ComparativeEconomicSystems

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					INTRODUCTION TO
ECONOMICS
Comparative Economic
    Systems

                       1
Economic System
   An economic system is the set of mechanisms
    and institutions that resolves the what, how, and
    for whom questions.
   Some standards used to distinguish among
    economic systems are:
       Who owns the resources?
       What decision-making process is used to allocate
        resources and products?
       What types of incentives guide economic decision
        makers?
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K. Marx
   Primitive society
   Slavery
   Feudal
   Capitalist
   Socialist/Communist

Criterion: ownership of the means of production
  and productivity
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Walt Rostow
1916 - 2003
Walt Rostow
   The Stages of Economic Growth: A Non-Communist Manifesto
    (1960);
   The Economics of Take-off into Sustained Growth (edited, 1963);
   The World Economy: History and Prospect (1978); and
   Theorists of Economic Growth from David Hume to the Present
    (1990), with commentary drawn from Economics in the Long View:
    Essays in Honor of W. W. Rostow, a festschrift published in 1982.
    Essays on the British Economy in the Nineteenth Century (1948),
    which gained him recognition as an economic historian of the first
    rank, nor his Process of Economic Growth (1953)
   A Proposal: Key to an Effective Foreign Policy (With M. F. Millikan,
    1957), which made his reputation in the field of foreign policy. About
    fifteen of his later books dealt with foreign policy.
Rostow’s Growth Theory
    The model argues that economic
    modernization occurs in five basic stages of
    varying length –
(1) traditional society,

(2) preconditions for take-off,

(3) take-off,

(4) drive to maturity, and

(5) high mass consumption.

Criterion: economic and technological level,
    volume and quality of the consumption
What are the basic types of
economic systems?
          Traditional
          Command
          Market


                              7
What is a
traditional economy?


     A system that answers the
     What, How, and For
     Whom questions the way
     they always have been
     answered
                                 8
What is the benefit of a
traditional economy?

 There is little friction
 among members because
 relatively little is disputed

                             9
What are the disadvantages of
a traditional economy?

Restricts individual initiative
Lack of advanced goods, new
technology, and growth.
                                  10
Pure Market Economy


   All resources are privately owned
   Coordination of economic activity is
    based on the prices generated in free,
    competitive markets
   Any income derived from selling
    resources goes exclusively to each
    resource owner
                      11
Invisible Hand of Markets
   According to economist Adam Smith
    (1723–1790), market forces coordinate
    production as if by an ―invisible hand.‖




                        12
What is the
invisible hand?
        A phrase, introduced by
       Adam        Smith,   that
       expresses the belief that
       the best interests of a
       society are served when
       individual consumers and
       producers compete to
       achieve their own private
       interests.
                               13
What is the advantage of a
market economy?
         It provides a wide
         variety of goods
         and services that
         buyers and sellers
         exchange at the
         lowest prices.   14
Problems with
Pure Market Economies
   Difficulty enforcing property rights
   Some people have few resources to sell
   Some firms try to monopolize markets
   No public goods
   Externalities




                        15
Pure Centrally
Planned Economy
   All resources government-owned
   Production coordinated by the central
    plans of government
   Sometimes called communism
   Use visible central planners




                       16
Problems with Centrally
Planned Economies
   Consumers get low priority
   Little freedom of choice
   Central planning can be inefficient
   Resources owned by the state are
    sometimes wasted
   Environmental damage



                        17
The Command Economy Pyramid
             Supreme
             planning
              agency



  Specialized planning agencies


         Producing units


         Consuming units          18
What are the strengths of a
command economy?
    Economic change can
    occur very quickly.
    Social welfare can be
    enhanced.

                              19
What are the weaknesses of a
command economy?

 Decision makers have the
 power to be absolutely
 wrong.
 Quality and variety of goods
 suffer.
                                20
Mixed Economy

   United States is a mixed economy

   Also considered a market economy

   Government regulates the private sector
    in a variety of ways.
             USA vs. Japan or Sweden ?
                      21
Transitional Economy
   A transitional economy is in the process of
    shifting orientation from central planning
    to competitive markets.
   It involves converting state-owned
    enterprises into private enterprises—
    privatization.
   The transition now under way will shape
    economies for decades to come.

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    GDP per capita in 2009
    (USD, PPP)
   Belarus 10,600    Germany        34,800
   Cuba      9,500   Holland        40,300
   China     6,000   Brazil          9,500
   Bulgaria 12,900   Japan          34,200
   USA      47,000   Sweden         38,500
   Denmark 37,400    Liechtenstein 118,000
   EU       33,400   World           10,400
   Zimbabwe 200 Congo 300 Burundi 400

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