Economics
Unit 4 Section 1
Three Basic Economic Questions—the student will apply social science skills to understand economic systems by identifying the basic economic questions encountered by all economic systems. (GOVT.14a)
Government Involvement—the student will apply social science skills to understand economic systems by comparing the characteristics of traditional, free market, command, and mixed economies, as described by Adam Smith and Karl Marx. (GOVT.14b)
Choice—the student will apply social science skills to understand economic systems by evaluating the impact of the government's role in the economy on individual economic freedoms. (GOVT.14c)
Economic Freedom and Political Freedom—the student will demonstrate knowledge of economic systems by explaining the relationship between economic freedom and political freedom. (GOVT.14d)
Economic Indicators— the student will demonstrate knowledge of economic systems by examining productivity and the standard of living as measured by key economic indicators. (GOVT.14e)
Entrepreneurship—The student will demonstrate knowledge of the United States market economy by assessing the importance of entrepreneurship, the profit motive, and economic independence to the promotion of economic growth. (GOVT.15a)
Business Structure—the student will demonstrate knowledge of the United States market economy by comparing the types of business organizations. (GOVT.15b)
Factors of Production—the student will demonstrate knowledge of the United States market economy by describing the factors of production. (GOVT.15c)
Supply and Demand—the student will demonstrate knowledge of the United States market economy by explaining the interaction of supply and demand. (GOVT.15d)
Circular Flow—the student will demonstrate knowledge of the United States market economy by illustrating the circular flow of economic activity. (GOVT.15e)
Global Economy—the student will demonstrate knowledge of the United States market economy by analyzing global economic trends, and the relationship of Virginia and the United States to the global economy. (GOVT.15f)
Every society must answer three basic economic questions.
How a society answers these questions determines the type of economy it has.
The reading below introduces the basic purposes of political and economic systems and takes a closer look at the factors that influence the three basic economic questions. On the next page we'll look at specific systems. Read the following and answer the questions below.
Comparative Political and Economic Systems
Is there such a thing as a perfect government? One "answer" was the utopian society established by the Shakers. In order to make their society perfect, the Shakers adhered to a strict policy of communal living, religious devotion, (pictured above in their distinctively animated form of worship) celibacy, rigorous labor, and equality.
The last two decades of the 20th century were great for democratic governments. The Cold War ended with the collapse of communist dictatorships throughout Eastern Europe, including the Soviet Union itself. South Korea and Taiwan moved out of their authoritarian pasts toward greater democracy. Apartheid was ended in South Africa.
But democracy is still not the only form of government in the world today. Despite differences in form and function, most of the world's governments still try to fulfill similar primary objectives.
Purposes of Political Systems
A government can use propaganda to reinforce its image as defender of the nation. This American poster from World War II shows how scare tactics can drum up support (as well as fresh recruits) for the military.
Most governments are designed to provide their inhabitants with two important services: protection from outside invasion and protection of citizens from one another. How many different ways can a government protect from invasions? They can form large armies and navies, build fortified cities, provide border patrols, negotiate with potential enemies, threaten or punish "rogue" states, or join international organizations. The list goes on and on. It makes sense, then, that every country has its own way of accomplishing these basic needs. Of course, some are more successful than others. But some similarities between governments will surely exist as well. For example, more than one country has thought to build strong armies and navies.
Likewise, try to think of different ways that countries can protect citizens from one another. Some commonalties will surely appear — police forces, crime prevention, putting criminals in jail, passing laws that define what is a crime and what is not. Again, governments have different ways to accomplish this end. Some allow more individual freedoms than others, some will have national police forces, and others will organize protection on the local level. As modern governments have taken on more responsibilities, such as regulating the economy and providing social services, the possibilities for different government structures and functions increase.
Purposes of Economic Systems
Economic systems provide needs for citizens by answering several questions:
Different economic systems around the world answer these questions in different ways.
The resources of an economic system are called factors of production because the economy needs them to produce goods and services. They may be grouped into four categories:
Governments must consider how their citizens use (and replenish) natural resources. Forests, for example, are being depleted at an alarming rate because of human activities like logging. But which is more important: wildlife, or the thousands of families that depend on the income that the logging industry provides?
