Ch. 26
Comparing Economic Systems
Section 2
Economic Systems
Market Economies



The way a society answers the basic economic questions
of What, How, and For Whom to produce determines its
economic system.
In a pure market economy, decisions are made in
free markets by the interaction of supply and demand;
DOES NOT EXIST
Private citizens—not the government—own the factors of
production (natural resources, capital, labor, and
entrepreneurship)
Market Economies (cont.)



The desire to earn a profit is what drives businesses to
make decisions about 3 basic economic questions; at
the same time consumers make decisions about
what to buy.
Supply and Demand interact in the markets to set prices;
decisions are made by producers and consumers based
on price.
A market economy is decentralized—decisions are
made by all the people, not just a few; no coordination
of decisions
Market Economies (cont.)

1.
2.
3.

In the U.S., the government plays several important
roles in the economy.
Provides Public Goods
Regulates businesses to maintain competition
Works to reduce negative externalities and
increase positive externalities
Externality—unintended side effects that have an
influence on third parties
Market Economies (cont.)



Most of the largest economies of the world are market
economies.
GDP explains the value in dollars of all final goods and
services produced in a country in a year; it can be
expressed in terms of each person within that country.
Per Capita GDP—dividing GDP by a country’s
population
Market Economies (cont.)



By using Per Capita GDP, we can compare one
nation’s economic success to another without
regard to the size of the two economies.
Most countries which have high per capita GDP,
including the U.S., have market economies.
Page 718 has a map comparing countries per
capita GDP
Command Economies



In a pure Command Economy, the central
government makes the major economic
decisions.
Individuals have few choices and little influence
over the economy
Also referred to as a controlled economy,
socialism, or communism
Command Economies (cont.)



Socialism—the belief that the means of production
should be owned and controlled by society, either
directly or through government.
Socialists feel that wealth should be distributed equally
among all citizens.
Karl Marx, a German philosopher and socialist, believed
that industrialized nations would eventually succumb to
a violent revolution.
Command Economies (cont.)

1.
2.

Karl Marx believed that that industrialized
nations were divided into two types of people
Bourgeoisie – capitalists who owned the
means of production
Proletariat – workers who produce the goods
Marx saw history as a class struggle in which
workers would eventually overthrow the
capitalists
Command Economies (cont.)

In time socialism would evolve into communism– one
class exists in which property would all be held in
common and there would be no need for governments

In a command economy, the government owns most
productive resources, especially land and capital.

Government answers all 3 of the basic economic
questions

Government is responsible for fixing wages of workers
and setting prices for goods.
Command Economies (cont.)

Governments in nations with command economies have
planning agencies which control different parts of the
economy


Agriculture
Steel production
Command economies can be very inefficient which
results in slower growth and lower per capita GDPs
than market economies
Ex. Former Soviet Union, Cuba, North Korea
Mixed Economies




Have the basic elements of a pure market economy and
a command economy.
Most countries in the world have a mixed economy
Private ownership and individual decision making +
government intervention and regulation
The U.S. is a mixed economy; Actually it is market
economy with government regulations.
Section 3
Economies in Transition



Many nations of the world today are changing economic
types
Some are shifting from command economies to market
economies; others are moving from traditional
economies to more developed ones
Toward the end of the Cold War, command economies
were unable to achieve the economic growth that the
West was able to reach.
Failure of Command Economies

By 1991, Eastern Europe began the gradual change both
economically and politically.

In the Soviet Union, the GOSPLAN, planned the
production and distribution of thousands of products.

Mistakes were made by those who had no economic
knowledge


Too many instances of shortage or surplus of supply
Supplies not shipped to where they were needed
Failure of Command Economies
(cont.)


1.
2.
3.
When the Soviet Union broke into smaller countries in
1991, Communist leaders could not keep the economy
afloat
Russian leaders called for a conversion to a market
economy, but there were problems:
State owned factories had to be switched to
private ownership
Stock markets had to be created
Let the forces of supply and demand guide the
market naturally
Failure of Command Economies
(cont.)

China was in the same situation but their transition has
been a smoother process and somewhat of a head start.

1980’s, began to introduce market reforms due to falling
behind Asian countries such as South Korea and Taiwan.

China’s economy has grown 10% every year for the past
20 years

People have access to goods and services they could
have never had with the old economy
Failure of Command Economies
(cont.)



Even though some success has been achieved,
serious problems remain
Global interdependence has caused domestic
farmers difficulty competing with cheaper
foreign food.
160 million unemployed in the country with
limited skills and starving
Developing Countries



Developing countries – country whose average per
capita income is only a fraction of that in more
industrialized countries.
These countries often have traditional economies –
economic decisions are based on custom or habit.
The way of life is passed down from generation to
generation with little changing; little to no technology
Developing Countries (cont.)

1.
Developing countries are often poor and want
to convert to a market economy but there are
5 problems they may face:
High Rate of Population Growth
If population grows faster than a nations GDP,
per capita GDP declines
What you are left with is a smaller share of
what the country produces for each person.
Developing Countries (cont.)
2.
3.
Landlocked
Some countries may not have access to ocean trade
routes; lack of natural resources
War
Destroys a countries infrastructure—roads, bridges,
factories, hospitals etc. Human resources are lost
(only the very young and very old are left); skills are
lost or are not efficiently used; agriculture disrupted
(land mines)
Developing Countries (cont.)
4.
5.
Debt
Countries borrow large sums to spark economic
growth, but GDP is less per year than the money they
owe; interest alone is too much for third world nation
to pay back.
Corruption in government
Delays development because resources or money is
horded or used inefficiently (civil wars)