Download BusinessEconomics_Lesson11_StudentResource_062314

AOF Business Economics
Lesson 11
Economic Systems
Student Resources
Resource
Description
Student Resource 11.1
Chart: The Economic Systems Spectrum
Student Resource 11.2
Economic Systems Scenarios: Three New Businesses
Student Resource 11.3
Scenarios: Pros and Cons of Different Economic Systems
Student Resource 11.4
Reading: Economic Systems Today
Student Resource 11.5
Scenarios: Comparing and Contrasting Economic Systems
Student Resource 11.6
Venn Diagram: Economic Systems
Student Resource 11.7
Independent Practice: Industry and Economic Systems
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.1
Chart: The Economic Systems Spectrum
Directions: The following chart describes general characteristics of the three economic systems discussed
in the lesson and the role that government plays in each. The characteristics in the graphic below
represent ideal forms of each system, but the characteristics of these types of economies in the world
today vary greatly. Nearly all systems fall between the two extremes of a command economy and a pure
free-market economy.
Command economies tend to favor large enterprises either focused on basic consumer demands (such
as food) or on very large-scale production of inputs needed for expansion of the economic infrastructure
(such as steel and cement) using monopoly control and economies of scale. An example of the first
category would be the large government-owned farms supplying key food products such as corn, wheat,
or potatoes for the Cuban public. An example of the second category would be the very large scale of
steel production in the former Soviet Union.
In a free-market economic system, enterprises that satisfy recently discovered consumer demands,
and/or use technology protected by patents, tend to be favored. This is because they can have a
substantial competitive advantage for a significant period of time and can therefore earn high profits and
returns on investment. One example of this is Apple with its iPod, iPhone, and iPad. Google is another.
In some mixed-market economies, governments favor major enterprises that satisfy critical social and
economic needs. The Indian government’s ownership of the country’s vast railroad system is an example.
Other countries with mixed-market economies rely on the market even more, but still with government
intervention, mostly in the form of business regulation or government social programs rather than through
direct government ownership. In the United Kingdom’s large railroad system, for example, the trains are
run by for-profit businesses. The government regulates these operations and subsidizes train services
that are considered socially desirable but unprofitable—for example, trains that run to rural regions. The
rail infrastructure (track, signals, and electric power) is a natural monopoly, run by a separate
government-owned and government-regulated company.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.2
Economic Systems Scenarios: Three New Businesses
Student Names:_______________________________________________ Date:___________
Directions: For each of the three new businesses described below, you and your partner determine which
of the three economic systems explained in Student Resource 11.1 would be most suitable for overall
success. Be sure to consider the size and objectives for each business and what industry it is in when
making your determination. Include your selection along with the reason(s) behind it in the appropriate
box for each company.
Business A
WALLY Sanitation Systems
Business objectives: This company will provide trash collection and general sanitation services for
major cities.
Size of enterprise:
Important
characteristics:
Depending upon how big each city is and how many cities the company
serves, the enterprise could be anywhere from medium to large-sized.
Provides a key social service while also offering a steady employment
opportunity.
Best economic
system for this
business and
reasons:
Business B
Tuna-R-Us
Business objectives: This company will catch, clean, can, and distribute tuna, a primary source of
protein for the entire country, and sell any excess on the international tuna
market.
Size of enterprise:
Important
characteristics:
Large, in order to address the food needs of the society.
Provides a key food source to the general population, as well as a steady and
dependable source of employment to its workers.
Best economic
system for this
business and
reasons:
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Business C
Dark Knight Graphics
Business objectives: This company will provide creative graphic design work for video-game
packaging and marketing materials.
Size of enterprise:
Important
characteristics:
Small, with aspirations of becoming a larger, major player in the industry.
Provides potentially highly profitable service to the gaming industry and highrisk, high-reward investment and employment opportunities to skilled workers.