The world at the turn of the 21st century was becoming smaller, as global interconnections made distant places seem close. At the same time, bloody nationalist conflicts turning neighbor against neighbor still raged. Government leaders around the world examined their own systems and each others to chart a course for the new millennium.
The type of economy a country has is determined by the amount of government involvement in economic decision-making.
Comparing Economic Systems
Karl Marx, German philosopher, economist, and revolutionary, laid the ideological groundwork for modern socialism and communism.
Karl Marx and Friedrich Engels turned the world upside down.
Until the publication of their 1848 Communist Manifesto, much of the western world followed a course where individuals owned private property, business enterprises, and the profits that resulted from wise investments. Marx and Engels pointed out the uneven distribution of wealth in the capitalist world and predicted a worldwide popular uprising to distribute wealth evenly. Ever since, nations have wrestled with which direction to turn their economies.
Capitalism
Image from Capitalism Magazine (http://www.CapitalismMagazine.com). Used with permission.
The antitrust lawsuit against Microsoft is one way that the government has tried to promote competition. Supporters of Microsoft say that forcing Microsoft to allow companies to bundle arch-rival Netscape's web browser with Microsoft Windows is not unlike making Coca-Cola include a can of Pepsi in each six-pack it sells.
Communism
Karl Marx, the 19th century father of communism, was outraged by the growing gap between rich and poor. He saw capitalism as an outmoded economic system that exploited workers, which would eventually rise against the rich because the poor were so unfairly treated. Marx thought that the economic system of communism would replace capitalism. Communism is based on principles meant to correct the problems caused by capitalism.
The most important principle of communism is that no private ownership of property should be allowed. Marx believed that private ownership encouraged greed and motivated people to knock out the competition, no matter what the consequences. Property should be shared, and the people should ultimately control the economy. The government should exercise the control in the name of the people, at least in the transition between capitalism and communism. The goals are to eliminate the gap between the rich and poor and bring about economic equality.
Socialism
Socialism, like communism, calls for putting the major means of production in the hands of the people, either directly or through the government. Socialism also believes that wealth and income should be shared more equally among people. Socialists differ from communists in that they do not believe that the workers will overthrow capitalists suddenly and violently. Nor do they believe that all private property should be eliminated. Their main goal is to narrow, not totally eliminate, the gap between the rich and the poor. The government, they say, has a responsibility to redistribute wealth to make society more fair and just.
There is no purely capitalist or communist economy in the world today. The capitalist United States has a Social Security system and a government-owned postal service. Communist China now allows its citizens to keep some of the profits they earn. These categories are models designed to shed greater light on differing economic systems.
Maintaining freedom of choice in the marketplace is the basis of the free-enterprise system. Government plays a limited but important role in the protection of individual economic freedoms.
Individuals have the right to the basic economic freedoms enjoyed in a free market society.The government is responsible for protecting these freedoms.
The government has created certain institutions and consumer-protection laws and agencies to protect these freedoms, including the following:
Not all countries have the same level of economic freedom. In fact, for the last twenty years the Heritage Foundation and the Wall Street Journal have been rating the countries of the world in terms of economic freedom. Let's take a look at this rating.
Read the Introduction and FAQs (especially Q.1, Q.2, and Q.3) on the About the Index page, then take a look at the map. Finally answer the questions below.
Direct Link: https://www.heritage.org/index/about
Direct Link: https://www.heritage.org/index/heatmap
Note: You may find it interesting to use the Create a Comparison Chart feature to compare two countries that catch your interest.
A strong relationship exists between the economic and political freedoms enjoyed by citizens of free and authoritarian nations.
The degree of economic freedom in a nation tends to be directly related to the degree of political freedom its citizens enjoy.
Comparing Governments
The Statue of Liberty is a symbol of freedom and democracy for people around the world.
No two governments, past or present, are exactly the same.
However, it is possible to examine the similarities and differences among political and economic systems and categorize different forms of government. One simple way to categorize governments is to divide them into democratic and authoritarian political systems.
