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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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Word Cards
11
command economy
12
market economy
an economic system in which the three
main economic questions are answered
by the government
an economic system in which
the three main economic questions are
answered by the interaction of buyers
and sellers
Example: In a command economy,
prices are set by the government.
Example: In a market economy, prices
are set when sellers and buyers agree
on the price for a good or service.
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13
circular flow
14
mixed economy
the pattern in which
goods and services and resources flow
in the marketplace
a combination of command
and market economies
Example: In the circular flow model,
you can see how money travels from
people to businesses and back to
people again.
Example: Most countries in the world
today have mixed economies.
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
SS060602
Lesson 2
15
monopoly
16
regulation
a situation in which
one company
controls an industry or is the only
provider of a product or service
a government rule with the
force of law that states what
may or may not be done or
how something must be done
Example: The company had a
monopoly on tires so it could set the
prices high and did not have to worry
about competition.
Example: Many government
regulations are aimed at protecting the
health and safety of consumers.
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COMMAND AND MARKET ECONOMIES
Products such as bread, meat, clothing, refrigerators, and houses are produced and sold in virtually every
country of the world today. The production methods and resources used to make these products are often
very similar in different countries. For example, bread is made by bakers using flour and water, often with
salt, sugar, and yeast added, then baked in ovens. Once the bread has been baked, the loaves are sold to
consumers in stores that, at least superficially, can look very much alike, even in countries with very
different kinds of economic systems.
Command Economies and Clothing
Despite those apparent similarities, there are many differences. Let’s compare the market economies of
North America, Western Europe, and Japan to the command economies found in the former Soviet Union,
Eastern Europe, and parts of Asia over the past half century. The processes used to determine what
products to make, how to make them, what prices to charge for them, and who will consume them are
starkly different. To see those differences more clearly, let’s look at how production and sales decisions are
made in the two kinds of systems for a specific kind of products -- shirts and blouses.
In command economies, government committees of economic planners, production experts, and political
officials establish production levels for these goods and designate which factories will produce them. These
central planning committees also establish the prices for the shirts and blouses, as well as the wages for the
workers who make them. It is this set of central decisions that determines the quantity, variety, and prices of
clothing and other products.
Three problems often occur within this system: poor planning decisions, the inability to respond efficiently to
change, and limited choices for consumers. Since production and distribution decisions are made centrally,
there tends to be more surpluses and shortages. A shortage is when the products sell out quickly,
disappearing from store shelves. Products sell out quickly when factories fail to meet their production
quotas or the central planning group underestimates how many shirts people want to buy at the prices they
set. In either case, unless the planners take steps to increase production, raise prices, or both, the
shortages will continue. Surpluses occur when the central planning group underestimates how many shirts
people want to buy at the prices they set. Moreover, it is difficult for central planners to respond efficiently
to changes in the economy because decisions are made centrally. Such decision-making requires large
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
SS060602
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amounts of information. Gathering and responding to that information takes time, which makes it difficult to
respond to changing economic conditions efficiently. Finally, the choices of products tend to be limited.
When central planners make the decisions on the varieties of the product they produce and what workers
get paid, there is no incentive for individuals and businesses to be innovative, which limits choices.
As the number of people living in the command economies increases, along with the number and
sophistication of new products, it becomes harder and harder for central planners to avoid or eliminate
shortages of the many things consumers want -- or surpluses of the products they don't. With more
products, more people, and rapidly changing production technologies, the central planners face an
explosion in the number of decisions they have to make, and in the number of places and ways where
something could go wrong in their overall plan for the national economy.
Market Economies and Clothing
Big shortages and big surpluses do not happen in the market economies because economic decision
making is different. To begin with, no central government planning group decides how many shirts or
blouses to manufacture, or what styles and colors. Decisions in a market economy are made through the
interactions of buyers and sellers. Anyone -- individual or company -- can decide to produce and sell shirts
and blouses in a market economy. Many will do just that if they believe they can sell these products at
prices high enough to cover their costs -- and earn more money than they can doing something else. This
leads to direct competition between different firms making and selling shirts and blouses. Competition is
one of the basic reasons why there are generally so many different styles, fabrics, and brands of clothing for
consumers to choose from in market economies.