Best economic
system for this
business and
reasons:
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.3
Scenarios: Pros and Cons of Different Economic
Systems
Directions: The following scenarios illustrate some of the pros and cons of prevalent economic systems.
The USSR’s Command Economy and Industrialization
Background: The Union of Soviet Socialist Republics (USSR), founded in 1922, was referred to by many
people as Russia but in fact included many other smaller countries within its boundaries. It was the first
country in the 20th century to adopt a command economy. Joseph Stalin, General Secretary of the ruling
Communist Party became the unchallenged dictator of the USSR in the late 1920s. He committed the
country to a rapid transformation into a major industrial power within a few decades, a process that
normally takes much longer. He succeeded in this, though at a very heavy cost in human suffering.
To achieve his goal, Stalin used the government’s control of productive assets within the economy to
institute a series of five-year economic plans that catapulted the USSR into a position as a major
industrial power.
Throughout the transformation, Stalin’s government in Moscow made all major economic decisions. Stalin
and his economic planners knew that in order to achieve the kind of wrenching economic reorganization
they envisioned, they needed to control the process. This meant that decisions about what was produced,
how it was produced, and for whom the goods were produced were not left to the interaction of supply
and demand. Rather, economic planners guided the economy with a keen eye on the overarching goal of
rapid industrialization and not on production of consumer goods or the profitable operation of businesses.
System Pros: From the standpoint of remaking the country’s economy, the five-year plans were very
effective. Between the years 1928 and 1938, production of iron and coal, key indicators of industrial
capacity, nearly quadrupled. New plants producing steel, machine tools, other heavy machinery, and
tractors, and to some extent basic consumer goods, sprang up across the country. Over 20,000 miles of
railroad track was laid down to facilitate the movement of goods around the massive country. In only a
decade, the USSR jumped from 30th to 3rd in global industrial output, an unparalleled transformation.
Even if we allow for the USSR’s notorious tendency to fake its economic statistics, the achievement was
undoubtedly formidable.
System Cons: This transformation, however, came at an unbelievable human cost. Alongside the
industrialization of the country, Stalin also tried to modernize agriculture. His efforts to make the
government the primary producer of food (by forcing family farms to combine into huge collective farms)
proved to be a catastrophic failure, leading to massive famine and the death of millions of Soviets. By the
time farm production returned to its former levels, the country had undergone a huge population shift.
Peasants flocked to the cities in search of food and work, with only some of them finding either. Many
went through crushing economic hardships while the country remade itself economically.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Venezuela’s Mixed-Market Economy and Social Inequality
Background: Over the last decade or so, the economy of Venezuela has come under ever-increasing
government control, moving away from a free-market economic system toward a mixed-market
economy—and even beginning to display some of the attributes of a command economy. The election of
President Hugo Chavez in 1999 marked a shift in the economic policies of the Venezuelan government,
with far greater emphasis placed on the social welfare of lower-income citizens than had been the case
historically. Chavez’s administration began pulling resources from the economy’s market-based activities
and used these resources on high priority social programs meant to address the longstanding economic
inequalities of Venezuelan society.
The goal of these changes was simple. Venezuela was one of the world’s largest oil producers, earning
billions of dollars every year. And yet, according to the government’s own statistics, nearly 50% of the
population lived under the poverty line. The Chavez administration used its control of the national oil
company to redirect money earned from selling oil toward improving public education, increasing access
to public health care, and to subsidize the prices of food and gasoline so that the poor could consume
more. Chavez’s death in early 2013 leaves an unclear path for the country’s economic future.
System Pros: Because of the government’s ability to determine spending and investment priorities for a
number of the economy’s productive assets (primarily the country’s oil company), it has improved the
lives of many poor Venezuelans. According to official statistics, the nation’s poverty rate has dropped
dramatically. Other indicators measuring improvements in the quality of people’s health and welfare
(which are harder to manipulate) such as infant mortality, also suggest that a government actively
involved in the nation’s economy has made a material and positive difference to the lives led by much of
its population.
