Economic Systems

Economic Systems

Module 5 Lesson 2

1

Big Idea

Economic Systems and Macroeconomics Video

Geographers understand world economies by studying factors of production, economic activities, and levels of development.

2

Main Ideas

There are three basic types of economic systems. Contemporary societies have mixed economies. The United States benefits from a free enterprise system.

Governments provide public goods. Geographers categorize countries based on levels of economic development and range of economic activities.

3

Main Types of Economic Systems

There are three basic types of economic systems.

Traditional Economy

• A traditional economy is a system in which people grow their own food and make their own goods.
• The work is focused on survival and based on established customs.
• Group leaders make economic decisions for the group.
• Often found in rural and remote communities

Command Economy

• A command economy is a system in which the central government makes all economic decisions.
• Government decides what goods to produce, how much to produce, and what prices and wages will be.
• Also called a centrally-planned economy

Market Economy

• A market economy is a system based on private ownership, free trade, and competition.
• Individuals and businesses are free to buy and sell what they wish.
• Prices determined by the supply and demand for goods
• Most common today

4

Modern Economies

Contemporary societies have mixed economies.

• Most countries today have mixed economies that blend elements of traditional, command, and market economies.
• The most common types of mixed economies are communist, capitalist, and socialist.

Communist Economies

• Closest to a command model
• Government owns factors of production
• North Korea, China and Cuba are examples of communist countries.
• Government makes all economic decisions.

Capitalist Economies

• Closest to a market economy
• Individuals and businesses own factors of production and make economic decisions.
• United States, Canada, and Taiwan are examples of capitalist countries.
• Government enforces health and safety standards.
• Government spends money from taxes to support economic development.

Socialist Economies

• Falls in between capitalist and communist models
• Government controls some industries and services such as healthcare, electricity and communications.
• Sweden and India are examples of socialist countries.

Trends Since the Fall of Communism

• Most communist regimes that existed between the 1940s and 1990s had economies that failed.
• Central planners had too many decisions to make and too little understanding of local conditions.
• Workers had no incentive to work hard for better wages.
• Shortages of food were common.
• Since the early 1990s most countries have adopted some form of market economy.
• China, Cuba, Laos, and Vietnam are communist but allow some market competition.
• North Korea does not.

5

The Free Enterprise System

The United States benefits from a free enterprise system.

• U.S. capitalism is sometimes called the free enterprise system.
• Americans enjoy the freedoms to choose careers, to own and operate businesses, and to make choices about how to spend money.
• The ability to make a profit is an advantage of the free enterprise system.

• Maintaining a functioning free enterprise system requires that people act in morally responsible and ethical ways.
• Unethical actions can have economic effects.

6

Government and Public Goods

Governments provide public goods.

• Federal, state, and local governments provide expensive or important services to large groups of people.
• These government goods and services that the public consumes are called public goods.
• The government pays for public goods with the taxes they collect.
• Schools, fire departments, highways, roads, airports, and bridges are examples of public goods.

Government Scarcity

• Scarcity affects governments.
• Governments try to balance providing public services and goods with taxes.
• Some economists believe that if taxes are too high, businesses won’t make as much profit.
• Other economists believe that if taxes are too low, it reduces the public services that protect our quality of life.
• Governments use regulations to control business behavior.

7

Economic Activities and Development

Geographers categorize countries based on levels of economic development and range of economic activities.

Levels of Industry

Primary Industry

– People earn a living by providing raw materials or natural resources to others. – Examples include agricultural industries such as farming, fishing, and mining. Primary industries use natural resources to make money. This farmer sells milk from dairy cows to earn a living.

Secondary Industry

– Manufacturing industries that use natural resources or raw materials to make other products – Example: automobile manufacturers use steel and other materials to build cars and trucks. Secondary economic activities use raw materials to produce or manufacture something new. In this case, the milk from dairy cows is used to make cheese.

Tertiary Industry

– Goods and services are exchanged – Includes wholesale industries, businesses that sell to other businesses – Includes retail industries where goods are sold to final consumers – Include service industries where businesses provide services rather than goods Tertiary activities provide goods and services to people and businesses. This grocer selling cheese in a market is involved in a tertiary activity.

Quaternary Industry

– Involves the research and distribution of information – Examples include librarians, computer programmers, and scientists Quaternary industries process and distribute information. Skilled workers research and gather information. Here, inspectors examine and test the quality of the cheese.

Economic Indicators

• Measures of a country’s wealth used by geographers to decide if a country is developed or developing
• One measure used is gross domestic product (GDP)—the value of all goods and services produced within a country in a single year.
• Other indicators include a country’s per capita GDP, level of industrialization, life expectancy, literacy rate, and overall quality of life.

Developed and Developing Countries

• Developed countries have strong economies and a high quality of life; usually have high per capita GDP
• Developing countries have less productive economies and a lower quality of life; usually have lower per capita GDP
• Usually as countries develop, fewer people work in primary industries.

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