1. Chapter 2 Section 4 Modern Economies
Economic Systems
Chapter 2 Section 4
Modern Economies

2. Economic Systems – Section 3
1. How do socialism and communism differ?
2. What characterizes an authoritarian government?
3. Why did Soviet collective farms offer little incentive to farmers?
4. In the Soviet Union, what was the opportunity cost of the emphasis on heavy industry?

3. Economic Systems Objectives: Explain the rise of mixed economies.
Interpret a circular flow model of a mixed economy.
Compare the mixed economies of various nations along a continuum between centrally planned and free market systems.
Understand the role of free enterprise in the economy of the United States.

4. Economic Systems
Most economies in today’s world are a mixture of economic systems.
Most contemporary mixed economies blend the market with government intervention, or involvement, in the marketplace.

5. Economic Systems The Rise of Mixed Economies:
No single economic system has all the answers.
Command Economies are cumbersome, do not adequately meet consumer needs, and limit freedom.
Traditional Economies have little potential for growth or change.
Market Economies, with all their advantages, have certain drawbacks.

6. Economic Systems The Rise of Mixed Economies:
Adam Smith noted that laissez faire was the way to go with an economy. It would raise the standard of living in a country.
Smith did acknowledge the need for a certain limited degree of government intervention in the economy.
Since Smith’s time, government intervention has continued to grow.
Some needs that markets could meet fall to governments so that all members of a society can participate. Education is one example.

7. Economic Systems The Rise of Mixed Economies:
Health care and mass transit may also fall into the category that the government helps with.
Governments create laws protecting property rights and enforcing contracts.
There would be little incentive to develop new products without property rights or patent laws.
Without out protection, some firms would dominate all the other firms in the industry.

8. Economic Systems The Rise of Mixed Economies:
A society must assess its values and prioritize It economic goals.
Some goals are better met by the open market and other are better met by government action.
In addition, societies must evaluate the opportunity costs of pursuing each goal.
Each nation decides what it is willing to give up to meet its goals? Are they willing to pay taxes to fund the army? To give money to people without jobs? and etc.

9. Economic Systems
A Circular Flow Model of a Mixed Economy:

10. Economic Systems A Circular Flow Model of a Mixed Economy:
Government purchases land, labor, and capital from households in the factor market.
Government purchases goods and services in the product market.
Government also provides certain goods and services through the factor resources that they combine.
The Federal, State, and Local governments in the US provide 4 million miles of road.

11. Economic Systems A Circular Flow Model of a Mixed Economy:
The government also collects taxes from households and firms (businesses).
The government then transfers the money they collect to businesses and individuals for a variety of reasons from worker disability to Social Security.

12. Economic Systems Comparing Mixed Economies:
The foundation of the US economy is the free market.
An economic system characterized by private or corporate ownership of capital goods is called free enterprise.
In a free enterprise system investments are determined in a free market by private decisions rather than by state control.

13. Economic Systems Comparing Mixed Economies:
Mixed Economies where government intervention dominates.
North Korea has a type of government that totally dominates the economy.
The Government owns all the property and all economic output.
State-owned industries produce 95% of North Korea’s goods.
Almost all imports are banned from the country, and production of goods and services by foreign companies is forbidden.

14. Economic Systems Comparing Mixed Economies:
In China, the economy is dominated by the government, ¼ of all enterprises are at least partly owned by individuals.
China is a nation that relies heavily on central planning in the past is in transition – a period of change on which an economy moves away from central planning toward a market-based economy.
To make this transition, state firms must be privatized – or sold to individuals, and then allowed to compete with one another in the marketplace.

15. Economic Systems Comparing Mixed Economies:
Mixed Economies where the market system dominates.
Hong Kong – has one of the world’s freest markets.
It was once dominated by Great Britain, but is now a special administrative region of China.
It continues to be a largely free economic system.
In Hong Kong, the private sector rules.
The government protects private property and rarely interferes in the free market, aside from establishing wage and price controls on rent and some public services.

16. Economic Systems Comparing Mixed Economies:
Hong Kong is highly receptive to foreign investment and imposes virtually no barriers on foreign trade.
Banks in Hong Kong operate independently of the government, and foreign-owned banks have nearly all the same rights as domestic banks.

17. Economic Systems The United States Economy:
The US has a free enterprise economy.
The government intervenes to keep order, provide vital services, and to promote the general welfare.
Some people argue for more government services while others argue that the government provides to many services.
US does enjoy a high level of economic freedom.
The government does intervene some in the economy.

18. Economic Systems The United States Economy:
The US has laws protecting private property.
Foreign investment is encouraged by this country.
US does protect some domestic industries from foreign competition.
The US does regulate some trade restrictions with some countries. i.e. - China and their human rights views or lack of human rights in the country.
The banking industry operates under relatively few restrictions and foreign-owned banks have a few additional restrictions.

19. Economic Systems REVIEW: 1. What is laissez faire?
2. Why have some nations begun a transition to a free enterprise?
3. What are nations with centrally planned economies sometimes slow to succeed when they privatize industry?
4. Compare the US free enterprise system with other economic systems we have talked about today?