ECONOMIC SYSTEMS

OBJECTIVES Characterize differing economic systems

in a diverse range of countries Describe the advantages and

disadvantages of a particular approach to classifying economic systems

Describe key characteristics of command, free-market, and mixed-market economies

Compare and contrast the strengths and weaknesses of the three main economic systems

KEY VOCABULARY Command

Economy Free-market

economy Industrialization Intellectual

property rights Market bubble Mixed-market

economy

Subsidy Welfare system

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS You have been chosen to take part in an

international committee responsible for deciding on which countries to locate three new businesses in, based on the type of economic system that would best ensure the business’s success

To avoid bias, the committee members will not know the country name, only the key characteristics of the economic system under which it operates

Before they make this decision, however, you must familiarize themselves with the key characteristics of the three types of economic systems in the classification called the Economic Systems Spectrum

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS Download: Chart- The Economic

Systems SpectrumReview the three different idealized or

extreme concepts of economic systems The chart in the resource represents

these notional “pure” forms of economic systems

In reality modern-day economies is much messier and more diverse

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS Few countries work within economic

systems that are purely command economies, or purely unregulated free market economies

Instead, their respective systems tend to fall at various points along the “spectrum” in this method of classification, which, reflect varying degrees of government involvement in daily economic decisions and actions

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS Download: Worksheet- Three New

Businesses You have been introduced to the

Economic Systems Spectrum (one of the many different ways economists classify differing systems)

You must work together to assess the implications of different economic systems for the three businesses In which country would you start each of

the businesses, based on the distinctive characteristics of its economic system?

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS Why one country might or might not be

preferable, based on the distinctive characteristics of its economic system, as a place to establish each particular business

While few countries run pure command economies today, and no countries operate pure unregulated market economies, there are great variations in how individual countries organize and run their businesses and economic activities

BUSINESS IN DIFFERENT ECONOMIC SYSTEMS Companies doing business in different economic

systems have learned to adapt to each, proving that business success can often be achieved in most of the different economic systems in operation today

North Korea represents the one example of a nearly pure command economy Its economic problems (in sharp contrast to South Korea)

can, to a large degree, be attributed to its economic system

South Korea started out at a similar level of economic development in the 1950s, but is now far ahead. But aside from such rare extreme cases, generalizations

about economic systems in use in other countries should be made with caution

SOME VIEWS ON THE PROS AND CONS OF DIFFERENT ECONOMIC SYSTEMS A country’s particular material, economic, and

commercial characteristics influence the type of economic system under which it operates

Over time, different economic systems have shown themselves to be either more or less effective in addressing the primary economic questions faced by all economies: What is produced How it is produced Who it is produced for As well as other economic issues of wide concern

financial and economic stability economic growth the distribution of income Unemployment Inflation environmental destruction.

SOME VIEWS ON THE PROS AND CONS OF DIFFERENT ECONOMIC SYSTEMS You will discover that diverse economic systems

have proven successful at responding to different countries’ needs at different times

However, successes have also come at a price, making it clear that (as with other aspects of economics) there are trade-offs

No single system is best in all circumstances

SOME VIEWS ON THE PROS AND CONS OF DIFFERENT ECONOMIC SYSTEMS Download: Vignettes- Pros and Cons of Different

Economic Systems Countries chosen for these vignettes do not reflect

examples of one “pure” economic system as described in the prior activity; rather, each country’s economy may exemplify some of the defining characteristics of such a system. The vignettes are about:

The former Soviet Union, with its command economy, and the relationship between that system and the country’s need for industrialization

Venezuela, and its mixed-market system’s efforts to rectify social inequalities

The United States and its free-market system’s relatively limited regulation of business, with both positive and negative consequences

ECONOMIC SYSTEMS TODAY Divide class into 3 groups

Take 5 mins to discuss your topic in depthNow 1 person from each group form a new

group Explain to your teammates the example you

read and the responses you gave to each question, along with the reasons why

ECONOMIC SYSTEMS TODAY Depending upon the circumstances,

countries’ economic systems have generally developed in one of two waysThey have either evolved slowly in response

to the changing needs of businesses and individuals, as in the example of the US economy at end of the nineteenth century and the beginning of the twentieth

They have made faster-paced, more radical changes in response to critical economic challenges, such as those that have taken place in China in the last 25 years

ECONOMIC SYSTEMS AROUND THE WORLD TODAY Presentation

ECONOMIC SYSTEMS AND THE INDIVIDUAL What do you think is the best and worst

thing about living within each of the three pure economic systems?

