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ECONOMICS
Notes
ECONOMIC SYSTEMS
Command Economy
Market Economy
Traditional Economy
What to produce?
Whatever the government
decides
What to produce?
What people want to buy
and sell (if people are
What to produce?
What people need to
survive
willing to buy it, then
businesses will make it)
How to produce?
However the government
decides
How to produce?
Laws of Supply and
demand
How to produce?
Hunting, farming, &
gathering (social roles
determine who does what)
For whom to produce?
Class reward system
Waiting in line / rations
For whom to produce?
Determined by how much
someone is willing to pay
for it
For whom to produce?
Make their own products
(what they have always
made)
Command Economy
Characteristics
Government or other central
authority makes decisions about
and determines how natural,
capital, and human resources will
be used.
Change can occur easily,
because its government driven
Little individual freedom
No competition between
businesses
Business are not run to create a
profit
Consumers have few choices in
the market
Factories are concerned about
meeting quotas (not profit)
Shortages often occur because
of poorly run factories and farms
Government determines your
job
Government sets the price of
goods and services
Market Economy
Characteristics
Traditional Economy
Characteristics
Resources (capital and natural)
Found in rural, non-developed
are owned by individuals
countries (some parts of Asia,
Economic decisions are made
South America, and Africa)
by individuals competing to earn a Customs govern the economic
profit
decisions
Individual freedom is
Technology not used
considered very important
Farming, hunting, and
Profit is the motive for increased
gathering are done the same
work
Competition between businesses way as the generation before
Activities are centered toward
Many economic freedoms and
the family or ethnic unit
choice in the market place
Men and women have
Competition determines prices
different economic roles and
which increase the quality of the
tasks
product
No government intervention in
the economy (hire kids, pollute,
unsafe conditions)
ALSO CALLED CAPITALIST
ECONOMY
MIXED ECONOMIC SYSTEMS
An economic system is the way society organizes the production
and consumption of goods and services. Every economic system answers
three basic economic questions: What to produce? How to produce? and
For whom to produce? How a society answers the three basic economic
questions determines the society’s economic system.
Historically, there are three types of economic systems—tradition,
command, and market (price) system. These economic systems answer the
basic economic questions in different ways. In an economic system based on
tradition, decisions are based on past behavior. In a command economy,
decisions about production and consumption are made by a central planning
unit, such as the government. A market system answers the basic economic
questions in the marketplace. A market economy is an economic system
where most goods and services and resources are exchanged through
transactions by people and businesses.
Most economies contain some features from a market and
command economic systems; this is called a MIXED ECONOMY. Mixed
economic systems are best because a mixture best satisfies the economic
goals of a society - such as economic freedom, equity, and economic
security.
“More Command than Market”
“More Market than Command”
What to produce?
Government decides what to produce, BUT
private/individual ownership of small
business is allowed in limited amounts
What to produce?
Business owners / leaders decide what to
produce based on sales, BUT the
government controls some of the decision
making
How to produce?
Government controls most of the means of
production (factories and tools), BUT small
business owners /leaders make limited
decisions on how to produce items
How to produce?
Business owners / leaders decide how to
produce, BUT the government sets
minimum safety requirements, minimum
wage, and age to start work (child labor
laws). Government also sets guidelines for
product safety
For whom to produce?
Government determines who receives which
goods and services BUT a few items
available outside the governments control
(black market)
For whom to produce?
Consumer’s incomes determine who gets
which goods and services (whoever can buy
it) BUT government provides welfare
benefits for the needy
EXAMPLES
North Korea, Iran
EXAMPLES
South Africa, Nigeria, China, India, Israel,
Saudi Arabia, Japan
MIXED ECONOMIC SYSTEM CONTINUUM
0%
Pure
Command
100%
Pure
Market
Place the following countries on the continuum.
South Africa (64%)
Nigeria (55%)
China (53%)
India (54%)
Israel (68%)
Saudi Arabia (64%)
Iran (45%)
Japan (73%)
North Korea (2%)
Pick one of the countries that are 70% or higher on the continuum and describe why it is so much more market
than command. Use your notebooks to help you.
Pick one of the countries that are in the 50% on the continuum and describe why it is almost equally market and
command. Use your notebooks to help you.
