What Is Economics?
Read the following narrative to complete you Economics Graphic Organizer.
Four Types of Economic Systems? Four? Are you sure?
The ways in which people have conducted business has changed drastically over the centuries. As civilizations developed into
countries, the leaders and their governments established their own ways of doing business and therefore developed systems for
running their economies in order to pay meet the budget of their country and to meet the needs of the citizens who live there.
All countries in the world are considered to have a mixed economy. While economists (experts in the field of economics) do
not use the term mixed economy, all countries have characteristics of a command economy and characteristics of a market economy.
That’s why we use the term mixed economic system. In rural areas there may even be some people who still create products the way
their ancestors did. They may even barter (trade) for goods they need instead of using normal forms of currency. This describes a
traditional economy~ people doing business based on tradition. However, no country operates as a traditional economy.
Economic Continuum
Market
Command
Hong Kong
N. Korea
All countries fall somewhere between market and command on the continuum of economic freedom. The more freedom
that individuals have to own and operate their own businesses, the closer to the market side of the continuum the countries will be. In a
market economy, the buyers (consumers) and sellers and producers decide what will be made, how to make it and who they will do
business with; all of these decisions depend on ‘supply and demand’. Hong Kong, a special region of China’s, is the most economically
free country in the world with a score of 89.9% (out of 100) with the lowest taxes and most freedom for private companies to trade.
(www.heritage.org)
On the other end of the continuum is the command economy. This economic system is opposite of a market economy. The
government makes all the economic decisions and does not give any of the decision making to private citizens. The government
decides what jobs people will do, what goods will be produced, and with whom they will do business. No country in the world has a true
command economy, but North Korea is very close; closer than any other country in the world. North Korea scored a 1% on the
economic freedom index in 2012.
Get out of the way! We want to trade!
Barrier: anything that restrains or obstructs progress, access, etc.
A big part of most countries’ economies is based on their willingness and ability to trade with other countries to make money
and to get resources that they are not able to produce. Early traders had to consider physical geographic barriers that made trading
more difficult like mountains, oceans and deserts. There are other things that can slow down (protective trade barriers) and even bring
trade to a complete stop (usually for political reasons). Quotas and tariffs are thought to be trade barriers that benefit domestic (within
the country) businesses. Quotas limit the number of imports from other countries. This helps to make sure that there aren’t too many
foreign goods in the ‘market’ and consumers will be more likely to buy domestic products. Tariffs place a tax on imported goods which
causes the price to be higher. This trade barrier is also designed to encourage buyers to buy goods made within their own country by
helping lower for domestic goods. The diagram below shows how tariffs protect domestic goods.
Embargos are a different type of trade barrier. When countries have political problems, sometimes one or more of the
countries will stop trading completely in order to punish the other country for doing something they do not like, such as invading another
country (Iraq’s Saddam Hussein) or having unfair laws (South Africa’s Apartheid laws of legal discrimination). Sometimes embargos are
successful but other times more ‘violent’ methods, like war, are needed to persuade the country to stop their unfavorable behavior.
Recipe for a STABLE BUSINESS
Natural Resources
+
Capital Goods (Resources)
+
Human Capital (Resources) = Productive Resources
Remember: the THREE legged stool! You must have all 3 legs or the stool is useless.
There are several things that a country must have in order to have successful businesses in their country. There must be
workers to makes goods and provide services. The more advanced the machinery and technology (capital goods) is the better quality
the products should be. It doesn’t matter how advanced the machines and factories are if there are workers to operate them. Countries
which educate their citizens (human capital) with skills to work more efficiently usually produce better goods and provide higher quality
services (doctors, teachers, lawyers, etc.). Often, citizens who are well educated will invest their own time and money to open their own
business, if their government allows them to do so. The entrepreneurs take the financial risk by investing their own money but if they
are successful they get to keep the profits (money) from the sale of their goods and services. A government needs all three types of
resources: natural, human and capital, to form a strong economy.
Public or Private?
Since there is no true market or command economy in the world, every country’s businesses can be divided into two types:
Government (public) and private. Government owned businesses often provide services for the PUBLIC, us, the citizens. Those types
of businesses include public schools, universities, state lottery programs and federal insurance and mortgage companies. Private
businesses are owned by individuals or groups of individuals who want to make money by producing and selling goods and services.
Both the government and private citizens can own companies that trade with companies from other countries. This is known as
international trade (inter=between +national= nation). These businesses trade with each other because it helps both of them. They
voluntarily trade. No one forces them to do so. Economists have proven that the more education and training a country gives its
citizens, the more stable the economy of the country. One of the ways that economists measure economic strength is by calculating the
Gross Domestic Product for the country. To do this, they add together the TOTAL value of all the goods and services produced in
that country within one year. Generally, the higher the GDP, the stronger the economy is. They will also figure the GDP per capita. It is
a very simple mathematical equation: GDP ÷ total population= GDP per capita (capita=head). GDP per capita is often a related to the
standard of living in a country. The higher the dollar values of the GDP/capita, the higher the standard of living.