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ECONOMY STUDY GUIDE
SS6E5 The student will analyze
different economic systems.
WHAT IS ECONOMY?
All of the activities people do to earn a
living are a part of a system called the
economy
 Economy =

What does economy include?
 Going
to work

Making goods (things)

Buying and selling

Trading services
How do YOU participate in the economy?
Anything you buy, sell, trade
 Selling baked goods
 Buying ice cream, juice, water

ECONOMICS IS . . .
THE
STUDY OF THE
PRODUCTION,
DISTRIBUTION, AND USE
OF GOODS AND SERVICES
 Because
a country does not
have everything they want or
need they must develop an
economic system to figure out
how to use its limited resources
to answer three basic questions.
3 BASIC QUESTIONS
 (1)
WHAT TO PRODUCE?
 (2)
HOW TO PRODUCE?
 (3)FOR
WHOM TO PRODUCE?
TRADITIONAL ECONOMY

Exchange of goods and services based
on custom and tradition
Traditional Economy
 In
a traditional economy, the
customs and habits of the past are
used to decide what and how goods
will be produced, distributed, and
consumed.
 Jobs are handed down from
generation to generation and there
is little change over the years.
Traditional Economy
 There
is no government leader to
tell the people what to do. The
people realize their needs and do
the work.
 The people in this society produce
what they need to survive.
Traditional Economy
 Types
of work in a traditional
economy
 Farming
 Hunting and gathering
 Cattle herding
 Pottery or other crafts
Example of traditional economy
 The
Yanomamo Indians in the
Amazon rain forest have a
traditional economy.
 Each village meets its own
needs by raising food and
finding resources in the forest.
Traditional Economy

Based on traditional economy who
answers these questions?

WHAT TO PRODUCE?


HOW TO PRODUCE?


What they need to survive
Farming and hunting and gathering
FOR WHOM TO PRODUCE?

The people.
COMMAND ECONOMY

An economy in which the government
owns the industries and makes the
economic decisions.
Command Economy
 The
government makes the
basic economic decisions. The
GOVERNMENT determine what
goods and services to produce,
the prices, and the wages
workers will be paid.
Problem with command economy

One problem with the command economy
system is trying to predict exactly what goods
people will need.
 For example, the government may think that
building tractors is important. More tractors
mean more crops. However, if the factories
are busy making tractors, they may not make
enough shoes. The people may have enough
food, but no shoes to wear.
Benefit of command economy
 One
benefit of command
economy is that prices are
controlled. The government
decides the cost of food and
other goods.
Example of Command Economy
Cuba
 The government owns all factories and
most farms.
 The government makes decisions about
what to produce and the prices.
 About 90% of Cubans work for the
government.

Command Economy
 In
a command economy who
answers these questions?
What to produce?
 The government
 How to produce?
 The government
 For whom to produce?
 The government

MARKET ECONOMY
An economy in which individual business
owners make economic decisions based
on what the consumers buy.
 Consumer=customer

Other names for market economy
Free enterprise
 Capitalism
 laissez-faire

Market Economy
 Most
businesses and farms are
owned by individual owners or
corporations (groups of people).
 The owners/people decide what
to produce.
Law of supply and demand
 The
law of supply and demand
determines the price people pay for
things.
 Supply- amount of good available
 Demand- how many consumers
want the goods
 Examples: Nikes, I-phones
Benefits of market economy
Consumers can usually find the products
they want.
 People are free to work and earn as
much money as possible to buy the
things they want and need.
 Businesses are free to find new ways to
make better products and lower prices.

Problems with market economy
If there is a great demand for goods or
services the price may go up so much
that people cannot afford to purchase it.
 If a company does not manage its
money well, it can go out of business
and the worker lose their jobs.

Example of Market Economy
Mexico
 Individuals and corporations own most
businesses. They make the decisions
about what to produce and sell.
 The government does not set prices or
own businesses or farms.

