Download The NUTS & BOLTS OF Economics in Europe, Canada, Latin

The NUTS & BOLTS OF
Economics in Europe, Canada,
Latin America and Australia
ECONOMIC SYSTEMS
Market Economy
Traditional Economy
What to produce?
What people want to buy and
sell (if people are willing to buy
What to produce?
What people need to survive
Command Economy
What to produce?
Whatever the government
decides
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)
Characteristics
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
Resources (capital and natural)
are owned by individuals
Economic decisions are made
by individuals competing to earn a
profit
Individual freedom is
considered very important
Profit is the motive for
increased work
Competition between businesses
Many economic freedoms and
choice in the market place
Competition determines prices
which increase the quality of the
product
No government intervention in
the economy (hire kids, pollute,
unsafe conditions)
ALSO CALLED CAPITALIST
ECONOMY
Characteristics
Found in rural, nondeveloped countries (some
parts of Asia, South America,
and Africa)
Customs govern the
economic decisions
Technology not used
Farming, hunting, and
gathering are done the same
way as the generation before
Activities are centered
toward the family or ethnic unit
Men and women have
different economic roles and
tasks
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). Gov’t 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
Cuba
EXAMPLES
UK, Germany, Russia, Brazil, Canada, and
Australia
MIXED ECONOMIC SYSTEM CONTINUUM
0% Pure Command
100% Pure Market
Place the following countries on the continuum.
Russia (51%)
Germany (71%)
UK (79%)
Australia (83%)
Brazil (57%)
Cuba (28%)
Canada (81%)
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 TO KNOW
Russia The Russian economy underwent tremendous stress in the 1990s as it
moved from a centrally planned economy to a free market system. The
result was a rapid decline (60%) in the value of the ruble, flight of foreign
investment, delayed payments on debts, a breakdown of the banking
system, and the threat of runaway inflation.
The Russian economy bounced back quickly from the 1998 crisis and
enjoyed over nine years of sustained growth averaging about 7% but when
the global economic crisis starting in 2008 hit Russia hard, including a
collapse in their stock market.
Brazil Since 1996, many Brazilian industries have become privatized. There is
competition, both foreign and domestic, in most major industries. On the
command side, the two largest banks in Brazil are government-owned and
there are still higher taxes than in many other market leaning countries.
The ownership of productive resources tends to be held by an increasingly
larger yet still more privileged class, with a large number in the population
living in poverty. However, Brazil’s reforms and its large scale
participation in international free trade relationships places it more toward
the market side of the continuum than the command side. It would fall
between Cuba and Canada on the continuum.
Brazil is moving toward a more pure market economy.
Australia
Australia's economy is dominated by its services sector, yet it is the
agricultural and mining sectors that account for the bulk of Australia's
exports. Since the 1980s, Australia has undertaken significant structural
reform of its economy and has transformed itself from an inward-looking,
highly protected, and regulated marketplace to an open, internationally
competitive, export-oriented economy. Key economic reforms included
reducing high tariffs and other protective barriers to free trade, privatizing
many government-owned businesses. Australia enjoys a higher standard of
living than any G7 country other than the United States. Both the federal
and state governments have recognized the need to invest heavily in water,
transport, ports, telecommunications, and education infrastructure to
expand Australia's supply capacity.
Cuba –
By official government statements, Cuba would be considered a socialist
state with most industries controlled by the government and 75 – 93% of
the labor force employed by the government. This places Cuba very close
to the command side of the economic system continuum. In reality,
however, like many centrally planned economies, Cuba’s state-run entities
are inefficient and do not provide all the goods and services desired by
citizens. Because of these inefficiencies, Cuba has a vibrant informal
economy that is estimated at about 40% of the total economy. Since
informal economies tend to be very close to pure market systems, this
would move Cuba somewhat away from the command side of the
continuum. However, in comparison to Canada, it would still be more
command-based.
UK The United Kingdom has the sixth-largest economy in the world, is the
third-largest economy in the European Union, and is a major international
trading power. The United Kingdom is the European Union's only
significant energy, oil & natural gas exporter. A highly developed,
diversified, market-based economy with extensive social welfare services
provides most residents with a high standard of living. Unemployment
rates are amongst the lowest within the EU.
Canada –
Due to the close relationship between the United States and Canada, the
economy, trade, and investment sections focuses on trading relationship
between the two countries. Canada definitely leans toward the market side
of the economic system continuum. Although famous for its socialized
medicine, Canadian industries are mostly privately owned. Canada allows
a tremendous amount of direct foreign investment by American
companies.
Germany –
The German economy Europe's largest--is a leading exporter of machinery, vehicles, chemicals, and household equipment and benefits from a highly
skilled labor force. Like its Western European neighbors, Germany faces significant demographic challenges to sustained long-term growth. The
modernization and integration of the eastern German economy—once the communist country of East Germany before reunification in 1989.