Of course, if consumers decide to buy just one kind of shirt and blouse month after month and year after
year, producers would soon learn that there was no reason to produce any other kind. But that simply hasn't
happened where people are allowed to choose from a wide selection of clothing products.
Another key point about market economies is that the prices for shirts, blouses, and other products sold in
stores aren't set by a central government planning committee. Instead, every seller is free to raise or lower
prices according to changing market conditions. For example, if one kind of shirt becomes very popular for a
time, and stores are worried about running out until they can get more, the store may raise price of such
shirts, at least until new shipments arrive.
This price increase accomplishes two things at the same time. First, by making this kind of shirt more
expensive compared to other shirts and products, some consumers will choose to buy fewer of them and
more of other items. Second, sellers are affected. The higher price goes directly to those who produce and
sell the shirts -- not the government. So, the higher price results in an increase in the profits of firms that
makes and sells this shirt. The increase in profits enables those firms to produce and sell more of those
shirts. Firms that make other products also see those higher profits going to the shirt producers, which lead
some firms to stop making something else and start making those popular shirts.
For all of these reasons -- consumers buying fewer shirts, current shirt-makers producing more shirts, and
other firms deciding to begin making shirts -- any shortage will soon be eliminated. In a market economy, it
doesn't take a central planning committee to make any of these decisions. In fact, the process happens
faster, and in some sense automatically, precisely because consumer and producer decisions are
decentralized.
Market economies provide no magic solutions to economic problems, however. Government plays a critical
role in helping correct problems that can't be fully solved by a system of private markets. In a market
economy, costs associated with production are not always paid by the producer. For example, if pollution is
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
SS060602
Lesson 2
a byproduct of manufacturing, it may not be factored into the price that a consumer pays for the product.
These external elements are passed on to others who are not party to the production or consumption of
goods and services. Governments play a role in addressing negative externalities through laws, regulations
or taxes. Moreover, market economies are not necessarily stable or fair to everyone. They are not immune
to problems such as inflation (a continual increase in the price of goods), unemployment, pollution, poverty,
and barriers to international trade. The primary difference between command and market economies,
however, is the extent to which the central government controls the economy.
Adapted from: What is a Market Economy? U.S. Department of State. 18 January 2015
<http://www.4uth.gov.ua/usa/english/trade/market/mktec2.htm>.
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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Lesson 2
Comparing Command and Market Economies
1. Read each of the following characteristics and decide whether they describe a
‘command’ or a ‘market’ economy and place an “X” in the correct box on the chart.
COMMAND
MARKET
A. There is a great amount of economic freedom.
B. The number of a certain kind of good produced like shirts is
determined by the government.
C. There is a lot of competition.
D. Shortages and surpluses of goods are common problems.
E. Anyone can produce and sell shirts.
F. The price of shirts is set by the government.
G. There is an overall plan for the national economy created by the
government.
H. Sellers can raise or lower prices whenever they want.
I. Consumers play a large role in decisions about what to produce.
J. There is often very little variety in goods since there is no
incentive for innovation.
K. The government does not play a major role in the economy.
L. Wages for workers are set by the government.
2. How are the three main economic questions answered in a command economy?
3. How are the three main questions answered in a market economy?
4. Over the last 50 years, some countries that had a command economy have moved toward creating a
market economy. Why do you think this is true?
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Unit 6: Economics and World Trade
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Circular Flow Video Transcript
Let’s face it, the economy is complex and can be difficult to understand.
Luckily, economists have developed models to help us learn and understand how the economy
functions. One of the most useful is the circular flow model.
The circular flow model highlights the “flows” within the economy―the flow of economic resources,
goods and services, and the flow of money.
To demonstrate the usefulness of the circular flow model, let’s follow a few dollars through a cycle.
Imagine you are a hungry consumer who hears the homemade fries at the diner down the street calling
your name. You take your money to the diner for a tasty meal.
When you pay your check, you are buying goods and services. But the money doesn’t remain in the
cash register for long.