System Cons: This policy change has not come without problems. Because of the competitive global
industry in which it works, the Venezuelan national oil company has to operate like a private-sector
business focused almost exclusively on profit and growth. However, by shifting the company’s resources
toward social programs, the government has denied the company crucial investment capital needed to
keep the oil flowing and the money coming in. The country’s production level has dropped each year
since Chavez took office. Only the dramatic increase in the price of oil through 2007 saved the
government from either going bankrupt or having to greatly curtail these social programs altogether.
Consequently, low world oil prices through 2008 and 2009 put the Venezuelan government’s budget
under great pressure. Moreover, when the cost of some of the food subsidy programs became too costly
for the government budget, the Chavez administration passed a law enforcing price caps on a number of
food staples. Forced to sell their products at a loss, Venezuelan food companies instead chose to leave
the market or reduce production, leading to food shortages.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
The USA’s Free Market and Market Excesses
Background: The Roaring Twenties, as it became known, was the period in US history between 1920
and 1929 when the country’s economy most resembled a pure free market. On the surface, the nation
experienced great prosperity. Industrial production increased dramatically as new consumer goods such
as the automobile, the washing machine, and the radio flooded the market. Consumers gorged
themselves on newly available credit (“buy now, pay later”) and went on a spending spree that did not
reflect their actual wealth. The stock market became a place where new millionaires were minted almost
weekly. Companies saw unprecedented profit growth at the same time that the wealthiest Americans
received a dramatic reduction in their taxes. To many, all seemed well and the government allowed the
free market to flourish with little or no oversight in most areas of economic activity.
However, this market boom period was built upon a weak foundation. Much of America’s newfound
wealth moved to the richest 1% of the population. While companies and their senior executives became
wealthier relative to the rest of the population, workers saw their wages stagnate throughout the decade.
Wanting to take part in the perceived general affluence of the time, unsophisticated lower-income people
began to try to make their riches in the stock market. However, because they lacked the capital, they
borrowed money to buy stocks on the assumption that they would be able to sell them at a higher price
later and repay the loan. This risky behavior worked for a couple of years, but it created a bubble in which
stock prices shot past any reasonable, economically sustainable level. Investing seemed so easy that it’s
said that shoe shine boys on Wall Street were routinely exchanging and trading on stock tips.
But when the market finally corrected itself and stock prices fell back to earth, it wasn’t just the little-guy
investor who lost everything. Banks that had lent out money to buy the stocks also went under, causing a
wave of panic to wash through the US financial system. While the stock market crash of 1929 was not
fully responsible for causing the subsequent Great Depression, it did signal the end of a long period of
market excess and the beginning of an even longer period of market recuperation.
System Pros: The high degree of market freedom experienced by US business during this period may
have contributed to the big productivity gains that took place, though other factors, such as new
technologies and business models (for example, mass production of automobiles, pioneered by Henry
Ford’s Ford Motor Company and Alfred Sloan’s GM) also played a major role. Job creation, product
innovation, and financial participation all reached historic highs. The American economy generated levels
of prosperity and opportunity, at least for parts of society, that were the envy of the rest of the globe.
Productive resources flowed into new enterprises, creating an industrial society able to satisfy many
consumer demands—automobiles for a mass market, for example. New wealth was visible almost
everywhere and it was widely believed that the government’s decision to stay out of the economy’s way
was the driving force behind it all.