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 United Kingdom, Germany, and Russia 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
TRADE BARRIERS
tariff quota embargo -
TAX ON IMPORTS
LIMIT ON IMPORTS
CUTS OFF ALL TRADE
Determine each type of trade barrier below:
Embargo
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?
Tariff
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?
Quota
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
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 DGP?
-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
Worker 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
GDP goes up
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)
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 lonely 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
1. 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
2. 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 1.
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
3. 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
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
Germany
99%
99%
99%
Russia
99%
99%
99%
UK
99%
99%
99%
Brazil
88.6%
88.4%
88.8%
Cuba
99%
99%
99%
Mexico
91%
92.4%
89.6%
Haiti
52.9%
54.8%
51.2%
Canada
99%
99%
99%
Australia
99%
99%
99%
1. The relationship between the literacy rate and standard of living in Latin America 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
2. How does the high literacy rate in Australia affect its economy and enhance the standard of living for its citizens?
A.Australia’s high literacy rate contributes to its economic success and promotes a high standard of living.*
B.The literacy rate has little effect on Australia’s economy; thus, it does not affect the standard of living.
C.Australia’s high literacy rate is the result of its poor economy.
D.The small percentage of people who cannot read are hindering most of Australia’s economic growth.
3. Which country on the chart above do you think as the lowest standard of living?
A.Mexico
B.Germany
C.Australia
D.Haiti
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. The euro (€) is the official currenncy of the European Union, and is currently in use in 16
of the 27 Member States. The states, known collectively as the Eurozone, are Austria, Belgium,
Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Slovenia and Spain and is used daily by some 327 million Europeans.
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:
When a country focuses resources on creating
fewer specific products and services than they
consume; make one thing well and trade for
everything else
Draw a Picture:
Benefits:
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 (one-crop economies
and lack of diversification) can lead to
economic trouble
SPECIALIZATION
NAFTA (North American Free Trade Agreement)
NAFTA – a free trade (no tariffs or quotas) agreement between Canada, Mexico, and the
USA; went into affect on Jan. 1, 1994
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)
FUNCTIONS OF NAFTA
Eliminate trade barriers between the USA, Canada, and Mexico. It also strives to
promote fair competition, increase investment, and protect and enforce property rights,
and establish a framework for further cooperation between North American countries.
WHY Formed?
Increase trade between among the three nations by ending tariffs, allowing products to
be shipped freely from one country to the next without companies having to pay taxes on
their cargo.
Benefits
-increase trade
-faster and easier trade
-companies don’t have to pay taxes on
imports therefore makes materials
cheaper
-big boost to Mexico and Canada’s
economy
-companies earn higher profits and
sales have risen
Drawbacks
-some US jobs lost to Mexican workers / work
for less money / cheaper labor
-forced small farmers in Mexico to go out of
business due to large corporate owned farms.
(think Zapatistas )
-working conditions in Mexico have improved
very little if at all
EU (European Union)
What led to the creation of the EU?
Create a unified Europe. Created in 1992. formed out of a similar organization the European Community.
What’s the purpose of the EU?
The twenty-seven members of the EU are political and military allies. They cooperate on security, law enforcement, and immigration issues. They also
promote trade and investment in member nations due to the elimination of trade barriers; it’s a free trade zone between member nations
What’s a Euro?
A European Currency used by several member nations introduced in 1999
Relationship between Member Nations
The EU member nations work together for advantages that they could not achieve individually. EU nations are more powerful when they work together
because they are more land, more people, more diverse natural resources, more money and an overall larger economy.
The main purpose of the European Union is to
A.Require all European nations to adopt a command economy.
B.Strengthen the economic, political, and defense ties of member nations.*
C.Create a large standing army for use around the world.
D.Solve Europe’s environmental problems.
The EU was established in the 1990s. Which of the following is a goal of
the EU?
A.to create a single European currency*
B.to endorse a single European language
C.to provide military aid to European countries experiencing civil war
D.to protect western European countries from formerly communist
countries
How has the European Economic Community/European Union been a
benefit to the countries that have joined it?
A.The use of tariffs has increased trade.
B.Trade among member nations has decreased.
C.More people now make full use of their country's resources.
D.The exchange of goods among the members has become easier.*
What is one of the goals of the European Union (EU), which was
established in the 1990s?
A.It is a special stock market for European businesses.
B.It provides better training for people wanting to run businesses.
C.It provides its members with military protection from foreign attack.
D.It is a system to remove tariff barriers and open trade between
countries.*
This group was created in 1993 for the purpose of creating a single
economic market in which there are no barriers to trade, services, or capital
among the member states.
A.Warsaw Pact
B.European Union*
C.North Atlantic Treaty Organization
D.South East Asian Treaty Organization
An example of economic cooperation among European nations that
occurred in the late 1900s was the
A.creation of the United Nations.
B.signing of the Treaty of Versailles.
C.creation of the League of Nations.
D.introduction of the Eurodollar.*
Questions?