Alice, the diner owner, uses the money to purchase resources. She buys homegrown potatoes from a
farmer; pays the server, who took your order, his wages; and makes a payment on the loan she got to
buy new equipment for the diner. All of these are costs of production.
After she has paid her costs of production, the remaining money is her profit—the income she earns as
an entrepreneur owning and operating her diner.
Let’s say your money goes to the farmer, and that for him is income. That money won’t remain in his
wallet forever, though. Before you know it he will spend it, and the cycle will begin again.
The circular flow model shows the interaction between two groups of economic decisionmakers―households and businesses―and two types of economic markets―the market for resources
and the market for goods and services. While the real economy is much more complex, the simple
circular flow model is useful for understanding some key economic relationships.
Let’s start with the two groups of economic decision-makers.
On one side of the model are households. Households consist of one or more persons who live in the
same housing unit, such as a family. Households own all the economic resources in the economy. The
economic resources are land, labor, capital, and entrepreneurial ability.
Land resources are natural resources. For example, these could be actual land owned by a farmer or
other natural resources such as oil, water, and trees.
Labor is just what it sounds like―work for which you are paid.
Capital resources are goods used to produce other goods and services. For example, think of a hammer
used by a carpenter or a computer used at a business.
Finally, entrepreneurial ability is the human resource that combines the other resources to produce new
goods and services and bring them to market. So, an entrepreneur might combine land, labor, and
capital in new ways―taking risks along the way―to bring a product or service to market.
On the other side we have businesses. A business is a privately owned organization that produces
goods and services and then sells them. Businesses can be large, such as an automobile manufacturer,
or small, such as a diner. And, businesses may produce goods, such as computers and bicycles, and
services, such as haircuts and car repairs.
But households and businesses are not isolated, they interact in markets.
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
SS060602
Lesson 2
At the top of the model we have the market for resources. The market for resources is where households
sell and businesses buy economic resources―land, labor, capital, and entrepreneurial ability. Notice
that it is households who own all the economic resources.
You might think of capital, say a delivery truck, as being owned by a business. But who owns the
businesses? You guessed it―households. Whether a small diner owned by an individual, a partnership
owned by several individuals, or a corporation owned by stockholders, all of these businesses are
owned by people who are also members of a household.
Let’s look at some transactions in the market for resources by a business. A diner: it uses a mix of
economic resources, such as land―potatoes for fries; labor―cooks and wait staff, and capital ―kitchen
equipment and cash register; resources to produce goods and services―in this case cheeseburgers,
fries, and milkshakes. The business buys these economic resources from households.
For example, let’s say you work at the diner. You are selling and the diner is buying your labor
resources. Those homemade fries come from potatoes― natural resources―bought from a local farm,
which is owned by a household. The new milkshake machine and French fry cutter―capital
resources―were bought from a business three states over and the stockholders of that business are
members of households. Finally, the diner itself is owned by Alice, who is a member of a household and
an entrepreneur who has turned her skill of making the best homemade fries in town into a successful
business.
In exchange for their resources, households earn income. Each resource has its own income category.
Households receive wages for their labor, rent for use of their land, interest for use of their capital, and
profit for their entrepreneurial ability. For working at the diner, for example, your income would be wages
paid in the form of a paycheck at the end of the month.
So, in the market for resources, households sell resources and businesses buy resources. The
resources flow one way (counter-clockwise) and money flows in the other (clockwise).
At this point in the cycle, households sell resources to businesses. So, households are holding income
and businesses are holding resources. But, what do households do with the income? What do
businesses do with the resources?
To answer these questions, let’s focus on the bottom of the model, the market for goods and services,
where the goods and services produced by businesses are bought.
Let’s start with businesses. Businesses use the economic resources they buy in the market for
resources to produce goods, such as computers and bicycles, and services, such as haircuts and car
repairs.
Businesses sell these goods and services to households in the market for goods and services. For
example, the diner produces cheeseburgers, fries, and milkshakes.
Households use part of their incomes to buy goods and services. The payment businesses receive is
called revenue. For example, at the diner, revenue comes from customers paying for their food.