System Cons: The reality of the Roaring Twenties was a more complicated story. True, there was
unprecedented affluence—but this wealth was very unevenly distributed, concentrated in the hands of a
small number of citizens. Even during the boom, many people and industries suffered. Throughout the
decade, American farmers (then a significant part of the US economy) suffered badly. Oversupply caused
food prices to plummet, forcing many farmers to sell their crops at a loss. These farmers began failing to
repay loans to their banks that, in turn, sought out other lending opportunities. This led banks to lend
more and more to risky companies and individuals (often to buy stocks), so when the stock market
crashed and individuals could no longer buy the goods that companies produced, companies failed by the
thousands and dragged the banks down with them. With so much of the US economy based on credit,
the lack of government regulation of banking activities made a financial calamity possible. The problem
was compounded when the government at the time (working from an ingrained belief that the less
government involvement in the economy, the better) refused to help out either the failing banks or the
failing businesses. By the time the government recognized the folly of this policy, the unemployment rate
was at more than 20% and the US economy was in deep trouble.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.4
Reading: Economic Systems Today
The different economic systems in operation across the globe vary tremendously. While nearly all
countries’ economic systems make use of market mechanisms (that is, have some aspects of capitalism),
they differ in the degree to which the government plays a day-to-day role in the economy. Because of
these differences, businesses operating in different countries have learned to adapt to the prevailing
economic system.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
The Economic Systems Spectrum is one way of classifying and describing differing economic systems. It
is a simplified model of the variations between economic systems currently operating around the world,
based on the degree to which the government plays a role in the economic activity of its country. The
Economic Systems Spectrum is only one of several different ways of classifying and describing differing
economic systems.
Consideration of China serves to illustrate the method. Up until the last decade, the government was the
largest and most important player in the country’s economy. Before 1980, China was a pure command
economy. Now much of China’s economy is run on market-based principles, but there are still significant
characteristics of a command economy (for example, in many cases the government decides which firms
can participate in particular industries). By contrast, Australia, where the government plays a smaller role
in its nation’s economic affairs, is much closer to a free-market economic system. Most economic
decisions are made through market mechanisms—but the government still intervenes in the economy
extensively, meaning that Australia has some elements of a mixed-market system.
Both ends of the Economic Systems Spectrum have their strengths and weaknesses. Because of this,
most countries now opt for mixed-market systems, which fall somewhere between the two extremes.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Pure free-market economic systems don’t exist in reality, but it’s useful to consider the advantages and
disadvantages of trying to make the real economy resemble one.
Pure free-market systems would be very dynamic. With supply and demand determining what is
produced, how, and for whom, free markets tend to allocate scarce resources to their most efficient use,
as defined by the economic concept of Pareto optimality. An economy is Pareto optimal if resources are
allocated in such a way that you can’t change the allocation to make anyone better off without making
somebody else worse off. The economy is on its production possibility curve: you can’t produce more of
one product without getting less of another. The economy is producing the right goods and services in
relation to consumer preferences.
Problems arise from this focus on efficiency. Businesses will tend to neglect retired workers, the disabled,
and children unless they are consumers. The free-market system can produce high levels of wealth and
consumption, but benefits are unevenly distributed, creating strain on society. Businesses can be
reluctant to reduce environmental harm if that involves significant costs.
An economic system that’s close to being a pure free-market system can remain stable for a long time,
but there’s an ever-present risk of instability, leading to depressions or extreme recessions, like the Great
Depression of 1929–1934. The causes and cures are complex and controversial, but it’s clear that this is
a major challenge of economic policy in a free-market economy.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Command economies also run into problems, although they’re different problems from those encountered
in a pure free-market system (or rather, a market system that’s close to pure). While command systems
proved effective in the earlier stages of industrialization of underdeveloped economies such as the former
USSR and pre-1980 China, they have performed very poorly in meeting any but the most basic needs of
the consumer. Because the government ran the economy, individual initiative and entrepreneurship were
almost nonexistent. This led to little innovation in any area that the government did not treat as a priority.
It also led to situations where the supply of some consumer goods could not keep up with demand, while
other goods in oversupply sat unused on store shelves.
The lack of communication between consumer and producer through the mechanism of supply and
demand meant that resources were allocated poorly and inefficiently, resulting in a lower average
standard of living than would have been possible if the same resources had been used more efficiently.
