02 comparative economic systems


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02 comparative economic systems

  1. 1. Chapter 29 ComparativeEconomic Systems • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles:If the SovietsAdam foolish to were SmithWhy did drivers in the former What did run their economy on five- mean when heremove the Soviet Union said that an year plans, why do some windshieldhand” promotes “invisible wipers and side institutions in a capitalistic mirrors whenever they the public interest? economy plan? parked their cars? 2
  3. 3. What is an Economic System?The organization and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced 3
  4. 4. What are the basic types of Economic Systems? • Traditional • Command • Market 4
  5. 5. What is aTraditional Economy?A system that answers the What, How, and For Whom questions the way they always have been answered 5
  6. 6. What is the Benefit of aTraditional Economy?There is little friction among members because relatively little is disputed 6
  7. 7. What are the Disadvantages of a Traditional Economy?Restricts individual initiativeLack of advanced goods, new technology, and growth 7
  8. 8. What is aCommand Economy?A system that answers the What, How, and For Whom questions by central authority 8
  9. 9. What is the Structure of a Command Economy? It has a pyramid structure 9
  10. 10. The Command Economy Pyramid Supreme planning agency Specialized planning agencies Producing units Consuming units 10
  11. 11. What are the Strengths of aCommand Economy? Economic change can occur very quickly Social welfare can be enhanced 11
  12. 12. What are the Weaknesses of aCommand Economy?Decision makers have the power to be absolutely wrongQuality and variety of goods suffer 12
  13. 13. Price per side mirror (rubles) Central Planners Fixing Prices $80 S Price set by planners Shortage of 400 $60 thousand side mirrors E $40 $20 D 200 400 600 800 1000 Quantity of side mirrors (thousands per day) 13
  14. 14. Shortage of mirrors Planners set the price ofmirrors below equilibrium 14
  15. 15. What is a Market Economy?An economic system that answers the What, How, and For Whom questions using prices determined by the interaction of the forces of supply and demand 15
  16. 16. Who was Adam Smith?The father of modern economics who believed that a free market economy acted like an “invisible hand” 16
  17. 17. What is the Invisible Hand?A phrase that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests 17
  18. 18. What is the advantage of a Market Economy?It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices 18
  19. 19. What are Criticisms of a Market Economy? • Lack of competition • Externalities • Lack of public goods • Income inequality 19
  20. 20. What is a Mixed Economy?An economic system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems 20
  21. 21. What is Capitalism?An economic system characterized by private ownership of resources and markets 21
  22. 22. What isConsumer Sovereignty?The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets 22
  23. 23. What is Communism?A stateless, classless economic system in which all the factors of production are owned by the workers and people share in production according to their needs 23
  24. 24. Who was Karl Marx?His criticism of capitalism advanced communism 24
  25. 25. What is Socialism?An economic system characterized by government ownership of resources and centralized decision making 25
  26. 26. What are theCharacteristics of Socialism? Public ownership Centralization 26
  27. 27. What are the Strengths of Socialism? • An equitable distribution of income • Rapid growth is possible • No unemployment 27
  28. 28. What are theWeaknesses of Socialism?Inefficiencies occurAbsence of entrepreneurship stifles growth 28
  29. 29. A Classification of Economic Systems U.S., Canada, Cuba China, former Soviet Union Western Europe Pure Puresocialism capitalism France, Mexico, Hong Kong Sweden, Latin Israel America, Japan 29
  30. 30. Key Concepts 30
  31. 31. Key Concepts• What is an Economic System?• What are the basic types of Economic System• What is a Traditional Economy?• What is a Command Economy?• What is a Market Economy?• Who was Adam Smith? 31
  32. 32. Key Concepts cont.• What is the Invisible Hand?• What is a Mixed Economy?• What is Capitalism?• What is Communism?• Who was Karl Marx?• What is Socialism? 32
  33. 33. Summary 33
  34. 34. An economic system is the setof established procedures by whicha society answers the What, Howand For Whom to produce question. 34
  35. 35. Three basic types of economicsystems are the traditional, command,and market systems. The traditionalsystem is based on decisions madeaccording to custom, and the commandsystem answers the three economicquestions through some powerful centralauthority. In contrast, the market systemuses the impersonal mechanism of theinteraction of buyers and sellers throughmarkets to answer the What, How, andFor Whom questions. 35
  36. 36. The Command Economy Pyramid Supreme planning agency Specialized planning agencies Producing units Consuming units 36
  37. 37. Capitalism is an economicsystem in which the factors ofproduction are privately owned andeconomic choices are made byconsumers and firms in markets. Asprescribed by Adam Smith, there isan extremely limited role forgovernment, and self-interest is thedriving force, held in check, orregulated, by competition. 37
  38. 38. Consumer sovereignty is thedetermination by consumers of thetypes and quantities of products thatare produced in an economy. 38
  39. 39. Socialism is an economic systemin which the government owns thefactors of production. The centralauthorities make the myriad ofsociety’s economic decisionsaccording to a national plan. Thecollective good, or public interest, isthe intended guiding force behind thecentral planners’ decisions. 39
