Ch. 26 Comparing Economic Systems Section 2 Economic Systems

Market Economies The way a society answers the basic economic questions of What, How, and For Whom to produce determines its economic system. In a pure market economy, decisions are made in free markets by the interaction of supply and demand; DOES NOT EXIST Private citizens—not the government—own the factors of production (natural resources, capital, labor, and entrepreneurship)

Market Economies (cont.) The desire to earn a profit is what drives businesses to make decisions about 3 basic economic questions; at the same time consumers make decisions about what to buy. Supply and Demand interact in the markets to set prices; decisions are made by producers and consumers based on price. A market economy is decentralized—decisions are made by all the people, not just a few; no coordination of decisions

Market Economies (cont.) In the U.S., the government plays several important roles in the economy. Provides Public Goods Regulates businesses to maintain competition Works to reduce negative externalities and increase positive externalities Externality—unintended side effects that have an influence on third parties

Market Economies (cont.) Most of the largest economies of the world are market economies. GDP explains the value in dollars of all final goods and services produced in a country in a year; it can be expressed in terms of each person within that country. Per Capita GDP—dividing GDP by a country’s population

Market Economies (cont.) By using Per Capita GDP, we can compare one nation’s economic success to another without regard to the size of the two economies. Most countries which have high per capita GDP, including the U.S., have market economies. Page 718 has a map comparing countries per capita GDP

Command Economies In a pure Command Economy, the central government makes the major economic decisions. Individuals have few choices and little influence over the economy Also referred to as a controlled economy, socialism, or communism

Command Economies (cont.) Socialism—the belief that the means of production should be owned and controlled by society, either directly or through government. Socialists feel that wealth should be distributed equally among all citizens. Karl Marx, a German philosopher and socialist, believed that industrialized nations would eventually succumb to a violent revolution.

Command Economies (cont.) Karl Marx believed that that industrialized nations were divided into two types of people Bourgeoisie – capitalists who owned the means of production Proletariat – workers who produce the goods Marx saw history as a class struggle in which workers would eventually overthrow the capitalists

Command Economies (cont.) In time socialism would evolve into communism– one class exists in which property would all be held in common and there would be no need for governments In a command economy, the government owns most productive resources, especially land and capital. Government answers all 3 of the basic economic questions Government is responsible for fixing wages of workers and setting prices for goods.

Command Economies (cont.) Governments in nations with command economies have planning agencies which control different parts of the economy Agriculture Steel production Command economies can be very inefficient which results in slower growth and lower per capita GDPs than market economies Ex. Former Soviet Union, Cuba, North Korea

Mixed Economies Have the basic elements of a pure market economy and a command economy. Most countries in the world have a mixed economy Private ownership and individual decision making + government intervention and regulation The U.S. is a mixed economy; Actually it is market economy with government regulations.

Section 3 Economies in Transition Many nations of the world today are changing economic types Some are shifting from command economies to market economies; others are moving from traditional economies to more developed ones Toward the end of the Cold War, command economies were unable to achieve the economic growth that the West was able to reach.

Failure of Command Economies By 1991, Eastern Europe began the gradual change both economically and politically. In the Soviet Union, the GOSPLAN, planned the production and distribution of thousands of products. Mistakes were made by those who had no economic knowledge Too many instances of shortage or surplus of supply Supplies not shipped to where they were needed

Failure of Command Economies (cont.) When the Soviet Union broke into smaller countries in 1991, Communist leaders could not keep the economy afloat Russian leaders called for a conversion to a market economy, but there were problems: State owned factories had to be switched to private ownership Stock markets had to be created Let the forces of supply and demand guide the market naturally

Failure of Command Economies (cont.) China was in the same situation but their transition has been a smoother process and somewhat of a head start. 1980’s, began to introduce market reforms due to falling behind Asian countries such as South Korea and Taiwan. China’s economy has grown 10% every year for the past 20 years People have access to goods and services they could have never had with the old economy

Failure of Command Economies (cont.) Even though some success has been achieved, serious problems remain Global interdependence has caused domestic farmers difficulty competing with cheaper foreign food. 160 million unemployed in the country with limited skills and starving

Developing Countries Developing countries – country whose average per capita income is only a fraction of that in more industrialized countries. These countries often have traditional economies – economic decisions are based on custom or habit. The way of life is passed down from generation to generation with little changing; little to no technology

Developing Countries (cont.) Developing countries are often poor and want to convert to a market economy but there are 5 problems they may face: High Rate of Population Growth If population grows faster than a nations GDP, per capita GDP declines What you are left with is a smaller share of what the country produces for each person.

Developing Countries (cont.) Landlocked Some countries may not have access to ocean trade routes; lack of natural resources War Destroys a countries infrastructure—roads, bridges, factories, hospitals etc. Human resources are lost (only the very young and very old are left); skills are lost or are not efficiently used; agriculture disrupted (land mines)

Developing Countries (cont.) Debt Countries borrow large sums to spark economic growth, but GDP is less per year than the money they owe; interest alone is too much for third world nation to pay back. Corruption in government Delays development because resources or money is horded or used inefficiently (civil wars)