Command economies did not necessarily do better at protecting the environment than market economies,
and there’s a lot of evidence that they’ve often done worse. While they generally were not maximizing
profits without regard to the environment, command economies were often seeking to maximize
production without regard to the environment.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Because of the problems that arise from either of the two extremes of the Economic Systems Spectrum,
most of the globe’s economies fall somewhere in between. The examples above represent measurable
differences in the degree to which each country’s government is involved in its respective economy.
However, the countries’ exact places along this spectrum are a matter of judgment and open to debate.
For example, some observers might say that small parts of China are closer to a free market than you
could find anywhere in the United States. And yet China’s government remains a significant force within
the country’s economy, subjecting most business operations to forms of government oversight,
regulation, or participation that do not occur in the United States.
Many countries undergo very significant change over time in relation to their economic system. Thirty
years ago, many countries were much closer to a command economy, represented by the left side of the
chart. Some countries, such as Venezuela, Bolivia, and even Russia, are (to varying degrees) moving
their economic systems to become more like command economies.
As material conditions within each country, and economic conditions globally, change, so also do the
needs and wants of businesses and individuals within each country. The evolution of a country’s
economic system reflects the business and political interests in the society as well as the material
conditions of the economy.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.5
Scenarios: Comparing and Contrasting
Economic Systems
This activity presents characteristics of three pure economic systems—the government-directed
command economy, the free-market economy, and a mixed-market system—through the lives of three
young women.
Each story recounts the experiences of a 16-year-old girl from a different part of the world. The first
immigrated to the United States with her family to seek a better life. The second lives in Cuba. The third
lives in France. All three narratives describe what life is like living under the different economic systems.
Mary—USA
Mary goes to a public school, though her best friend goes to an upscale private school. Mary would like to
be with her friend, but the tuition is beyond her family’s reach. Both girls are considering future careers in
business. Due to her grades and her family’s financial situation, Mary will likely have to attend a less
expensive state college, and she will need to do what she can to qualify for scholarships, grants, and
loans to pay the expenses. Her parents continue to worry about how to pay for her college education.
Sometimes she gets into squabbles with her mom over clothes because Mary wants jeans and tops with
the big-name labels and in all the latest styles. Her mom finds some of the stuff overpriced, but given the
sizable selection in clothes and prices, they come to a working arrangement.
When they first arrived in the United States, Mary’s mom began working as a clerk in the local hospital
because this was what she was trained to do. However, Mary’s mom wanted to shift to a new career that
would bring in more money for the family, so she went to night school and learned the skills of a
paralegal, or an assistant to lawyers. She’s now unemployed and currently looking for a job in her new
career. Mary’s dad works in an auto parts store. It doesn’t pay much, but he loves being around people
who know so much about cars!
Food choices are vast in the United States. Mary tries to stay away from fast food but indulges with her
friends now and again. Her mom is on an organic kick, so she shops around at three or four different
stores to get the items she wants at an affordable price. She knows from watching the news that, as in
the rest of the world, some people in the United States go hungry.
Mary’s brother broke his arm last week. The family health insurance covered some, but not all, of the
expenses, but her parents still worry about how much it may cost.
Maria—Cuba
Maria attends an agricultural technical school that teaches sugar cane farming techniques (Cuba’s main
export), even though she wants to be a writer. If she continues to do well at school, she’ll have the
opportunity to go to college for free, though it will be a course of study focused on agriculture. Her
teachers encourage her to continue writing on her own time. However, because the government has
decided that it must increase sugar cane production in order to trade more with other countries, it has
pushed its strongest students toward an academic path focused on agriculture or economics.
