS IN TRANSITION In Russia, the decades-long transition to capitalism has resulted in the current market- based economy, with the exception of government-controlled energy, natural resource, and defense-related industries. After the failure of the Great Leap Forward, China was influenced by successful market economies in Asia and today is undergoing some privatization and other capitalistic endeavors. In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made the transition to capitalism. After the Soviet Union collapsed, many Eastern European countries transitioned to capitalism, including Poland, Hungary, the Czech Republic, and Slovakia.

10. OTHER FACES OF CAPITALISM Compared to the U.S. government, the Japanese government is much more involved in the day-to-day activities of the private sector. By opening its markets to world trade, South Korea has progressed from one of the poorest countries in Asia in the mid-1950s to a leading producer of electronics and automobiles today. The government in Singapore has focused on a few select industries, pouring money and resources into pharmaceuticals, medical technology, and financial and high-tech industries. Taiwan has always depended on economic planning and was one of the early economic powers in Asia, but its centralized planning may hamper future economic growth.