Pick the country that is below 50% on the continuum and describe why it is so much more command than market. Use
your notebooks to help you.
ECONOMIC SYSTEMS SAMPLE QUESTIONS
The economic system of communist countries is most closely related to which of the following?
A. command
B. market
C. traditional
D. supply and demand
You are a small business owner and you sell computer gaming consoles. You have chosen to sell this product to teenagers and young adults. You
decided to sell consoles because they are easy to build, are popular and make a high profit. You decide on the prices for your consoles based
ONLY on the following factors:
How many consoles you have in your warehouse, and
How many consoles you are sell each week
Which type of economy do you have?
A. subsistence
B. command
C. market
D. closed
What do the economic systems of the Japan and Israel have in common?
A. All are examples of pure market economies.
B. All are examples of mixed economies that are mostly market economies with
some elements of command economies.
C. All are examples of mixed economies that are mostly command economies with
some elements of market economies.
D. All are examples of pure command economies.
In this country a single or centralized government authority decides what is produced. Which term identifies this type of economic system?
A. Traditional
B. Command
C. Market
D. Pubic
South African economic policy is conservative focusing on controlling inflation, maintaining a budget surplus, and using state-owned enterprises to
deliver basic services to low-income areas as a means to increase job growth and household income. However, companies are freed to choose
what to produce, how to produce, and for whom to produce. Where does this policy place South Africa on a continuum between pure market and
pure command?
A. Almost pure traditional
B. Pure market
C. More market than command
D. Pure command
THE RELATIONSHIP BETWEEN GDP AND PRODUCTIVE RESOURCES
GDP – Gross Domestic Product
What is GDP?
-estimate of the total market value of all final goods and services produced in the borders
of ONE country in ONE year. Translation: estimate of all the stuff a country makes in a
year.
Why do people calculate GDP? (why do we care?)
-its an indicator of an economies health
measures a country’s economic output (how much stuff they make in a year)
it helps us compare two economies
higher the GDP the better the economy
What factors do not affect GDP?
-Imports – they are not made IN the country
-Resold or used items; these were counted in the year they were produced when they
were new; can’t count twice
Per Capita GDP
-GDP divided by the county’s population
-Average value of goods and services produced in one country in one year PER
PERSON. (This is NOT average income)
-Per Capita GDP is a BETTER way to compare two economies than with just GDP. See
example:
CHINA
GDP – $8.791 trillion
Per Capita GDP – $6,500
GERMANY
GDP – $2.812 trillion
Per Capita GDP – $34,200
Productive Resources:
Human Capital (resource) – labor/work done by people to produce
products
Examples: teacher, engineer, lawyer, doctor, waiter, factory worker
Capital Goods (resources) – the machines, tools, factories, and
technology that are used to make other goods and services
Examples: flour, drill, oven, truck, gasoline, computer, hammer
Natural Resources – raw materials used to make products or “gifts of
nature”
Examples: trees, water, minerals, animals, fruit
INVESTMENT IN HUMAN CAPITAL
Workers have
education, training
are healthy and
have safe working
conditions
Workers are able to
produce a higher
quantity and higher
quality goods and
services
More products are
made and
international trade
increases
GDP goes up
What are the ways a country or business can invest in its human capital?
Education and training for its citizens
Ensure safe working conditions
Invest in the health of its workforce (healthy workers can go to work)
INVESTMENT IN CAPITAL GOODS
Businesses buy new
factories, tools, and
machines
Workers are able to
produce faster and
more efficiently
More products are
made and
international trade
increases
What are the ways a country or business can invest in its capital goods?
Encourage building of new factories
Uses new machines and tools
Encourage use of high tech tools
Improve its infrastructure (roads, bridges, electricity grids, etc)
GDP goes up
ABSENCE OR PRESENCE OF NATURAL RESOURCES
A country has no
or limited natural
resources
The country must
import the natural
resources they need
Importing resources
adds to the cost of
producing goods and
service (makes more
expensive)
Countries that import
their natural
resources tend to
have lower
standards of living
Countries that have formidable obstacles (climate, terrain, and distance which hinder
exploitation of natural resources and countries that lack of access to) natural resources
tend to have lower standards of living. The lack of natural resources also hinders
trade.
