Economic Systems
Benchmark: Compare how different
economic systems answer the fundamental
economic questions of what goods and
services to produce, how to produce them,
and who will consume them.
I. Trade, Specialization,
and Interdependence
• A. International Trade
– 1. US sells goods to other nations
– 2. US buys goods from other nations
Question: Why doesn’t the US just make and sell to
our own country???
Answer: Other countries have goods that we don’t
have.
Ex: coffee, tea, bananas, chocolate
• B. Cost and Specialization
– 1. Opportunity cost: the value of the next best
alternative when a choice is made
– Ex: If you make $120/day and you decide to go
fishing instead of work, the opportunity cost is
$120
– 2. Trade involves opportunity cost
– Ex: US business buys goods from other nations
because they are cheaper to produce there
• 3. Absolute Advantage: when a country
is able to produce more of a particular
good, due to increased efficiency or
cheaper labor costs.
– a. specialization: when a country
specializes in the making of a good
• C. Interdependence: The US depends on
trade with other countries in order to stay
competitive and profitable
– a. results:
• Negative: move plants to foreign countries, loss
of US jobs
• Positive: cheaper prices for goods, greater choice
of products
• D. Global Organization: The WTO
– 1. World Trade Organization
•
•
•
•
•
a.
b.
c.
d.
e.
US is a member
enforces standing trade agreements
encourages trade talks between countries
attempts to settle disputes
tries to help developing nations
• E. Regional Organization: NAFTA
– 1. North Atlantic Free Trade Agreement
• a. signed in 1994 (Clinton), but was an idea of
the Bush administration
• b. free trade zone that includes US, Mexico,
and Canada
• c. abolished tariffs between the 3 countries
• d. established 1 big market
II. Labor Unions, Business
Organizations, and Farm
Organizations
• A. In terms of the economy, what are
pros and cons of labor unions and farm
organizations in the United States?
The U.S. Government
and the Economy
• Explain how the U.S. government
provides public services, redistributes
income, regulates economic activity,
and promotes economic growth and
stability.
I. Effects of Governmental Actions
on Individuals and Business
• A. Gov. has played an important role in our economy
– 1. gov. action or lack of action
Examples:
a. Interstate Commerce Commission: regulates trade within
US and makes it fair
b. passes laws against tainted food, impure drugs, air and
water pollution, and unsafe autos
2. US gov. is one of largest consumers in our economy (armed
forces)
** Throughout history, the US gov. has become increasingly
involved in our economy
II. Taxes
•
A. Gov. must levy taxes
– 1. pay employees
– 2. buy equipment
– 3. provide assistance to those in need
B. Tax increase
1. less money for businesses to research
2. less money for individuals to buy things
Types of Taxes
•
A. Income Tax: Tax on income earned at a job
–
1. individuals
–
2. businesses
–
3. Income taxes are progressive: the more you make, the
more you are taxed
B.
Excise Tax: Tax on the manufacture or sale of certain
items (Ex: gas and airline tickets)
1. Excise (or sales) taxes are regressive: they are the
same, but it hurts those who make less money more than
someone who makes a lot of money
Ex: If Person A makes $50K/year and pays $5K in excise tax,
that is 10% of his earnings.
If Person B makes $100K/year and pays $5K in excise
tax, that is 5% of his earnings.
C. “sin” tax: taxes on cigarettes and alcohol
III. Government
Regulation of Business
• A. laws the encourage competition
• B. regulate monopolies
• C. Antitrust Legislation (prevent monopolies)
– 1. Interstate Commerce Act: passed in 1887 to regulate
railroads prices and interstate trade
– 2. Sherman Antitrust Act: broke up many industrial
monopolies (Standard Oil). President Teddy Roosevelt
enforced this law
– 3. Others: Clayton Antitrust Act, Federal Trade
Commission, Meat Inspection Act, Securities and
Exchange Act, Truth in Packaging Act
IV. The Federal Reserve
System
• The Fed: the central bank of the United
States
• a network of 12 banking districts in
major cities around the United States
• established in 1913
• managed by a board of governors
• Fed’s decisions do NOT have to be
approved by the President
Federal Reserve’s Responsibilities
• A. to set the nation’s monetary policy by influencing
money and credit conditions in the economy in
pursuit of full employment and stable prices
• B. to supervise and regulate banking institutions to
ensure the safety and soundness of the nation’s
banking and financial system and to protect the credit
rights of consumers
• C. to maintain the stability of the financial system
and contain risk that may arise in financial markets
• D. to provide certain financial services to the U.S.
government, to the public, to financial institutions,
and to foreign official institutions, including playing a
major role in operating the nation’s payments
systems
Federal Reserve System and the Economy
• To help when the economy is bad, the Fed
will:
– a. lower the reserve requirements that banks
must hold, therefore……..
