Economic Systems


Main idea

To deal with the fundamental problem of scarcity, different types of economic systems exist.

Key Terms market economy, per capita GDP, command economy, socialism, communism, mixed economy

Reading Strategy Organizing Information As you read the section, complete a diagram like the one below by describing three characteristics of a market economy.

Read ta Learn

♦ How does a market economy work?

■ What are the characteristics of a command economy?

Read ta Learn

♦ How does a market economy work?

■ What are the characteristics of a command economy?

Command Economy Trade

Americans m Action

China and its 1.3 billion people joined the World Trade Organization In December 2001, ending a 15-year quest and ushering in a new era of reform expected to bring sweeping changes to the Communist-ruled nation. Reuters news agency reported that "foreign Investors have waited eagerly for the worlds largest potential market to become an integral part of the global economy. The Communist Party [newspaper] People's Daily urged officials to abide by WTO commitments and said entry would fundamentally change the way the government handled the economy."

U.S. trade negotiator Charlene Barshefsky meets with China's Minister of Foreign Trade Shi Guangsheng

Market Economics

Not all economic systems are alike. Some, like the one in the United States, arc based on markets. Others, like China's, include far greater government control. These different economies deal with scarcity in different ways. All societies face the basic questions of WHAT to produce^ HOW to produce it, and FOR WHOM to produce it. The way these questions are answered determines a society's economic system. In a pure market cconomy, these decisions are made in free markets based on the interaction of supply and demand. Capitalism is another name for this system.

One of che chief characteristics of a market economy is that private citizens not the government own the factors of production. As you recall, those factors are natural resources, capital, labor, and entrepreneurship.

Because the factors of production are in private hands, a market cconomy offers a high degree of individual freedom. Businesses make their own decisions regarding what to produce, how to produce it, and for whom to produce it. Driving those

572 Chapter 26 Comparing Economic Systems

<4 «znaaa decisions is the business owner's desire to earn a profit. At the same time, consumers make their own decisions about what to buy.

In a market economy, these decisions take place in the market. Supply and demand interact to set prices, and producers and consumers base their decisions on prices.

A market economy is decentralized. That is, decisions are made by all the people in the economy and not by just a few. The economy seems to run by itself because no one coordinates these decisions.

There arc no pure market economics in the world. In the United States, for example, government provides public goods such as defense and a system of justice.

Another government role is to make sure that markets stay competitive. Effective competition requires a large number of sellers. The U.S. government ensures this by regulating businesses. It also punishes businesses that break laws meant to ensure competition.

Finally, the government plays a role with externalities,These are the unintended side effects that have an influence on third parties. For example, the government works to reduce pollution, which is a negative externality. The government also takes steps to encourage activities that generate positive externalities. For instance, it provides money to fund basic science research. That research can be used by businesses to develop new products.

The majority of the largest economies in the world today are market economies. Look at the map on this page, which shows the per capita GDP for selected nations.

** Per Capita GDP, Selected Nations





\ UNITED \ 'ff? KING DO M\ I I J $24,219 ^Vi -£ FRANCE
















$800 KENYA


InloiproUng Maps

Economists often use per capita GDP as a rough measure of a nation's prosperity. All amounts are shown in U.S. dollars. What is the per capita GDP for the United States? Which nation has a larger per capita GDP— North Korea or South Korea?

Per capita GDP divides the total GDP by the country's population. By expressing GDP in terms of each person, we can compare one nation's economic success co another without regard to the size of the two economies. Look at the countries that have high per capita GDPs. Most of them, including the United States* have market economies.

E£f) Explaining Why is economic freedom a characteristic of market economies?

Command Economies

The system that we know best in the United States is the market economy. The opposite of this system is the command economy. Ln a pure command economic system, the individual has little, if any, influence over how the basic economy functions. Under this system, the major economic decisions are made by the central government. The government tells producers what to do it commanda the actions they should take. 'JLhis form of economic system is also called a controlled economy. The term "communism* applies to command economies.