Brazil is building new factories and
using newer technology. These are
examples of
A.Opportunity costs.
B.Gross domestic product.
C.Investment in human capital.
D.Investment in capital goods.
A sixth−grade class decides to open a
popcorn stand. The stand and the popcorn
popper are examples of which factor of
production?
A.natural resources
B.human resources
C.capital resources
D.entrepreneurship
Entrepreneurship
Entrepreneurs are people who have an idea for a business, are willing to take a risk, and
combine human, natural, and capital resources to produce a new good or service.
Entrepreneurs are only able to succeed in a more market system (closer to market than
command on the economic continuum), where they have the freedom to control their own
economic decisions.
Benefits of Entrepreneurship in an economy
Creates new jobs / hires more people
Creates new products and increases trade
Tax money from their business helps the government
Encouraging Entrepreneurship in an Economy
Make the laws to ensure it is quick and easy to start a new business
Have courts and laws that protect privately owned property and investments
A country’s laws
make it easier for the
entrepreneur to start a
business and
have laws to protect
their investments
An entrepreneur
believes their idea for
a new product will
earn a profit and want
to risk their $ and
resources to start a
business
If the business is
successful, the
entrepreneur will
create new
products and hire
new workers (creates
new jobs)
GDP goes up.
International trade
increases. Taxes
are collected to help
the government earn
money
Why is entrepreneurship important to a
country’s economy?
A. Build highways
B. Improve schools
C. Invest in capital goods*
D. Provide better health care
Jose is an auto mechanic in a nearby larger
town. He has decided his own small town
needs its own car repair shop. Jose bought the
building and opened his shop. Jose is an
example of
A. Trade surplus
B. Entrepreneur*
C. Gross domestic product
D. Opportunity costs
You are watching a speech by the Prime
Minister of Australia on T.V. with your
parents about improving the Australian
economy. In the speech, the Prime
Minister says: “We must take make is
easier for Australians to open small
businesses. My plan will give tax breaks
and incentives to Australians who want to
start their own small business...” The
Prime Minister’s plan is based on the
conclusion that:
A. Investing in human capital will
increase the country’s gross
domestic product (GDP).
B. Promoting entrepreneurship
will improve economic
development.*
C. Investing in capital goods will
increase the country’s gross
domestic product (GDP).
D. A tariff on goods imported
from other nations will help
businesses
TRADE BARRIERS
tariff -
TAX ON IMPORTS
quota -
LIMIT ON IMPORTS
embargo -
CUTS OFF ALL TRADE
Determine each type of trade barrier below:
embargo
tariff
quota
The United Kingdom Customs Service has found toxic lead-based paint in
toys imported from a Chinese toy-making company. These toys are
intended for sale in the United Kingdom. Exposure to the paint over a
long period of time could be fatal to children under 6 years old. What type
of trade barrier would guarantee that no child in the United Kingdom
would be exposed to the deadly lead-based paint?
You are the governor of New South Wales, Australia. Living in Sydney,
you have learned that surfing has a huge impact on your state’s local
economy. As governor, you have two economic goals:
* Protecting local Australian surfboard manufacturers from foreign
competition,
* Generating more tax revenue for your state government.
What type of trade barrier could you use that would accomplish both of
these goals?
In order to protect a nation’s car manufacturing industry from foreign car
producers, the government allows 50,000 imported cars a year. This is an
example of what kind of trade barrier?
Why would a country want trade barriers such as tariffs?
Protect local industry and jobs from foreign competition
oTariffs make the foreign product more expensive because the cost of the
tax is passed on to the consumer
Tariffs generate additional money for the government
Why would a country want trade barriers such as quotas?
Protect local industry and jobs from foreign competition
oQuotas force consumers to buy the domestically made product because
there is not a lot of the foreign product available
oMake the foreign product more expensive (supply and demand)
Why would a country want a trade barrier such as an embargo?
Force a another government to change its policies or conform to international
policy
Why would a country want free trade (no trade barriers)?
Lowers the price of imported goods and services
Standard of living for the nation improves, although some jobs may be lost
LITERACY RATE & STANDARD OF LIVING
Literacy rate of a country is the percentage of people over the age of 15 who can read and write. The
economy of a nation impacts the ability of a country to improve literacy and standard of living. There is a
relationship between literacy to the standard of living and the cultural development of a country. Literacy
rate is a factor affecting human capital which in turn impacts standard of living and culture.