– b. interest rates will decrease, therefore……
– c. banks will lend out more money,
therefore………..
– d. there will be more money in the economy,
therefore……….
– e. more items are being bought, therefore…..
– f. the economy becomes better, because people
now have jobs and are spending more money
• To help when inflation is high, the Fed will:
– a. raise the reserve requirements that banks must
hold, therefore……..
– b. interest rates will increase, therefore…….
– c. banks will lend out less money,
therefore………..
– d. there will be less money in the economy,
therefore……….
– e. less items are being bought, therefore…..
– f. the economy slows down, and prices of items
stay the same or decrease
1. OGT Multiple Choice
• (Blue Book 2007) Which of the
following is a “progressive” tax?
• A. excise tax
• B. state income tax
• C. sales tax on an automobile
• D. “sin” tax on tobacco
2. OGT Multiple Choice
• (Blue Book 2007) Why did many people in
the late 1800’s and early 1900’s want the
government to break up monopolies?
• A. Monopolies created excessive
competition.
• B. Monopolies decreased dividends for their
shareholders
• C. Monopolies advocated an increase in
labor union membership
• D. Monopolies decreased competition and
fixed prices
3. OGT Multiple Choice
• (Blue Book 2007) Which of the following
would result in the Fed increasing interest
rates?
• A. The Fed buys securities on the open
market
• B. The Fed keeps the reserve requirment the
same
• C. The Fed lowers the reserve requirement
• D. The Fed raises the reserve requirement
4. OGT Multiple Choice
• (Orange OGT Study Guide 2007) A business in
Country A has a productive capacity that
outstrips consumer demand in its country. The
best economic decision for that business would
be to
• A. reduce the product’s price so more
consumers in Country A could purchase
• B. store the product in warehouses until more
consumers in Country A could purchase it
• C. reduce its workforce so it produces less of its
products
• D. sell its products to consumers in other
countries in addition to Country A
5. OGT Multiple Choice
• (Orange OGT Study Guide 2007) Which of
the following is most likely to contribute to
international trade between two countries.
• A. High unemployment in both countries
• B. Equal distribution of natural resources
• C. Production of specialized goods in each
country
• D. Different economic systems in each
country
6. OGT Multiple Choice
• (Orange OGT Study Guide 2007) Generally
when two parties trade with each other there
should be a rise in their standard of living
because
• A. each is gaining access to a wider variety
of products
• B. each is limiting choices for its consumers
• C. one side will benefit to the detriment of the
other
• D. both sides will see a loss of consumer
confidence
7. OGT Multiple Choice
• (Orange OGT Study Guide 2007) What is one
major change countries participating in
international trade may see in their economic
infrastructure?
• A. A greater variety of products being
produced in their country
• B. Increased production of goods for which
the country has a comparative advantage
• C. Higher prices for all manufactured goods
produced in the country
• D. The elimination of all goods for which the
country has the absolute advantage
8. OGT Multiple Choice
• (Orange OGT Study Guide 2007) Which of
the following statements best describes trade
by people in the United States with people in
other nations.
• A. The US has not traded at all with other
nations
• B. The US has always traded at all with other
nations
• C. The US has reduced its trade with other
nations
• D. The US has increased its trade with other
nations
9. OGT Multiple Choice
• (Orange OGT Study Guide 2007) Labor
unions in the U.S. have been interested
in all of the following except
• A. higher wages
• B. longer work week
• C. safer working conditions
• D. shorter work week
10. OGT Short Answer
• (Orange OGT Study Guide 2007) Saudi
Arabia is one of the world’s largest produces
of oil. However, it does not produce many
manufactured goods. On the other hand,
Japan does not have much oil as a natural
resource but does produce a large number of
manufactured goods. Explain why it would
be beneficial for these two countries to trade
with each other (2 points).
11. OGT Extended Response
• (BASE TEST 2006) One way the Federal Reserve System
• seeks to influence the U.S. economy is by raising or lowering
the rate of interest (discount rate) that member banks must pay
to borrow money from the Federal Reserve.
•
Considering that the inflation rate rose significantly from 1976 to
1980, identify the change (increase or decrease) the Federal
Reserve System could have made in the discount rate to
reverse that trend.
•
Describe the expected impact this change in the discount rate
would have had on: consumer spending business spending
•
Explain why this change in the discount rate would produce the
desired effects on spending.