In short, the market for goods and services is simply where the goods and services produced by
businesses are bought.
So, in the markets for goods and services, businesses sell goods and services and households buy
goods and services. Products flow one way (counter-clockwise) and money flows in the other
(clockwise).
Let’s step back a bit and notice a few things about the circular flow model.
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
SS060602
Lesson 2
First, it shows how businesses and households interact in the two markets―the market for resources
and the market for goods and services. Notice that households and businesses are both buyers and
sellers.
Households are sellers in the market for resources. Households sell land, labor, capital, and
entrepreneurial activity in exchange for money, which in this case is called income.
Households are buyers in the market for goods and services. Households exchange income for goods
and services.
Businesses are sellers in the market for goods and services. Businesses sell goods and services in
exchange for money, which in this case is called revenue.
Businesses are buyers in the markets for resources. Businesses exchange the revenue earned in the
market for goods and services to buy land, labor and capital in the market for resources. In this case, the
money spent is called the cost of production.
Second, the model shows the flow of money in exchange for goods and services and resources.
Money flows clockwise, while goods, services, and resources flow counter-clockwise.
The circular flow model is a simple tool for learning about the economy. It shows the relationship
between households and businesses and how these different decision-makers in the economy fit
together.
Plus, it shows how money keeps economic resources and goods and services moving around and
around and around the economy. And that’s something Alice appreciates.
Source: “Episode 6 - Circular Flow.” The Economic Lowdown Video Series. Federal Reserve Bank of St. Louis. 18
January 2015 <http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-6circular-flow/>.
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Unit 6: Economics and World Trade
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What Can Happen in a Pure Market Economy?
What is the problem?
How might
government help
solve the problem?
How does the U.S.
government prevent this
from happening?
In order to cut costs, a toy
company has decided to use
lead paint because it is
cheaper.
Since pollution control
devices are expensive a
paper-making company has
decided to dump its waste
directly in the river next to its
factory.
One large company that
makes tires has bought out
all the other tire companies
in the country. Now it has a
monopoly – it is the only
company that sells tires. It
doubles the price of tires.
To get people to buy its
goods, a company begins to
make hourly automated
phone calls to every cell
phone in the country.
All the highway bridges in
the country are privately
owned. As a result, people
have to pay a toll every time
they cross a bridge.
A fast-food chain has begun
to add horsemeat to its
burgers in order to lower the
cost of making them.
To protect from invasion or
attack, we need people and
equipment to defend
ourselves.
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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Lesson 2
The Role of the Government in the U.S. Economy
Role
The government regulates
competition.
Example
FTC (Federal Trade Commission) creates rules
about trade and enforces antitrust laws that
discourage the development of monopolies.
The government establishes agencies to administer
and enforce laws about:
The government regulates
businesses through several
different agencies.
 FCC (Federal Communications Commission) communications by radio, television, wire,
satellite and cable
 EPA (Environmental Protection Agency) human interactions with the environment
 FDA (Food and Drug Administration) - food
and medicines
 Bridges and interstate highways
The government provides
public goods and services.
The government regulates
the money supply.
 Postal services
 National defense
The Federal Reserve System acts as a central
bank.
The government establishes agencies to administer
and enforce laws about:
The government protects
people’s health and safety.
 EPA (Environmental Protection Agency) human interactions with the environment.
 FDA (Food and Drug Administration) - food
and medicines
 Consumer Product Safety Commission unsafe consumer products
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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Lesson 2
Economic System Continuum
Country
A
B
C
D
E
Description
Government owns or controls most of the factors of production—almost all land and
capital—and dominates the economy by answering all three basic economic
questions. There is some private enterprise. For example, farmers may work small
plots of land and farm them for profit.
Almost all business is privately owned. Government, however, provides
administrative guidance. For example, an Economic Planning agency channels
production into areas seen as vital to the nation’s economic future. The government
regulates banking activity and has the power to regulate interest at commercial
banks.
The great majority of businesses are privately owned and operated. Government
plays a role mainly through regulation and providing some public goods and
services such as national defense and public education.