Country
Total Literacy Rate
for the Country
Literacy Rate
for Men
Literacy Rate
for Women
IRAN
79%
84%
70%
79%
85%
71%
ISRAEL
97%
99%
96%
NIGERIA
68%
76%
61%
SOUTH AFRICA
86%
87%
86%
CHINA
91%
95%
87%
INDIA
61%
73%
48%
NORTH KOREA
unavailable
unavailable
unavailable
JAPAN
99%
99%
99%
SAUDI ARABIA
The relationship between the literacy rate and standard of
living in Nigeria is
A. Literacy rate has no affect on the standard of living.
B. The higher the literacy rate the higher the standard
of living.
C. The standard of living is independent of literacy rate.
D. Low literacy rate creates a higher standard of living.
How does the high literacy rate in Japan affect its economy and
enhance the standard of living for its citizens?
A. Japan’s high literacy rate contributes to its
economic success and promotes a high standard of living.
B. The literacy rate has little effect on Japan’s economy; thus,
it does not affect the standard of living.
C. Japan’s high literacy rate is the result of its poor economy.
D. The small percentage of people who cannot read are
hindering most of Japan’s economic growth.
CURRENCY EXCHANGE / EXCHANGE RATES
Currency is the money people use to make trade easier. In the United States, we use U.S. dollars to buy goods
and services. When we Americans work at a job, we are paid in dollars. Most of the time, when you are in a
different country, you cannot buy goods and services with currency from your own country. So what do you do?
You trade it in, or exchange it! With each exchange; however, the bank charges a fee. A business that exchanges a
lot of money will pay many fees.
We all know that there is not a currency for Earth; each country has its own currency except Europe. For
international trade to be successful, countries must agree on a system of how much one currency trades for another.
The exchange rate is based off the laws of supply and demand – the more people (traders of currency) are willing to
pay for a dollar, the more valuable it becomes. Remember back to our exchange rate simulation. You were willing
to give me a lot of other countries’ currency to get a US dollar. In that simulation, the dollar was more valuable
than the other currency, because the demand for dollars was higher than the demand for the others.
There are many foreign exchange markets where money from around the world is traded many times a day –
how well or how poorly a currency is trading in these markets determines the exchange rate. The exchange rate
between currencies fluctuates (changes) over the day.
EXAMPLE: You own Olympic Fish Company, a fleet of fishing ships in the islands of Greece. Greece is a member of the
European Union, and uses the Euro as its currency. You make your living selling fish to your customers, mostly in other
countries. Today you have received two orders:
Order #1
To: Olympic Fish Co. Piraeus, Greece
From: Champs Elysees Fish Market, France
1oo tons of sea bass
Note: France is an EU member nation using the Euro.
Order #2
To: Olympic Fish Co. Piraeus, Greece
From: Red Lobster Atlanta, Georgia USA
100 tons of sea bass
Note: Payment in U.S. dollars ONLY.
Based on what you see in the two orders above, which of the orders is easier for you to fill?
A. Order #1, because trade with the France is easier since it uses the Euro.
B. Order #1, because the United States has placed an tariff on fish imported from Greece.
C. Order #2, because France has placed a quota on fish imported from Greece.
D. Order #2, because trading with the United States is easier since is uses the U.S. dollar.
SPECIALIZATION
**Specialization encourages trade between nations**
The division of labor refers to the practice that the tasks of producing a good or service are
divided up into separate tasks. When workers focus on performing separate tasks, specialization
occurs. Within the economy as a whole, the division of labor explains why even if you bake your
own bread, you typically don't grow your own wheat, grind it into flour, build your own oven,
make your own bread-pans and so on. Instead, people specialize in a few skills and then take the
wages that they earn from those skills to purchase the other products that they desire from other
specialists.
Specialization benefits everyone when the skills and strengths of
people match their job in a community. Keep in mind that when
people do what they are good at and then trade their output with
others who are doing what they are good at, we are better off than
we would be if everyone tried to do everything for themselves. It’s
better for the overall economy if individual people produce one
thing well and trade it, than to produce poorly everything they use
in day themselves.
