TYPES OF ECONOMIC SYSTEMS

Introduction to Political Economy

What is an economy? The large set of inter-related 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

What are some of the major economic issues of the day?

How do governments address the various issues?

Not all governments are the same.

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.

Types of SystemsTypes of Systems

Economic Development from above

How countries choose to develop!

Growth Rates by State

CONSTITUTION FOR THE UNITED STATES OF AMERICA

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

wel·fare   Health, happiness, and good fortune; well-being. Prosperity.

pos·ter·i·ty   Future generations:

All of a person's descendants.

tran·quil·li·ty The quality or state of being tranquil; a state of peace, serenity.

de·fence: a means or method of protecting the physical or functional integrity of body or mind

The U.S. Economy

Freedom with restrictions Capitalism with Socialism – comparisons with other

countries Public sector/ government with private sector/businesses

What are the goals of the society? 

http://en.wikipedia.org/wiki/Government_spending

An Economic System designed around

consumers and businesses.Players Goal Examples

Consumers Maximize personal utility

Some people maximize their utility (happiness) by purchasing material goods. Some people maximize their utility by giving away their time and money to charity/ missions. http://www.youtube.com/watch?v=90HhZ-pyC2Y

Businesses Maximize long-run profit

Businesses maximize profit to make owners happy!

http://news.exxonmobil.com/press-release/exxon-mobil-corporation-announces-estimated-second-quarter-2013-results

Government Maximize social welfare

http://www.edd.cahwnet.gov/Unemployment/Federal_Unemployment_InsuranceExtensions.htmGovernment’s goal is to make the masses happy, not just one group of people or businesses.

Types of Economies

• Command - governments

determines prices and quantities produced

• Capitalistic free market interaction

between buyers and sells determines prices and quantities produced

• Mixed a mix where in some

markets the government is a buyer, regulator, or producer.

Even with a free market capitalist system there are times when the system does not operate in a manner that best suits the overall population. These occurrences are known as free market breakdowns. Some of these free market breakdowns are on the “Free Market Breakdown” page on the website.

Principles of Capitalism

Capitalism addresses the needs of consumers and businesses.

Capitalism attempts to solve problems without government intervention.

Capitalism inspires free enterprise. Capitalism promotes private property

rights.

Five Questions each economy must address

How a country answers these questions reveals the type of economic system that will prevail.

A capitalistic country looks to the private sector to address these questions.

Question: 1

How much should the economy produce? It depends on the resources it has available

The resources are land, labor, capital and entrepreneurial spirit. The goal is to use each of the resources efficiently.

US Farmland

             • On the arable land, which is only 11% of Japan's total land area, the population density is

among the highest in the world.

• 145,833 sq mi in Japan – 15,000 square miles of farmable land

• 9,600,000 square acres

 • Census of Agriculture • Contact NASS Customer Service, 1-800-727-9540.

1997, 2002 and 2007 Census of Agriculture1997 2002 2007

Approximate total land area (acres)

2,262,462,020 2,263,960,501 2,260,994,361

Total farmland (acres)

954,752,502 938,279,056 922,095,840

Percent of total land area

42.2% 41.4% 40.8%

Cropland (acres) 445,324,765 434,164,946 406,424,909

Percent of total farmland

46.6% 46.3% 44.1%

Percent irrigated 11.5% 11.6% 12.7%

http://news.exxonmobil.com/press-release/exxon-mobil-corporation-announces-estimated-second-quarter-2013-results

2. What should be produced?

3. How are the goods and services produced?

By the most efficient companies.

Top Ten Most Profitable Companies

Sometimes by the government.

In a capitalistic system the best companies survive, the weaker companies go out of business.

1 Royal Dutch Shell oil 2 Wal-Mart Stores 3 Exxon Mobil oil 4 Sinopec Group oil 5 China National Petroleum oil 6 BP oil 7 State Grid oil 8 Toyota Motor 9 Volkswagen 10 Total oil

4. Who receives the output?Income Distribution by Quintile

YEAR BOT 20

MID 20

TOP 20

TOP 5

2010 116,011

3.9 8.8 13.9 20.2 53.5 23.5

2005 114,384

3.4 8.6 14.6 23 50.4 22.2

2000 108,209

3.6 8.9 14.8 23 49.8 22.1

1990 94,312 3.8 9.6 15.9 24 46.6 18.5

1970 64,778 4.1 10.8 17.4 24.5 43.3 16.6

The Distribution of Income is not equal in the United States. In the US the top 20 percent of wages earners

make 53 percent of the income.

The bottom 20 percent of the wage earners make 3.9 percent of the money.

In a Communist Society, theoretically every one would make the same amount. Their would be no rich or poor. Yet, there would also be no incentive to work hard because everyone makes the same amount.

Percent of Taxes Paid by Quintile

5. Can the system adapt to change?

Country Agriculture

Industry

Service

United States

0.9% 20.4% 78.6%

South Korea

3.3% 40.7% 56%

Indonesia 13.1 % 46% 41%

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 29.1 148

In millions

Styles Change!

State of the Art

Change does occur in the US without government intervention.

Businesses change to earn profit. Cell phones have gotten smaller, batteries last longer, service has improved. Why? Because companies want to earn profit, and these qualities attract consumers!

Music is now played on a Smart Phone, MP3 or I-Touch.

Why? Because companies want to earn profit and these smaller units attract consumers.

The U.S. Economy is mixed.

Some goods and services are produced by private companies.

Some goods and services are produced by the government.

The trend in the US is for more government. There are pros and cons of more government. The biggest cons are incentive to work and large deficits. The pros are stability and equality among citizens.

How can the type of economic system be determined?

http://anepigone.blogspot.com/2008/03/government-spending-as-percentage-of.html

http://www.usgovernmentspending.com

http://www.heritage.org/index/Ranking.aspx

Government percent of overall spending

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.

Why has the government sector grown so much?

Free Market Breakdowns?