Download *Economy and Government Rev.

Review for Final
Economics: How different societies around the world meet their economic needs.
Economists - study economics
Know these FOUR types of Economic Systems: Traditional, Free Enterprise, Communist, Socialist
Traditional Economy: Generally people do what their ancestors did and tend to be primarily agricultural often using the
“barter system”. They usually center around the family/tribal unit. Children often follow the example of his/her parents.
Major occupations consist of hunting, herding and gathering.
Examples - Bushmen of the Kalahari Desert, Berber tribesmen of Algeria and villages in South Asia
Main Features:
• Economic Decisions - customs/traditions determine what should be produced, how it should be produced and for whom.
• Production - based on custom/time-honored methods, new ideas are discouraged. Change/growth proceed slowly.
• Private Property - often no private property; things are owned by the family or village.
• Trade - goods/services are produced to meet the needs of members family/tribe. There is very little trade with outsiders.
Traditional economies are generally marked by subsistence agriculture and cottage industries.
Subsistence Agriculture - land usually produces only enough crops to feed the farmer‘s family. There is rarely a surplus
and economic growth is slow. (much of Africa, Asia and parts of Latin America)
Cottage Industries in traditional societies people use their spare time in their home to weave cloth, make furniture/clothes,
and to produce hand goods. (families earn extra income during winter)
Free Enterprise: Also known as Capitalism or the Free Market System where people own their own goods and
property. Some people invest their money in different ways(producing or distributing goods) so they may gain a profit. Prices
in a free enterprise system are established by the interaction of supply/demand.
Supply - how much of a good producers are willing to make/sell
Demand - how much of a good consumers are willing to buy
What happens to the price when there’s a large supply and low demand? prices decreases
There is limited government interference in the economy in a free enterprise system but government plays a vital role. The
government provides/enforces a set of common rules, maintains monetary system, provides for the nation’s defense and
protects people’s right to own property. Sometimes people look to government to break up or regulate companies that
have obtained to much power (monopoly).
Main Features:
• Private Property - people have right to own private property, use it as they see fit with limited government interference.
• Free Enterprise - people are free to take part in any business or sell any legal product. Businesses are also free to do
anything they wish in order to attract customers - such as lower prices, provide better quality goods, advertise, etc.
• Profit Motive - ability to make profits is what drives people to risk their in starting a new business.
• Supply and Demand - the interaction determines prices. If the supply is high but demand is low, the price goes down.
When demand is high the price goes up.
Unlike traditional economies, free enterprise economies generally have Commercial Agriculture and Industries. Farmers
grow food in order to sell it to others for cash. Crop production is intended for distribution to wholesalers and retailers.
Large scale commercial agriculture makes production cheaper - farmers use tractors and other equipment.
Examples - US, UK, France, Chile, Japan, Germany, Singapore
Communism: economic system where all important economic decisions are made by government leaders who decide
what, how, and for whom goods and services will be produced. The way goods are produced and distributed is controlled
by government leaders for the good of society as a whole.
[Communism was developed by Karl Marx who believed that business owners (capitalists) used their wealth to take advantage of
workers by taking away most of the value of what they produces. Marx predicted that the conditions of workers would grow so bad that
they would eventually rise up and overthrow their capitalist rulers in a violent revolution. Workers would then establish an equal society
and live in perfect harmony with no social classes.]
Main Features:
• Role of Government - all major decisions (production, distribution, resources) are made by government planners.
• Private Property - ownership is abolished, replaced by national ownership of all land, factories, farms, and resources.
• Cooperation - workers labor together and share equally. The economy is supposed to be run for the benefit of all. In
practice, government leaders run things to prepare for true communism.
Example - North Korea
• Major Goal - is to achieve a classless society; equality among all workers.
Socialism: an economic system (like Communism) in which the most important businesses are owned by the government
(factories, mines, railroads, airlines, oil, banks, etc.). Unlike communism, socialism encourages private ownership of some
businesses (shops, manufacturers). Some economists refer to socialist economies as “free market socialism” because
these economies don’t involve state planning. Socialist disagree with the communist belief that workers’ lives could only
be improved through violent revolution. Workers could improve their own conditions by having a government own basic
industries and also provide essential services (free-schooling, low-cost housing, public transportation, and national health
program).
Main Features:
• Role of Government - should use its power to bring an end to poverty by taking control of the major resources and
providing public services.
• Economic Decisions - many decisions about production, distribution and resources are made by the government. Other
decisions are made privately.
• Private Property - major industries are owned by the government - other property is held privately.
• Major Goal - seeks a fairer distribution of income among society. People’s basic needs (health care, transportation
education, housing) are met for free or at very low cost.
Examples - China, Vietnam, Cuba(transitioning from communism to socialism)
Mixed Economies: In the real world, no economy totally follows any one economic system. Most countries have
economies that blend features of each.
Governments
• DEMOCRACY - the government is elected by the people. Ordinary citizens hold supreme power because all
government decisions ultimately comes form the people. A democracy is unlike an oligarchy because it is not ruled by
a certain group and it is unlike a dictatorship or monarchy because it is not ruled by one person - the people have the
power. The government is based on the will of the people, people enjoy certain basic rights - gives citizens the
confidence to criticize government freely.
Direct Democracy - where citizens decide issues directly by voting, like in open assemblies(ancient Greece).
