Transcript Economic System

INTRODUCTION TO
ECONOMICS
Comparative Economic
Systems
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Economic System
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An economic system is the set of mechanisms
and institutions that resolves the what, how, and
for whom questions.
Some standards used to distinguish among
economic systems are:
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Who owns the resources?
What decision-making process is used to allocate
resources and products?
What types of incentives guide economic decision
makers?
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K. Marx
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Primitive society
Slavery
Feudal
Capitalist
Socialist/Communist
Criterion: ownership of the means of production
and productivity
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Walt Rostow
1916 - 2003
Walt Rostow
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The Stages of Economic Growth: A Non-Communist Manifesto
(1960);
The Economics of Take-off into Sustained Growth (edited, 1963);
The World Economy: History and Prospect (1978); and
Theorists of Economic Growth from David Hume to the Present
(1990), with commentary drawn from Economics in the Long View:
Essays in Honor of W. W. Rostow, a festschrift published in 1982.
Essays on the British Economy in the Nineteenth Century (1948),
which gained him recognition as an economic historian of the first
rank, nor his Process of Economic Growth (1953)
A Proposal: Key to an Effective Foreign Policy (With M. F. Millikan,
1957), which made his reputation in the field of foreign policy. About
fifteen of his later books dealt with foreign policy.
Rostow’s Growth Theory
The model argues that economic
modernization occurs in five basic stages of
varying length –
(1) traditional society,
(2) preconditions for take-off,
(3) take-off,
(4) drive to maturity, and
(5) high mass consumption.
Criterion: economic and technological level,
volume and quality of the consumption
What are the basic types of
economic systems?
Traditional
 Command
 Market
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What is a
traditional economy?
A system that answers the
What, How, and For
Whom questions the way
they always have been
answered
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What is the benefit of a
traditional economy?
There is little friction
among members because
relatively little is disputed
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What are the disadvantages of
a traditional economy?
Restricts individual initiative
Lack of advanced goods, new
technology, and growth.
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Pure Market Economy
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All resources are privately owned
Coordination of economic activity is
based on the prices generated in free,
competitive markets
Any income derived from selling
resources goes exclusively to each
resource owner
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Invisible Hand of Markets
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According to economist Adam Smith
(1723–1790), market forces coordinate
production as if by an “invisible hand.”
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What is the
invisible hand?
A phrase, introduced by
Adam
Smith,
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.
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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.
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Problems with
Pure Market Economies
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Difficulty enforcing property rights
Some people have few resources to sell
Some firms try to monopolize markets
No public goods
Externalities
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Pure Centrally
Planned Economy
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All resources government-owned
Production coordinated by the central
plans of government
Sometimes called communism
Use visible central planners
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Problems with Centrally
Planned Economies
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Consumers get low priority
Little freedom of choice
Central planning can be inefficient
Resources owned by the state are
sometimes wasted
Environmental damage
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The Command Economy Pyramid
Supreme
planning
agency
Specialized planning agencies
Producing units
Consuming units
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What are the strengths of a
command economy?
Economic change can
occur very quickly.
Social welfare can be
enhanced.
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What are the weaknesses of a
command economy?
Decision makers have the
power to be absolutely
wrong.
Quality and variety of goods
suffer.
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Mixed Economy
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United States is a mixed economy
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Also considered a market economy
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Government regulates the private sector
in a variety of ways.
USA vs. Japan or Sweden ?
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Transitional Economy
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A transitional economy is in the process of
shifting orientation from central planning
to competitive markets.
It involves converting state-owned
enterprises into private enterprises—
privatization.
The transition now under way will shape
economies for decades to come.
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GDP per capita in 2009
(USD, PPP)
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Belarus 10,600
Germany
34,800
Cuba
9,500
Holland
40,300
China
6,000
Brazil
9,500
Bulgaria 12,900
Japan
34,200
USA
47,000
Sweden
38,500
Denmark 37,400
Liechtenstein 118,000
EU
33,400
World
10,400
Zimbabwe 200 Congo 300 Burundi 400
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