Market Economy
In
a market economy who
answers these questions?
What to produce?
 The people (supply and demand)
 How to produce?
 The owners/people
 For whom to produce?


The people
MIXED ECONOMY
An
economy that has
characteristics of both
command and market
economies
Mixed Economy
 There
are no pure (totally)
command or pure (completely)
market economies.
 All modern economies have
characteristics of both command
and market and are referred to
as MIXED.
Mixed Economy
 Cuba
is considered a command
economy. However the government
does allow some farmers to sell
extra produce and keep the money
for themselves after the government
quotas (amount required) have been
met.
Mixed economy
 Mexico
is considered a market
economy. However, the
government owns the energy
companies.
 Brazil uses the market economy,
but the government owns the
steel industry.
Mixed economy

In the United States we have a mixed
economy. Individual ownership is encouraged
(market economy) but the government
(command economy) is involved.
 For example, the government makes laws to
protect workers from unfair bosses.
 Also the U.S. government makes rules for
businesses such as how much pollution a
factory can produce.
Mixed Economy
 Although
there are no countries with
a pure (totally) command or pure
(totally) market economy, most
countries are closer to one type of
economic system than another.
 Look at the economy continuum on
the next slide.
Watch the continuum link.

http://www.econedlink.org/interactives/in
dex.php?iid=187&type=educator
COMMAND
ECONOMY
Cuba
MARKET
ECONOMY
Venezuela
Brazil
Canada
You try!
Which statement describes the economy of Brazil?
A. Brazil has a pure market economy.
B. Brazil has a pure command economy.
C. Brazil is mostly a market economy, but the
government does control some businesses.
D. Brazil is mostly a command economy, but the
government allows some farmers to sell some
of their goods on their own.
COMMAND
ECONOMY
Cuba
MARKET
ECONOMY
Venezuela
Brazil
Canada
An economy that is a blend between a
command economy and a market
economy is said to be
A. hybrid
B. mixed
C. centralized
D. decentralized
COMMAND
ECONOMY
Cuba
MARKET
ECONOMY
Venezuela
Brazil
Canada
Which country in the diagram has the
economic system closest to a pure
market economy?
A. Brazil
B. Canada
C. Cuba
D. Venezuela
Standards
• SS6E2 The student
will give examples of
how voluntary trade
benefits buyers and
sellers in Latin
America and the
Caribbean and
Canada.
• A. Explain how
specialization
encourages trade
between countries
• B. Compare and
contrast different
types of trade barriers
such as tariffs,
quotas, and
embargos
• HOW DO COUNTRIES GET
THE OTHER GOODS THEY
NEED?
THEY
TRADE!
What is trade?
• Trade is the voluntary exchange of goods
and services among people and countries.
• Have you ever traded something?
Trade
• Sixth graders often trade money for things
they want to purchase at school.
• Give an example.
• Trade occurs when buyers and sellers
willingly participate in market transactions.
TRADE BARRIERS
• What is a barrier?
Trade Barriers
• Countries sometimes try to limit trade by
creating trade barriers.
• Countries try to stop, block, or slow down
the amount of goods coming into their
borders.
• Examples of trade barriers:
1. tariff
2. quota
3. embargo
TARIFF
• Tariff- a tax (money) on imports
• Imports- goods purchased from other
countries
• Example- Norway imposed a fee of 29%
on lumber imported from Canada
QUOTA
• Quota- specific limit placed on the number
of imports that may enter a country
• (sounds like quotient (a number in math) and a
quota is a limit or NUMBER of goods)
• Once the quota (amount) has been
reached no more imports will be allowed
into a country.
• Example- a country may limit sugar
imports to 50 tons per year
EMBARGO
• Embargo- government order to stop trading with
another country. The military is usually involved.
• (EMbargo--- M for military)
• The embargo might be enacted to put pressure on
another country.
• Example- The United States put an embargo
against Cuba hoping that Cuba would change from
a communist country to democratic one.
EMBARGO
• Another example of an embargo was in
1998. Australia put an embargo on
weapons being shipped to Yugoslavia.
There was a war in Yugoslavia and