  40. 40. Communism is an economicsystem envisioned by Karl Marx to bean ideal society in which the workersown all the factors of production.Marx believed that workers whoworked hard would be public spiritedand would voluntarily redistributeincome to those who are lessproductive. Such a communist nationdescribed by Marx does not exist. 40
  41. 41. Chapter 29 Quiz ©2000 South-Western College Publishing 41
  42. 42. 1. The economic system in which all of the basic decisions are made through a centralized authority, such as a government agency, is termed a a. market economy. b. capitalistic economy. c. command economy. d. traditional economy.C. To answer the three basic economic questions, the market economy uses the price system and a traditional economy is based on customs. 42
  43. 43. 2. Command economies typically suffer from a. unemployment, but not underemployment. b. neither unemployment nor underemployment. c. both unemployment and underemployment. d. underemployment, but not unemployment. D. Command economies assign people jobs rather than allow the market system to determine wages and employment. 43
  44. 44. 3. Adam Smith stated that the role of government in society should be to a. provide defense. b. enforce contracts. c. do absolutely nothing. d. both (a) and (b).D. Adam Smith believed in a limited role of the government to provide national defense, education, maintain infrastructure, enforce contracts, and little else. 44
  45. 45. 4. When making economic decisions, Adam Smith urged society to a. follow the principle of self-interest. b. follow the principle of public interest. c. transfer wealth according to need. d. provide equal income for all citizens.A. Adam Smith stated “By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it.” 45
  46. 46. 5. The doctrine of laissez faire a. advocates an economic system with extensive government intervention and little individual decision-making. b. was advocated by Adam Smith in his book The Wealth of Nations. c. was advocated by Karl Marx in his book Das Kapital. d. none of the above. B. Laissez faire is a French expression meaning “allow them to act” stated differently, “The least government is the best government.” 46
  47. 47. 6. In Adam Smith’s competitive market economy, the question of what goods to produce is determined by the a. “invisible hand” of the price system. b. “invisible hand” of government. c. “visible hand” of public interest. d. “visible hand” of laws and regulations. A. The “invisible hand” refers to a system where no central authority makes the key economic decisions, but rather decisions are make collectively by all consumers and producers in the economy. 47
  48. 48. 7. Adam Smith wrote that the a. economic problems of the 18th-century England were caused by free markets. b. government should control the economy with an “invisible hand.” c. pursuit of private self-interest promotes the public interest in a market economy. d. public or collective interest is not promoted by people pursuing their self-interest. C. Adam Smith recognized that everyone making decisions based on their own self interest would enhance the public interest. 48
  49. 49. 8. Adam Smith, in his book The Wealth of Nations, advocated a. socialism. b. an economy guided by an “invisible hand.” c. government control of the “invisible hand.” d. the adoption of mercantilism.B. Adam Smith advocated a laissez faire stance by government. That is, the government should provide the foundation for a free market system, but should not be a major participant in answering the questions of What, How, and for Whom. 49
  50. 50. 9. The economic system in which private individuals own the factors of production is a. a planned economy. b. capitalism. c. collectivism. d. socialism.B. For answers a,c, d, resources or factors of production are owned by the government. 50
  51. 51. 10. Which of the following is not a basic characteristic of capitalism? a. Economic decisions occur in markets. b. Factors of production are privately owned. c. Income is distributed on the basis of need. d. Businesses make their own product and price decisions. C. Karl Marx believed people would be motivated by the principle “from each according to his ability, to each according to his need.” 51
  52. 52. 11. According to Karl Marx, under capitalism, a. profits would be shared fairly. b. incomes would be distributed equally. c. workers would be exploited and revolt against owners of capital. d. workers would actually own the factors of production.C. Karl Marx believed that private ownership and profits lead to exploitation. The result is a class struggle between a few “haves” and “havenots.” 52
  53. 53. 12. Karl Marx predicted which of the following? a. market system would self destruct. b. “haves” would revolt against the “have- nots.” c. wealthy were entitled to profits as their reward for risk-taking. d. none of the above.A. Karl Marx argued the market system would destroy itself because owners would go too far and pay starvation wages in order to maximize profits. 53
  54. 54. 13. How many nations in the world today operate totally according to Karl Marx’s theory of communism? a. None. b. Several. c. Only the United States. d. Many.A. Under Marx’s idealized society of communism, people would distribute wealth according to need and no central authority would be necessary. 54
  55. 55. 14. In Marx’s ideal communist society, the state a. actively promotes income equality. b. follows the doctrine of laissez faire. c. owns resources and conducts planning. d. does not exist.D. Under Marx’s idealized society of communism, individuals with ability would distribute the wealth of society according to each person’s need. 55
  56. 56. 15. Karl Marx was a (an) a. 19th-century German philosopher. b. 18th-century Russian economist. c. 14th-century Polish banker. d. 19th-century Russian journalist.A. Karl Marx was born in Germany, the son of a lawyer. Marx was an outstanding student at Berlin University. In 1841, after receiving a doctorate in philosophy, he turned to journalism. 56
  57. 57. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 57
  58. 58. END 58