Representative Democracy - where citizens elect representative to decide issues(started with Romans)
• REPUBLIC - a country that has no monarch(king or queen). The supreme power rests in the body of citizens entitled to
vote and is exercised by representatives chosen directly or indirectly. The head of the country is usually an elected
president. Often, the people in a republic choose representatives to make decisions. In modern republics such as the US
and India, the executive is legitimized both by a constitution and by popular suffrage(vote). Examples: Argentina, Mexico
• MONARCHY - has a king, queen, emperor or empress. The ruling position can be passed on to the ruler’s heirs.
Monarchy is probably the oldest form of government. Other examples: Brunei, Oman, Qatar, Saudi Arabia
In some traditional(older) monarchies, the monarch had absolute power or rulers claimed to hold this power by “divine
right”. In more recent times, monarchs have shared power with an elected legislature.
• CONSTITUTIONAL MONARCHY - like the UK, also has a democratic government that limits the monarch's control.
Examples: Norway, Australia, Bahamas, Monaco, Japan
• DICTATORSHIP - a system of government in which a single person or small group exercise complete power over
others. The individual or Junta (group) is not constitutionally responsible to the people or their elected representatives.
Dictators usually eliminate all opposition and rule through a single legal party while maintaining strict control. Dictators
sometimes hold elections but these election are not truly free as opposition parties are not permitted. In a military
dictatorship, the army is in control.
Examples: Libya, Belarus, Turkmenistan, Burma
* TOTALITARIAN - government controls all aspects of individual life. People are forced to do what the government tells
them and may also be prevented from leaving the country. Under totalitarianism, people can only belong to
organizations controlled by the government. Modern dictators, like Adolf Hitler (Nazi Germany), Joseph Stalin (USSR),
and Saddam Hussein (Iraq) established totalitarian systems. The government either controls or prohibits all churches/
religious groups and controls television, radio and newspapers. All dissent is suppressed and citizens are terrorized by
secret police.
Current examples: Cuba, North Korea
* THEOCRACY - is a government run by religious leaders. The government claims to be directed by God, or divinely
blessed. There is no legal separation between church and state. The Iranian Constitution emphasizes the importance of
religion and Islamic law(Sharia). Iran has both a theocratic and democratic government. Voters elect the President and
representatives to the legislature. However, these officials remain subject to the control of Iran’s religious leader, the
head of state or Supreme Leader. The Supreme leader interprets religious law, can dismiss the President, and can
declare war.
ANARCHY - is a situation where there is no government. This can happen after a civil war in a country, when a
government has been destroyed and rival groups are fighting to take its place.
Role of Productive Resources: Economists identify FOUR types of resources that economic activities require:
Natural Resources, Human Resources, Capital Resources, Entrepreneurship
• Natural Resources - are materials on or in the earth such as trees, fish, coal etc. that have economic value. What are
the three basic types? (Give an example of each) p. 93
• Human Resources - include all the human labor that is require to produce something.
• Capital Resources - are goods made, not to consume, but to make other goods and services. Machines and tools are
capital goods. Money is a capital resource
(technology, transportation, communication, power, sanitation, etc. - the basic support system needed to keep an economy going.)
• Entrepreneurship - People who bring together and organize all other productive resources are called entrepreneurs
like business owners or managers.
Economic Indicators - tell how well an economy is performing.
• The GNP (p. 94-95) is the total value of all goods and services produced within a nation in a year.
• Gross Domestic Product per capita - A measure of the total output of a country that takes the gross domestic product (GDP)
and divides it by the number of people in the country. The per capita GDP is especially useful when comparing one country to another
because it shows the relative performance of the countries. A rise in per capita GDP signals growth in the economy and tends to
translate as an increase in productivity.
• The GDP is the total (worldwide) value of all goods and services produced by a country over a year.
Per Capita Income - is the average amount of money earned by each person in a political unit/country.
Industrialization - growth of industry; help determine level of development when manufacturing/machine power become
widespread.
Human Development Index (HDI) - was developed by the UN as a tool for ranking countries based on their level of
economic development. Index classifies countries as: “less developed”, “newly industrialized” (“middle developed”),
or “more developed”. The terms developing, nation in transition and developing nation are used on page 94-95 in book.
• Less Developed Nations - countries with with a lower standard of living where the majority of people work in
subsistence agriculture (dominate in many Asia, African and Latin American countries)
Characteristics: low urban percentage, limited infrastructure, low per capital GDP, few people go to high school or
college, low literacy rate, low life expectancy, high birth rate/higher population growth rate, few doctors, more primary and
secondary economic activities
• More Developed Nations - countries with high levels of industrialization and high standard of living. People work
mainly in manufacturing, technology and service jobs. (US, Canada, Japan, Germany, Singapore etc.)
Characteristic: high urban percentage, low population growth rate, high per capita GDP, high levels of education, small
percent of farmers who engage in commercial farming(crops & livestock), high literacy rates, high life expectancy, good
health care, low birth rates, more tertiary and quaternary economic activities
Standard of Living - Country’s level of development based on quality of life - using income, life expectancy, literacy,
good health care, etc.
Types of Economic Activities: p. 92
• Primary - raw materials, the production of goods and extraction of resources (crops, grazing, fishing logging mining).
If the percent of people engaged in primary activities is high then country is probable less developed.
• Secondary - manufacturing/production of goods (textiles and furniture). Secondary activities add value to raw materials by
changing their form.
• Tertiary - deals with services performed by people and businesses. The US has more than 80% of its workers that
perform some service rather than produce a good.
• Quaternary- economic activities consist of those involving information processing and management like computer
programmer or manager of a company.
“Less developed” countries - engage mainly in primary activities. / “Newly industrialized countries - engage in more secondary activities.
“More developed countries - engage in tertiary or quaternary activities.