Australia stopped selling weapons to both
sides.
• Australia wanted to help end the fighting.
LET’S LOOK AT TRADE IN
SOME OF THE AREAS OF
THE WORLD WE STUDY…
Europe
• In Europe the European Union (EU) is a
free trade zone. There are no tariffs
between the countries in the EU.
• Russia is not a member of the EU. Russia
places a tariff on imported goods which
increases the prices.
• Russia hopes that the higher prices on
imports encourage Russians to buy
products made in Russia.
Australia
• In Australia there are few trade barriers.
• Australia wants to encourage imports and
exports.
• Australia has natural resources such as
coal and iron ore. Australians trade these
resources with China. In return China
sends manufactured goods like
televisions, computers, washing machines
to Australia.
Canada and
Mexico
• In 1994 Canada, Mexico, and the United
States signed the North American Free
Trade Agreement (NAFTA).
• NAFTA took away all tariffs on goods
traded among the three countries.
• Leaders believed that trade would
increase between the three countries.
• NAFTA created the world’s largest freetrade zone.
What is specialization?
• When a person in a factory does one job
or part of the process they become an
expert at that job. The person can improve
at their machine and learn the best way to
complete their job. This worker is able to
save time and money while being
productive.
Specialization
• Countries may specialize in the production
of certain goods. Most countries do not
make all of the goods (stuff) they need.
Instead they focus on producing certain
goods.
You try!
1. Which type of trade barrier
involves a limit on goods brought
into the country?
•
•
•
•
A. embargo
B. quota
C. tariff
D. voluntary exchange
2. What might make an embargo against
a country successful?
• A. Merchants are able to continue doing
business.
• B. People in the country are not affected by
the embargo.
• C. The country does not need to trade with
other countries.
• D. The citizens in the country suffer because
of the embargo and demand a change from
their government.
3. Which is an example of specialization?
• A. A business makes and sells goods for a
profit.
• B. Two people come to an agreement to
trade goods they produced.
• C. A factory builds only one product and finds
ways to build it better and less expensively.
• D. A country buys all the goods it need from
other countries and does not produce any of
its own.
4. Why do businesses specialize?
• A. because they can sell more types of
goods
• B. so they can produce goods at a slower
pace
• C. so the workers will not become experts
in their jobs
• D. because they can produce more goods
in less time and for less money
5. In order to help U.S. car companies
sell more cars, some people want to
put a limit on the number of cars that
can be imported from other countries.
This is an example of a(n):
•
•
•
•
A. embargo
B. quota
C. tariff
D. voluntary trade
6. What action did Australia take to
try to stop the fighting in
Yugoslavia?
• A. embargo
• B. quota
• C. tariff
• D. trade
7. Which type of trade barrier involves
adding a special tax onto goods
brought into the country?
•
•
•
•
A. embargo
B. quota
C. tariff
D. voluntary trade
STANDARDS:
SS6E6 The student will
analyze the benefits of and
barriers to voluntary trade.
Explain why
international trade
requires a system for
exchanging currencies
between nation.
INTERNATIONAL TRADE
REQUIRES A SYSTEM FOR
EXCHANGING CURRENCIES
BETWEEN NATIONS.
Mexican Pesos
Brazilian Reals
Currency
• Currency is the money
people use to make
trade easier. In the
United States we use
U.S. dollars (USD or $)
to buy goods and
services.
• In other countries
different currencies are
used.
Examples of Different Currencies:
•
•
•
•
•
•
•
•
1. Canada- Canadian dollar
2. Mexico- peso
3. United States- American dollar
4. Cuba- peso
5. Brazil- real
6. Russia- ruble
7. Australia- Australian dollar
8. members of the European Union- euro
CURRENCY
• Most of the time when you
are in 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.
Exchange rate is a fee
that you pay the bank
each time you exchange
money/buy something.
Economic Standard
• SS6E7 The student
will describe factors
that influence
economic growth and
examine their