The majority of production is carried out by private business. However, in an effort
to distribute wealth more evenly, there is an extensive social welfare system. This
system provides health care, housing allowances, elderly care, and monetary
support for children, etc. High taxes, sometimes as much as 80% of income, are
used to provide these services and redistribute the nation’s wealth.
The majority of production is in private hands, but there is government ownership of
a few sectors such as railway and electricity. The government may also suggest or
indicate what it considers desirable production targets for private industries.
Pure
Command
Economy
Complete
Government
Control
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6th Grade Social Studies: World Geography and Global Issues
Unit 6: Economics and World Trade
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Lesson 2
What is government's role in the economy?
April 03, 2011 By ART CALLAHAM
There’s been a lot of talk about the economy lately. Add to that the role of federal, state and local
government, and you have a subject that will usually set anyone’s hair on fire. So, what is the role of
government in the economy?
On one side, you have conservatives, who believe the government’s role in the economy must be “hands
off.” The more conservative in nature, the more and more hands off. Some conservatives beat their chests
and shout, “Don’t spend taxpayer money (often expressed as “my money”) on airport runways, new roads
(unless it goes in front of my house), libraries, school construction, the arts, senior centers, etc. And, by the
way, I don’t want any debt. You won’t have it if you don’t spend.”
Analyzing Position #1: According to the author what role do conservatives think the government
should play in the economy?
On the other side are liberals, who believe government should have its hands in everything, including the
economy. The more liberal in nature, the more and more hands on. Some liberals beat their chests and
shout, “If you can’t buy it, afford it or have it, the government should provide it to you (maybe even for free).
And, by the way, we support borrowing.”
Analyzing Position #2: According to author what role do liberals think the government should play
in the economy?
In spite of the strategies of the far left and the far right, there is a key role for government to play in our
economy. That role is creating jobs. And I don’t mean jobs “within the government.” I mean private-sector
jobs. Governments create jobs in the private sector by funding projects. Capital, infrastructure, building and
bond projects are some government-funded projects.
Analyzing the Author’s Argument: According to author what role does he think the government
should play in the economy?
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Unit 6: Economics and World Trade
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Lesson 2
When one level of government funds a project, it often attracts funding from other levels of government,
sometimes from private foundations, and sometimes from the private sector in terms of private capital
fundraising.
An example of this process is the Washington County Free Library renovation. The first funder in terms of
responsibility was the county, which put up $7 million to renovate the central branch of the library. That
money attracted $11.5 million in state funding, $1.5 million in city funding, $3 million in private citizen
contributions…and $1 million from a foundation — a total of $24 million.
A similar situation occurred with Hagerstown Regional Airport’s runway extension, where $4 million in local
government funding attracted another $57 million from other levels of government.
Analyzing the Argument: Does this section offer strong evidence to support his argument? Why or
why not?
Critics may dispute the necessity of renovating the library or extending the runway, and I’m not going to
justify either project (although I fully support both). What I’m writing about is the economy, jobs, partnering
between levels of government, borrowing money and how money attracts other money. Let’s start by
looking at the government and its role in creating private-sector jobs.
Most large projects allocate 60 percent of the total project costs to labor. In my two examples, the total
government dollar participation was $61 million for the runway and $20 million for the library. Using my
formula, that’s $36 million at the airport and $12 million at the library — or $48 million total.
Let’s use $56,000 annually per job as an estimate of the average cost of wages plus benefits. That $48
million equates to about 850 job years. To keep the math simple, let’s say the average job on either of the
projects lasted 2 years. In that scenario, over a two-year period, the government funding brought 425 jobs
to this community.
Analyzing the Argument: Does this section offer strong evidence to support his argument? Why or
why not?
Art Callaham is a local community activist and president of the Washington County Free Library Board of
Trustees.
Source: Callaham, Art. “What is Government’s Role in the Economy?” Herald Mail Media. 3 April 2011. 18 January 2015
<http://articles.herald-mail.com/2011-04-03/opinion/29382360_1_local-government-private-sector-private-sector-jobs>.
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