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Unit 2: Economic Systems
IES Lluís de Requesens (Molins de Rei)
Batxillerat Social
Economics (CLIL) – Innovació en Llengües Estrangeres
Jordi Franch Parella
Objectives
In this unit, the students will learn the main
characteristics of the three different economic systems:
- Free market economy
- Mixed economy
- Planned economy
They will also learn the key points in the thought of
their intellectual “fathers”.
Adam Smith
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Adam Smith (1723-1790) is considered
the father of modern economic theory.
He is the author of “The Wealth of
Nations” (1776).
He truly understood the importance of
saving and established the law of
supply and demand. But he was wrong
with the objective theory of the labourvalue, that influenced Marx.
Richard Cantillon

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Recent research has discovered that
Richard Cantillon (1680-1734) can
be considered the “father” of the
free market economy with his work
“Ensayo sobre la naturaleza del
comercio”. He was the first to
understand the effects of the
increment in the quantity of money
(inflation) and the process involving
changes in the relative prices and
distributing the income unfairly.
Karl Marx
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Karl Marx (1818-1883) is the author of
“Das Kapital” (1867) and is the father of
planned economy or communism. He
claimed that the labour was the unique
source of value and that capitalists took
it away from workers. He was also wrong
in believing that a false divide is between
labour and capitalist classes. In a
planned economy there is no private
property and all belongs to the state, that
decides for you what to study, where to
work and whether you have a right to
life.
John Maynard Keynes

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here)
Keynes (1883-1946) was the author of
the “General Theory” (1936) and the
father of mixed economy. He mistrust
free
market
for
reaching
full
employment and supported the role of
government to interfere society both
fiscal and monetary. The former
involves public spending, deficits and
huge debts and the latter the creation
of money out of thin air, to fix interest
rates
artificially
low
and
the
expansion of credit.
Market Economies
 Resources are owned and controlled by
individuals
 Economic decisions are made by individuals
competing to earn profits
 Individual freedom is considered very important
 Economic decisions are made by the basic
principals of supply and demand
 Profit is the motive that guides firms in their
attempts to serve the consumers
Market Economies
 Also called capitalist economies
 There are many economic freedoms
 There is competition among businesses
 Competition determines price which
increase the quality of the product
Command Economies
 The government or other central authority makes
decisions and determines how resources will be
used
 There is no private property, nor markets, nor
supply and demand, nor prices
 There is little individual freedom
 There is no competition
 Businesses are not run to create a profit
Command Economies
 Consumers have few choices in the market
place
 Factories are concerned with quotas
 Shortages are common because of poorly
run factories and farms
 The government dictates the job in which
you work
Command Economies
The government sets the prices
of goods and services
Examples of command
economies: Cuba, North Korea
and the People’s Republic of
China
Mixed Economies
Private property is allowed, but the government takes an
active role in society
It does mean that the ratio public spending / GDP is high
(40% USA, more than 40% Spain, 50% Germany, 55%
France, 60% Sweden ...)
It involves that the government commits itself to provide
public education, public health, public pensions ... (Welfare
state)
In monetary terms, the Central Bank fixes interest rates,
inflates monetary supply and takes control of commercial
banks in orchestrating credit expansion
Review
Three Types of Economies
Market Economies
Planned Economies
Mixed Economies