presence or absence
in the areas of the
world we study.
• Explain the
relationship between
investment in human
capital (education and
training) and GDP.
• Explain the
relationship between
investment in capital
(factories, machinery,
and technology) and
GDP.
What is GDP?
• The Gross Domestic Product (GDP) of a
country is the total value of all the goods
and services produced in a country in one
year.
• The GDP is one way of telling how rich or
poor a country is.
• The GDP is a good way to compare the
wealth of different countries.
GROSS DOMESTIC PRODUCT
High GDP = High Standard of Living
Low GDP = Low Standard of Living
GDP
• Raising the GDP of the country
can mean higher standard of
living or better economic level for
the people.
• One way to increase the GDP is
to invest in human capital
(people).
• Human capital is the money a
country spends on education,
training, improving the skills and
health of the workers/people.
HUMAN CAPITAL
• Russia, Germany, and the UK have made
large investments in human capital.
• The literacy rate (percentage of people who
can read and write) of each country is nearly
100%.
• Russia has the most poverty of the 3
countries. The Russian government is
investing (spending large amounts of money)
to train workers and educate the youth.
• In the former Soviet Union, workers were
assigned jobs. Today, in Russia, workers
must show their skill and value to the
business in order to keep their jobs.
PHYSICAL CAPITAL
• Another way to raise the GDP is
to invest in physical capital.
• Physical capital is the factories,
machines, technologies,
buildings, and property needed
by businesses to operate.
• If a business is going to be
successful, it must keep the
buildings in good condition and
the equipment up to date.
• CAN YOU GUESS
WHICH EUROPEAN
COUNTRY IS BEHIND
IN INVESTING IN
PHYSICAL CAPTIAL?
RUSSIA !
• Russia is behind because the former
Soviet Union did not do a good job of
investing in physical capital.
• Russia’s workers are not as productive as
workers in the EU.
• The highways and buildings are in need of
repair. The equipment and technology are
out of date.
• To solve this problem, the Russian
government has plans to invest ONE
trillion dollars over the next few years in
capital improvements.
• Human resources are the education and
skills that people have to produce goods
and services.
• Capital resources are things like
machines and equipment that people need
to produce goods and services.
• Natural resources are “gifts of nature”
such as forests, water, minerals, and
fertile soil.
NO ONE HAS EVERYTHING
Scarcity
is the limited supply
of something.
No country has everything
the people need and want.
The Role of Natural Resources in a
Country’s Economy
• Natural resources are important to countries.
• Without natural resources of their own,
countries must import the natural resources
that they need, which adds to the cost of
goods and services.
• A country is better off if it can use its own
resources to supply what it needs.
• If a country has many natural resources, it
can trade with other countries for goods and
services it needs.
REVIEW QUESTIONS
1.What is the currency people
use in much of the EU called?
•
•
•
•
A. dollar
B. euro
C. pound
D. ruble
2. What is a problem with
exchanging currency?
• A. People make more money by trading
currency.
• B. Most people want to use American
dollars to trade.
• C. Banks do not like to exchange their
money for other currencies.
• D. It costs more to do business because
banks charge fees for exchanges.
3. Which is an example of investing
in human capital?
•
•
•
•
A. cash
B. education
C. factories
D. highways
4. What is human capital?
• A. a country’s standard of living
• B. the cash a business has to
spend
• C. investment in the workers of a
business or country
• D. the buildings, equipment, and
property owned by a business
Entrepreneurship
• The person who takes
a risk and provides the
money to start and own
a business is called an
entrepreneur.
• An entrepreneur has
an idea and is willing to
take a risk to make
their business a
success.
Entrepreneurs help the
economy of their country by:
1. Giving people jobs
2. Paying tax money
3. Producing goods and
services to trade
No country has everything it needs.