Download Economic Systems Notes

Economic Systems - Chapter 19.1 26.2 & 26.3
Gross Domestic Product (GDP)
 Measure of an economy’s size & success (monetary measure - $13.78 trillion in 2007)
 Total value of all the final goods & services produced in a country during a single year
o Used cars not counted in GDP because second hand sales are not counted
 Used to measure standard of living (quality of life based on the possession of necessities and luxuries that
make life easier) in a country
 Measures quantity not quality
 Per Capita GDP – total GDP divided by the country’s population (U.S. was $45,800 (2007 est.))
 Compared yearly to check growth of country
o Higher GDP from previous year = growing economy
o Lower GDP from previous year = shrinking economy
4 Types of Economies
 Traditional
o Economic decisions made by customs
o Hunting/farming/gathering
o No technology
o No global trade
o Rural & non-industrialized
o Africa, South America & Asia
o Sometimes known as 3rd World Countries
 Command Economies
o Government makes all economic decisions (3)
o Productive resources are owned by the government
o Prices are set by the Government & are typically low
o No Competition
o Shortages are common
o No individual freedoms
o North Korea, Cuba, China, former USSR
 Market Economies
o Decisions made by market forces of supply & demand
o Individual freedoms
o Capitalism – Private citizens own the means of production
o Free Enterprise – Freedom of businesses to compete without government interference
 Mixed Economies
o Any combination of economic systems
Capitalism & Free Enterprise
1. The U.S. economy is built on a market economy, but government still plays a role
o Free Enterprise – minimum gov’t interference
o Capitalism – private citizens own and use factors of production (land, labor, capital, &
entrepreneurship) to make a profit
7 Characteristics of a Market Economy
1. Markets – exchanges here determine prices of goods & services
2. Consumer Sovereignty – the consumer is ‘king’ of the market
 They are the ones who determine what products will be produced
 It exists only in Market based economies
3. Economic freedom – freedom of choice with consequences
 Example 4. Private Property Rights
5. Competition
 Capitalism thrives on competition
 Rewards the most efficient producers
6. Profit Motive
 Purpose is to raise the standard of living
 It is the reason for growth in a market system
7. Voluntary Exchange
 Both buyers & sellers must feel a benefit
The Rise of Capitalism
 2 concepts developed
o People work for economic gain
o Government should have a limited role
 1200s C.E. trade routes opened between Europe & the East
o Silk Roads, Marco Polo
 Throughout hundreds of years trade increased
 Development of ideas of wealth
 Adam Smith
o Scottish Economist
o Wealth of Nations
 Basic Principles of Economics
 Individuals who seek profit benefit all of society
 Laissez-Faire – to leave alone
 The government should not interfere in the market
 Government’s only role should be to ensure free competition
The U.S. is a Mixed Economy
 Government regulations
 Government provides some goods & services
 At certain times government can take control of the means of production
Socialism
 Socialism – belief that the means of production should be owned & controlled by society either directly or
through the gov’t
 Karl Marx
o Wrote “The Communist Manifesto”
o Socialist – believed industrialized nations divided into bourgeoisie (entrepreneurs) & proletariat
(workers)
o Predicted revolution of the proletariat
o Believed socialism would develop into communism
Communism
 Communism – one class would evolve where property would be commonly held & there would be no need for
government
 Built on the idea of socialism
Transitioning Economies
 Former Soviet Union & the Soviet Bloc
 Inefficiency of command economies led to no or very small growth
 Transition of this type of economy led to transition from Communism to Democracies
 Why would a transition be hard?
Economic Systems - Chapter 19.1 26.2 & 26.3
Gross Domestic Product (GDP)
 Measure of an economy’s size & success (monetary measure - $13.78 trillion in 2007)

_________________________________________________________________________________________________
___________________________________________________________

o Used cars ____________________________________ in GDP because second hand sales are not counted
Used to measure standard of living (quality of life based on the possession of necessities and luxuries that make life
easier) in a country

Measures _______________________ not quality

_________________________________________________________________________________________________

Compared yearly to check growth of country
o
Higher GDP from previous year = ____________________________________________
o
_______________________________ GDP from previous year = shrinking economy
4 Types of Economies
 Traditional


o
__________________________________________________________________________________________
o
o
o
Hunting/farming/gathering
No technology
No global trade
o ________________________________________________________________________
o Africa, South America & Asia
o Sometimes known as 3rd World Countries
Command Economies
o
o
________________________________________________________________________
Productive resources are owned by the government
o
o
o
o
________________________________________________________________________
No Competition
Shortages are common
No individual freedoms
o ________________________________________________________________________
Market Economies
o Decisions made by market forces of supply & demand
o Individual freedoms
o
__________________________________________________________________________________________
____________________________________________ – Freedom of businesses to compete without gov’t
interference
 Mixed Economies
o Any combination of economic systems
Capitalism & Free Enterprise
 The U.S. economy is built on a market economy, but government still plays a role
o
o
o
__________________________________________________________________________________________
Capitalism – private citizens own and use factors of production (land, labor, capital, & entrepreneurship) to make
a profit
7 Characteristics of a Market Economy
1.
_________________________________________________________________________________________________
2.
Consumer Sovereignty – __________________________________________________________
 They are the ones who determine what products will be produced
 It exists only in Market based economies
3.
Economic freedom – _____________________________________________________________
4.
5.
6.
7.
 Example Private Property Rights
Competition
 _________________________________________________________________________________________
 Rewards the most efficient producers
Profit Motive
 Purpose is to raise the standard of living
 It is the reason for growth in a market system
Voluntary Exchange
 _________________________________________________________________________________________
The Rise of Capitalism
 2 concepts developed
o People work for _________________________________________________________
o Government should have a limited role

_________________________________________________________________________________________________


o Silk Roads, Marco Polo
Throughout hundreds of years trade increased
Development of ideas of wealth

__________________________________________________________________________________
o Scottish Economist
o
___________________________________________________________________________________
 Basic Principles of Economics
 Individuals who seek profit ___________________________________________

Laissez-Faire – ____________________________________________________
 The government should not interfere in the market
 Government’s only role should be to ensure free competition
The U.S. is a Mixed Economy
 Government regulations

_________________________________________________________________________________________________
 At certain times government can take control of the means of production
Socialism

_________________________________________________________________________________________________
_________________________________________________________________________________________________

Karl Marx
o Wrote “The Communist Manifesto”
o
o
o
Communism

_______________________________________– believed industrialized nations divided into bourgeoisie
(entrepreneurs) & proletariat (workers)
Predicted revolution of the proletariat
_______________________________________________________________________
_________________________________________________________________________________________________
_________________________________________________________________________________________________
 Built on the idea of socialism
Transitioning Economies
 Former Soviet Union & the Soviet Bloc

_________________________________________________________________________________________________

Transition of this type of economy led to transition from Communism to Democracies
Why would a transition be hard?
