Transcript Types of Economic Systems

ECON 215 Dr. Lou Pantuosco
The Macro picture
What is an economy? The large set of interrelated economic production and consumption activities
which aid in determining how scarce resources are allocated.
What is economics? The allocation of scarce
resources among competing uses.
What are the resources that are
considered scarce?
Land, labor capital and entrepreneurial spirit
Types of Economic Systems
 The question that each economy faces is whether they want prices, quantities,
distribution of goods and services, and distribution of income to be determined by
the private sector or the public sector.
 Private sector – made up of consumers and businesses.
 Public sector is the government. There are different levels of government : local,
state and federal.
 Some services are produced by both private and public agencies such as education,
trash collection, and security.
 The groups in the economy are consumers, businesses, and government.
Economic Development from above
How countries choose to
develop!
Types of Economies
• Who makes the decisions?
 Traditional System decisions are made by the elders
 Command System decisions are made by central
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
government
Communist
Socialism
Market Economy decisions are made by individuals
Mixed Economy individuals make some decisions the
central authority make some decisions
US Government spending
the U.S. is a MIXED ECONOMY
http://www.usgovernmentspending.com/
Percent of GDP spent by Government
 Cuba
67 percent
 Hong Kong
18 percent
 Italy
50 percent
 Japan
42 percent
 Philippians
16 percent
 Spain
45 percent
 United States 42 percent
Resource Ownership
• Who owns the goods?
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Communism communal ownership
Socialism government ownership
Capitalism private ownership
Foundational Tenets of Capitalism
 Addressing the Issues of
 Resource Ownership
 Property Rights
 Free Trade
 The Five Foundation Questions
Property Rights are a key component of
each economic system
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The definition, allocation, and protection of property rights comprise
one of the most complex and difficult sets of issues that any society has to
resolve, but one that must be resolved in some fashion. For the most part,
social critics of “property” rights do not want to abolish those rights. Rather,
they want to transfer them from private ownership to government ownership.
Some transfers to public ownership (or control, which is similar)
make an economy more effective. Others
make it less effective. The worst outcome
by far occurs when property rights really
are abolished. The Tragedy of the Commons
is an example of the value of property rights.
Property Rights are important in
Capitalism
 Tragedy of the Commons
 Ownership is necessary,
otherwise no one will value
the property.
 The Family Pond – passed
down to the next
generation.
Trade Options in a Capitalistic Economy
 Another key component is each country’s policy
regarding trade.
 Free Trade - The theory of comparative advantage
supports the concepts of specialization and
exchange
 Fair Trade – evaluates trade policies between
countries to insure a level playing field.
 Protectionism – isolates a country in a world
economy. The objective is to protect domestic
jobs.
The impact of trade on consumer prices
 Prices will differ in each of the trade approaches.

Free trade – low prices, products made in low
wage/ high productivity plants

Fair trade – price most likely higher, government
subsidies will be offset by tariffs or taxes placed on
foreign goods

Protection – higher prices, more American jobs
Within the developed countries there is a
progression towards specialization and exchange.
• Specialization each person concentrates on a limited
number of tasks or activities
• Exchange trading with others to obtain our desires
Theory of Comparative Advantage
This theory has worldwide implications, because some countries
have sectors that have to sacrifice for the good of the world i.e.
US television or apparel producers.
This theory also promotes world trade.
An absolute advantage is the ability to produce a good or service
using fewer resources than other producer’s use.
Those who make economic decisions must decide how to
allocate the resources within the economy (land, labor, capital,
entrepreneurial spirit).
Theory of Comparative Advantage
• A basic tenet of free trade
• The Theory of Comparative Advantage claims that the
country (economy) with the relatively lower opportunity
cost should produce the goods.
• For example:
The US can produce corn for $100 per ton, and televisions for $25 per set.
Japan can produce corn for $200 per ton, and televisions for $15 per set.
What should each country produce?
The US can produce corn for $100 per ton, and televisions for $10 per set.
Japan can produce corn for $200 per ton, and televisions for $15 per set.
What should each country produce?
The US can produce corn for $100 per ton, and televisions for $5 per set.
Japan can produce corn for $200 per ton, and televisions for $15 per set.
What should each country produce?
Resource Allocation
• Basic Economic Questions

We will answer the following five questions from a
“market economy/ capitalist” perspective.
1.
How much should the economy produce?
What should be produced?
How should the output be produced?
Who should receive the output that is produced?
Can the system adapt to change?
2.
3.
4.
5.
1. How much should the economy produce?
 It depends on their resources. A given economy can only
produce as much as their resources allow them to. At
this point Mexico can not produce as much as the US.
1. How much should the economy produce?
•
The Production Possibility Frontier
Combination A
Combination B
Combination C
Combination D
Combination E
medicine
200
150
100
50
0
tanks
0
50
75
90
100
1. Graph the combinations.
2. Starting at 150 combination B, in terms of tanks, how many tanks does it cost the government to
purchase 50 units of medicine?
3. If the government becomes better at producing both medicine and tanks, what will happen to the
production possibility frontier?
4. If the government becomes better at producing tanks, but not medicine what happens to the
production possibility frontier?
5. How will it be shown of the PPF, if the government has to use some of their money to pay the interest
on their debt, or uses their money inefficiently?
1. How much should the economy produce?
• The Production Possibility Frontier
Tanks
100
90
75
50
0
2. What should be produced?
 Leave it up to the individuals in society. Let the
demand of the consumers determine what should
be supplied. Adam Smith, the founder of
economics, referred to the above philosophy as
the "invisible hand".
3. How should the output be
produced?
 Internationally, the country that should produce the
goods or services is the one(s) with the relatively lower
opportunity cost (this is known as Theory of
Comparative Advantage)

 Within a given country, the companies that produce
the goods are the ones that are the most profitable and
efficient. (Survival of the fittest)

4. Who should receive the output
that is produced?
The rich people receive the goods
See the income distribution chart
The Shrinking Middle Class
http://finance.yahoo.com/tech-ticker/the-u.s.-middle-
class-is-being-wiped-out-here's-the-stats-to-prove-it520657.html?tickers=%5EDJI,%5EGSPC,SPY,MCD,WMT,X
RT,DIA
4. Who should receive the output that is
produced?
5. Can the system adapt to change?
Employment by Sector
Occupations
1900
2010
number
percent
number
percent
Agriculture
10.4
35.7%
4.3
2.9%
Manufacturing
7.1
24.4%
11.5
7.8%
Trade and Transportation
4.8
16.5%
24.9
16.8%
Services
6.8
23.4%
107.3
72.5%
Total
29.1
In millions
148
5. Can the system adapt to change?
 How have cars changed in the past ten years?
 How have clothes changed in the last decade?
 Changing structure of the American economy.
 Flaws of each system ..
 Should everyone be paid the same?
 If the government becomes too strong who will they
be accountable to?
 If the rich become too wealthy will class warfare
result?