Specialization encourages trade and can be a positive factor in a
country’s economy. Specialization occurs when one nation can
produce a good or service at a lower opportunity cost than another
nation. However, one drawback is that we end up depending on each
other to create the goods or services we need. But specialization is
possible only when people are able to coordinate their production
and consumption decisions with each other.
There are three reasons
why the division of labor
increases output:
workers who specialize
on one job become much
better at doing it;
with specialization, the
time that it would take to
switch between jobs is
eliminated
workers who specialize
on one job often invent
more effective ways or
new machines for doing
the job.
Define it:
Benefits:




Draw a Picture:
SPECIALIZATION
Drawbacks:

Over-specialization means
Define it:
Draw a Picture:
When a country focuses resources
on creating fewer specific products
and services than they consume;
make one thing well and trade for
everything else
Benefits:
SPECIALIZATION
Greater variety of products
with trade



Drawbacks:

Over-specialization means
Define it:
Draw a Picture:
When a country focuses resources
on creating fewer specific products
and services than they consume;
make one thing well and trade for
everything else
Benefits:
SPECIALIZATION
Greater variety of products
with trade
Produce more in less time
Better quality
More free time for workers
Drawbacks:
Dependent on others for
important items
Over-specialization (onecrop economies and lack of
diversification) can lead to
economic trouble
OPEC (organization of petroleum exporting countries)
import – products brought into a country for sale
export – products leaving a country for sale
trade – voluntary exchange of goods and services
free trade – trade that does not have trade barriers (quotas, tariffs, embargos)
What is OPEC?
The Organization of Petroleum Exporting Countries (OPEC) was created in 1960
by some of the countries with large oil supplies who wanted to work together to try to
regulate the supply and price of oil they export to other countries.
The central organization of the world oil trade is the OPEC. OPEC is an international
organization that has many members; not all oil producing nations are OPEC members and
not all OPEC members are Middle Eastern countries. The members of OPEC include the
Southwest Asian countries of Iran, Iraq, Saudi Arabia, and Kuwait. OPEC’s purpose is to
help its members develop policies on oil production and trade that will benefit each other.
The organization manipulates the price of oil according to market demand, availability,
and other factors.
Function of OPEC?
By controlling the production of oil, OPEC lowers or raises the price of oil (based on
the laws of supply and demand). OPEC decides how much oil they will produce and that
determines the price on the world market. When they produce less, the price on the world
market goes up. When they increase production, the price on the world market goes down.
Role of oil in the economies of SW Asia
Some countries in SW Asia have access to oil fields while others do not. By comparing
the GDPs of Israel, Iran, and Saudi Arabia and the presence or absence of oil, you should
notice an impact on the GDP. Be able to explain how the presence or absence of oil affects
economic development. While oil is a extremely valuable resource, countries like Israel
have made up for the lack of oil by creating a highly developed industrial sector producing
high-tech goods.
Israel
GDP— $170.3 billion
(2008 est.)
Oil – No significant
proven reserves.
Saudi Arabia
GDP— $527 billion (2008 est.)
Oil – Largest producer and
exporter of oil in the world.
Approximately 90% of
government revenues come from
the oil industry.
Iran
GDP— $852.6 billion (2008
est.)
Oil – The economy relies
primarily on the oil industry.
Over 85% of government
revenues come from this sector.
Over 80% of exports are
petroleum and petroleum
products.
Ticket Out (for a grade)
1.
When President Obama decided to create programs for continuing higher education
and training for citizens, making sure companies have safe working conditions, and
investing in the healthcare and overall well being of the workforce in the United States
is a great example of how President Obama has invested in ___________________ to
boost the GDP of the US.
A. Capital goods
B. Healthcare Plans
2.
C. Currency
D. Human Capital
Since China is a major exporter of goods to all over the world they have invested in
more machines, tools, factories, and technology to make all of their goods and
services more efficiently. China has made an good decision by investing in
____________ to make their exports/products better.
A. Capital goods
B. Healthcare Plans
C. Currency
D. Human Capital
3. Trees, water, minerals, animals, fruit are examples of
A. Capital goods
B. Natural Resources
C. Organic Goods
D. Human Capital