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6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 Lesson 2 Graphic Organizer Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 1 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 Lesson 2 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. (SS060602) (SS060602) 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. (SS060602) (SS060602) Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 2 of 14 January 26, 2015 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. (SS060602) (SS060602) 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 Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 3 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 Lesson 2 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 Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 4 of 14 January 26, 2015 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>. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 5 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 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? Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 6 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 Lesson 2 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. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 7 of 14 January 26, 2015 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. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 8 of 14 January 26, 2015 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/>. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 9 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 Lesson 2 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. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 10 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 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 Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 11 of 14 January 26, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 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 Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 12 of 14 January 18, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 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? Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 13 of 14 January 18, 2015 6th Grade Social Studies: World Geography and Global Issues Unit 6: Economics and World Trade SS060602 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>. Michigan Citizenship Collaborative Curriculum Copyright © 2010-2015 Oakland Schools Page 14 of 14 January 18, 2015