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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.