She goes to the market with her mother for school clothing. The selection is limited and those items she
does like remind her of stuff she saw in Western fashion magazines more than four years ago. Her mom
works in a fish processing plant, even though as a young girl she was a promising dancer. She changed
jobs when the government said that it could no longer afford to keep the ballet company together. Though
the fish processing plant was not her first, or even her second or third, choice, it was better than the other
options offered her. She would like to learn another profession, but neither agriculture nor economics
interests her. Maria’s dad was once a well-respected pitcher on the Cuban national baseball team (one of
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
the best amateur teams in the world), but he has since been relegated to a job as a guard at the national
museum of labor. Both of Maria’s parents dislike their jobs, but they are guaranteed for life (or as long as
they don’t criticize the government).
Maria’s diet is limited because there are few incentives for the local farmers to plant more than the state
requires. She uses her ration coupons at the store to get the basics—bread, powdered milk, flour, and so
forth. When her father was pitching for the national team, Maria’s family received government vouchers
for some of the Communist party officials’ stores and could buy items that many of her friends could not
get in the local stores.
As she walks back from the market, she takes in the scene around her. Most people are in the same
economic position as her family is. Their lives are adequate, though sometimes sparse, materially. Very
few have much more than her family does.
Her little brother broke his arm last week playing with his friends. Fortunately, health care is free,
accessible, and quite good, so he now has a cast and a follow-up appointment with the doctor in three
weeks to check on his progress.
Marie—France
Marie attends the equivalent of an American high school. Depending on how well she does on the
national government-run exit exam, she’ll be allowed to continue on to university studies leading to a
degree, to short-term studies (two years of postsecondary schooling), or to a vocational school that’ll
prepare her for a job right away. University studies include three options: science and math, economics
and social studies, or humanities (languages, geography, and history). The government funds all of this
education.
Food is plentiful and varied in France. People from all over the world come to her country just to eat the
food and drink the wine! Marie’s father is a winemaker for one of the cooperative wineries owned by the
people who work there. Because he did very well in his university studies, he was able to escape some of
the manual jobs offered out of vocational school. He gets to work in the cool wine caves and cellars and
never has to put in more than 37.5 hours per week. Marie’s mother runs their bread bakery and caters to
the tourists.
Marie looks forward to her upcoming years in university but worries about her future employment
opportunities given France’s current 10.4% rate of unemployment. She’s considered starting up her own
business after she graduates, but she’s heard there are many more challenges to doing so than in other
countries, such as the United States or Canada.
Although some clothing made by French designers is extremely expensive, most clothes that appeal to
Marie are not. The minor arguments Marie has with her mother are over the amount of clothes Marie
would like to have but has no space for in their small home.
All working people in France have part of their paycheck deducted to fund the health care system, and
everyone is entitled to have medical care. Last year Marie had to have her tonsils removed. Luckily, her
family had complementary health insurance that covered the portion of the doctor’s bill that the
government didn’t.
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.6
Venn Diagram: Economic Systems
Student Name:_______________________________________________ Date:___________
Directions: Write the characteristics listed below in the appropriate part of the Venn diagram below. Note
that many of these characteristics are shared.
Intellectual property
Environmental
protection
Tax incentives for
business
Government-owned
business
Government regulation
Monopolies
Consumer choice
Welfare system
Labor laws
Stock markets
Consumer protection
Private property
Profit incentive
Income inequality
Supply and demand
Incorporation laws
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
Student Resource 11.7
Independent Practice: Industry and Economic
Systems
Student Name:_______________________________________________ Date:___________
Directions: Read each of the following descriptions of industries that operate in different economic
systems and then answer the associated questions.
The Alternative Energy Industry in Germany
Germany, even with its cold, northern-European climate, is now a world leader in solar power technology,
getting a bigger proportion of the country’s power from solar than California does. Although the cost of
generating solar power is still more expensive than the cost of generating the same amount of power
using fossil fuel (meaning that the business is an economic loser in the short term), the government and
individuals have embraced this new energy source in anticipation of better economic results—as well as
less environmental impact—down the road.