Download: Vignettes- Comparing and Contrasting Economic Systems Each young woman (and her family) depicted

in the reading faced different economic decisions that were the result of the type of economic system in which she lived.

Even though each of the young women lived in a different system, the three womens’ lives had more commonalities than differences.

CHARACTERISTICS OF ECONOMIC SYSTEMS Download: Worksheet- Venn Diagram You will find a list of economic system

characteristics that they must associate with each system represented in the diagram

Many of the characteristics are shared between at least two of the systems and in some cases among all of them

CHARACTERISTICS OF ECONOMIC SYSTEMS There is not absolute agreement among economists

about which characteristic belongs to which economic system due to the myriad forms in which each system now comes, and the fact that they change constantly

Moreover, different businesses want and need different things from government in order to succeed So a characteristic such as government-regulated pricing

might be disliked by companies in the clothing industry because some labels build cachet through higher pricing, while it is often favored by taxi drivers as well as taxi passengers because it guarantees taxi drivers a minimum fare for every ride they pick up; reassures passengers who might otherwise be afraid of how much their ride might cost; and saves everybody from having to haggle over the price for every ride.

Businesses value each economic system based on the characteristics it holds and which of these characteristics best serves the businesses’ primary interests

WHICH SYSTEM WORKS BEST? Different businesses and industries

favor different economic systems The degree of government involvement

in the economy is seen by some firms as problematic, but by others as crucial to their success

WHICH SYSTEM WORKS BEST? All economic systems must address three basic questions:

what is produced, how, and for whom Each system goes about answering these questions has

enormous impact on the success of businesses operating within it

In some cases certain industries might not exist without the help of government Airbus, the European aircraft manufacturer, which was created

by a consortium of European governments, though it was built up from pre-existing smaller, mostly shareholder-owned, companies

Meanwhile, other industries find government intervention so costly as to make the business unprofitable Insurance companies that have left the lucrative Florida car

insurance market because the state has made the sale of [unprofitable] hurricane insurance a condition of the companies’ right to sell any insurance at all in the state

WHICH SYSTEM WORKS BEST? Download: Worksheet- Industry and

Economic Systems The relationship between business and

government is a major determinant of the differing economic systems in place in different countries

WHICH SYSTEM WORKS BEST? The German government has long had an active

role in the operation of that country’s economy Its involvement in supporting an industry that

promises high-paying domestic employment opportunities and lower oil import bills reflects public policy objectives which are widely accepted in Germany.

In contrast, over the last 25 years, the US government decreased its level of direct involvement in the economy, so willingness to allow venture capital funds to operate with little regulation, and with tax laws that are favorable to partners and investors in these funds, reflects the role of venture capital in supporting new businesses and new job creation.

WHICH SYSTEM WORKS BEST? Regardless of how involved or

uninvolved government is, most economic systems today embody some form of balance between the economic interests of business and the role of government

In most systems, the two rely on each other to a substantial degree, even if there can also be tensions between government and business decision makers.

ECONOMIC SYSTEMS Create your own short answer questions

you would make if creating a test on this lesson

ECONOMIC SYSTEMS Test 40 mins

ECONOMIC SYSTEMS Could either government or business

survive without the other? Why or why not?

ENRICHMENT On the Internet or in the library, research

the social, economic, and human cost of the “shock therapy” transition from communism and a command economy to a partially free-market-based system in the former Soviet Union

Look not only at the difficulties that people in Russia and other parts of the former Soviet Union faced, but also at the lingering effects that just over 70 years of communism had on the expectations of the Russian people.

CROSS-CURRICULAR INTEGRATION History/Sociology: Research the rise of

Chinese communism under Mao Tse Tung, and how he sought to connect some of aspects of a command economy to certain aspects of China’s cultural and philosophical heritage, while opposing other aspects of that heritage

Comment on reasons why China might or might not have been fertile ground for the implementation of a command economy

Use an inquiring approach, but also use critical discussion, and point out the risk, with such subject matter, of over-generalization.