In the early 1800s, some people believed that ending the misery of exploited workers required eliminating capitalism completely.They advocated socialism, the belief that the means of production should be owned and controlled by society, cither directly or through the government. In this way, socialists felt that wealth would be distributed equally among all citizens.

Karl Marx, a German thinker and writer, was a socialist who advocated violent revolution. Marx believed that in industrialized nations, the population is divided into capitalists, or the bourgeoisie, who own the means of production, and

Student Web Activity ViaiL and click on Student Web Activities— Chapter 26 to learn more about the Lypes of economic systems.

workers, or the proletariat, who work to produce the goods, Marx interpreted human history as a class struggle between the workers and the capitalists. Eventually, the workers would revolt and overthrow the capitalists in a revolution.

Marx first called his own ideas "scientific socialism." He believed that in time, socialism would develop into full communism. Under communism one class would evolve, property would all be held in common, and chcre would be no need for government.

In a command economy, most productive resources—especially land and capital—are owned by government. They are not in the hands of private individuals. Because the government plays such a major role in these economies, people have less economic freedom. As a result, people in these systems generally have fewer choices than do those in market economies.

The government makes the three basic allocation decisions in a command economy. It decides WHAT to produce, l'or instance, it tells factory managers whether to make cars or buses or military vehicles. The government also regulates HOW goods will be produced. It tells managers where they should buy their raw materials, for example, finally, the government decides FOR WHOM to produce. It fixes the wages of all workers and sets prices as well.

As you might expect, governments in command economies have planning agencies with a great deal of power. These organizations take control of difierenc parts of the economy, such as agriculture, steel production, and shoe manufacturing. They make the important decisions in chose industries.

Command economies can be very inefficient. As a re suit > they tend to grow more slowly and attain a lower per capita GDP than market economics. Cuba and North Korea are perhaps the two best current examples of command economics. Look at the map on page 573 to see how low their per capita GDPs arc.

For many decades, the Soviet Union had a command economy. The Russian cconomy that survived it has been trying to convert to a market economy ever since. China is another command economy that is making the transition to a market economy. You will read how these two economies are changing in the next section.

Mixed Economies

A mixed cconomy combines basic elements of a pure market cconomy and a command economy. Most countries of the world have a mixed cconomy in which private ownership of property and individual

Command Economy

Command Economy North Korea's command economy has focused on producing weapons and not consumer goods. Who owns most of North Korea's productive resources?

decision making are combined with government intervention and regulations. In the United States, most decisions are made by individuals reacting to market phenomena— such as prices determined by supply and demand, competition, private property, and exchange. However, federal, state> and local governments make laws regulating ccrtain areas of business.

f/^S^ki Contrasting What is the difference between a pure market economy and a mixed economy?


Checking for Understanding

1. Key Terms Write a true state men I and a false sLaLemenL for each of the following terms:

market economy, command economy, mixed economy. Indicate which statements are true and which arc false.

Reviewing Main Ideas

2. Explain What does it mean to say that a market cconomy Is decentralized?

3. Contrast Does Lhe governrnenL take a more active role in a market cconomy or in a command economy?

Critical Thinking

4. Drawing Conclusions Many nations are moving away from a command economic system and toward a market economic sysLem. Why do you Lhink this is so?

5. Making Comparisons On a chart like the one below, describe how Lhe role of Lhe individual differs under different economic systems.

Economic System

Role of Individual



6. Interpret Study the map on page 573. Whal is Lhe per capita GDP for Argentina? For India? Does China's per capita GDP surpass Lhe world average?


7. Research Choose one familiar item that is imported to the UniLed SLaLes. CollecL information about the item, including where iL comes from and how much it costs. Learn why the country it comos from produces Lhis iLerri. PresenLyour information in class.

Chapter 26 Comparing Economic Systems m+Uiitiiimlp


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  • dawit
    What are mixed markets, socialists, and command economies look like?
    8 years ago
  • silvia russo
    Why do people that live in a command economy have less freedom?
    8 years ago

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