Why has this industry taken off in Germany, of all places, a location with average daily hours of sunlight
comparable to rainy England? By providing tax breaks and investment incentives, the German
government has stimulated large-scale investment into superior photovoltaic cells (the primary hardware
used to gather the sun’s rays and transform them into usable electrical energy) and a host of other new
technologies that try to squeeze as much energy as possible out of the light and radiant heat from the sun
that reaches the earth. The country’s Renewable Energy Act passed in 2000 has led to the rise of a new
industry employing some 370,000 people as of 2010 and diminishing the country’s reliance on foreign
energy sources such as imported oil and natural gas.
1. Which of the three economic systems explored (or variations of these systems) would be best for
Germany’s alternative energy industry? Why?
2. Why might a government encourage such an industry through such mechanisms as tax breaks?
3. What are some other example industries that would mirror the alternative energy industry’s
interests and preferences and why?
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
The Medical Profession in Cuba
Access to affordable health care has become a major issue in the United States. However, if you travel
90 miles to the south to one of our nation’s poorest neighbors, you will find no such issue. Data for 2010
indicates that Cuba, a country that spends less than 1/19th of what the United States spends on health
care each year for its population ($431 vs. $8,362), ranks nearly as high as the United States as
measured by the United Nations International Health Indicators.
This comparison becomes even more interesting when you look at it through the eyes of a medical
professional operating in these two countries. One way the United Nations measures how well a country’s
medical system performs is by ratio of doctors per 1,000 members of the population. The United States
has 2.6 doctors for every 1,000 in population. For perspective, France, a mixed-market economy, has a
ratio of 3.3 doctors for every 1,000. Cuba’s ratio is nearly 6 doctors for every 1,000 in population. Yet, the
average annual salary for a doctor in the United States is about $185,000. In France it’s about $110,000.
And in Cuba it’s about $400. Given these numbers, it would seem that expenditures don’t necessarily
always correlate with successful medical care.
1. Which of the three economic systems explored would likely best serve the interests of a patient?
Why?
2. Why might a government (or, for that matter, a business) have an incentive to approach the
provision of medical care differently than profit-making companies involved in providing medical
care?
The Venture Capital Industry in the United States
The venture capital industry is one of the many great success stories of the US economy. Venture
capitalists, financiers who invest in new and innovative companies with lots of potential, often make huge
sums of money from a highly risky investment. Take Michael Moritz, for example. His firm’s $12.5 million
investment in Google in 1999 was worth over $3 billion in 2004. And there are thousands of other stories
like his, though perhaps not of the same magnitude, that have come out of the venture capital world over
the last quarter century. While some venture capitalists have seen tremendous success, it’s important to
keep in mind that they also risk losing everything.
Many commentators have attributed the dominance of the United States in technology industries to two
features of its economy: its well-developed and highly unregulated venture capital industry and its strong
protection of private property rights, particularly intellectual property (patents). The freedom of an
unregulated market means that venture investors are allowed to make investment decisions, with no
governmental oversight or investment mandates, based solely on the investor’s assessment of the market
potential of a company and its products. If they pick well, the investors stand to earn a substantial reward
for their acuity. If they pick poorly, they stand to lose, sometimes significantly for their mistake.
The companies in which these venture capitalists invest take similar risks and can enjoy similar rewards
depending upon the success of their ideas and hard work. Because these companies think their ideas
Copyright © 2008–2014 National Academy Foundation. All rights reserved.
AOF Business Economics
Lesson 11 Economic Systems
and the potential financial benefits that come from them are protected, they are more willing to commit the
time and resources necessary to see their ideas through. As a result, US companies hold the lion’s share
of international patents (28% of all patents as of 2013), and some, though not all, US venture funds have
turned out to be among the most profitable investment options in the world.
1. Which of the economic systems explored would most likely benefit the industries described
above? Why?
2. Given what venture capitalists do, the risks they take, and the potential rewards, how might this
industry be especially well suited for a more free-market-based economic system?
Copyright © 2008–2014 National Academy Foundation. All rights reserved.