Democracies
Many countries today claim to be democracies, but if the citizens are not involved in government and politics, they are democratic in name only. Some governments are more democratic than others, but systems cannot be considered truly democratic unless the meet certain criteria:
Whither democracy? It was not until 1920 — after decades of tireless protest and campaigning — that women were granted suffrage by the ratification of the 19th Amendment.
The degree to which a government fulfills these criteria is the degree to which it can be considered democratic. Examples of such governments include Great Britain, France, Japan, and the United States.
Authoritarian Regimes
Mao Zedong's position as authoritarian ruler of the People's Republic of China is glorified in this propaganda poster from the Cultural Revolution. The poster reads: "The light of Mao Zedong Thought illuminates the path of the Great Cultural Revolution of the Proletariat."
One ruler or a small group of leaders have the real power in authoritarian political systems. Authoritarian governments may hold elections and they may have contact with their citizens, but citizens do not have any voice in how they are ruled. Their leaders do not give their subjects free choice. Instead, they decide what the people can or cannot have. Citizens, then, are subjects who must obey, and not participants in government decisions. Kings, military leaders, emperors, a small group of aristocrats, dictators, and even presidents or prime ministers may rule authoritarian governments. The leader's title does not automatically indicate a particular type of government.
Authoritarian systems do not allow freedoms of speech, press, and religion, and they do not follow majority rule nor protect minority rights. Their leaders often come from one small group, such as top military officials, or from a small group of aristocratic families. Examples of such regimes include China, Myanmar, Cuba, and Iran.
No nation falls entirely into either category. It also dangerous to categorize a nation simply by the moment in time during which they were examined. The Russia of 1992 was very different from the Russia of 1990. Both democratic and authoritarian governments change over time, rendering the global mosaic uncertain and complex.
Formulation of economic policies requires an understanding of accurate measures of the economy's performance.
Productivity and the standard of living are generally higher in economies that have limited government planning and limited control of the economy.
Gross Domestic Product (GDP) is one of the most important indicators of the health of the economy of an entire nation. As you know, the GDP measures the value of all the goods and services that a nation produces. The United States is currently, by far, the world leader in GDP. Take a look at this listing of nations ranked by GDP (be sure to click on "Per Capita" to see a very different perspective of GDP when you think about it "per person").
Just for fun, this map shows each state in the USA and associates it with a country that has a similar GDP (this really just shows how huge the economies of California and Texas are).
Direct Link: https://www.businessinsider.com/map-of-of-us-states-gdp-and-other-countries-2014-2
The entrepreneur sees an economic need and tries to fill it. The Economist defines "entrepreneur" this way:
| Entrepreneur |
| The life and soul of the capitalist party. Somebody who has the idea and enterprise to mix together the other factors of production to produce something valuable. An entrepreneur must be willing to take a risk in pursuit of a profit. |
Source: http://www.economist.com/economics-a-to-z/e#node-21529737
Entrepreneurs are the risk-taking individuals who go out and start their own business. Some of the most famous business people in the world are successful entrepreneurs who started a business and worked to the top. Mark Zuckerberg, Steve Jobs, and Oprah Winfrey are all extremely successful examples of modern entrepreneurs, but millions of entrepreneurs are running smaller, but still successful, business across the country and around the world. Restaurant owners, inventors, hair stylists and artists can all be examples of entrepreneurs.
Image Source: http://b-i.forbesimg.com/randalllane/files/2013/11/1112_philanthropy-gates-bono-forbes-cover-120213_768x1008.jpg
Entrepreneurship is the organizational abilities and risk-taking involved in starting a new business or introducing a new product.
Entrepreneurs must be willing to take risks, handle rejection, survive financial uncertainty, and make personal sacrifices.
Profit is an entrepreneur's reward for taking a risk and succeeding.
Profit is the difference between the revenue received from the sale of a good or service and the costs of providing that good or service.
Entrepreneurs must have the freedom to start new business ventures but must accept the responsibilities of that freedom.
Economic structures that provide freedom of choice encourage and have more entrepreneurship.
There are three basic ways that businesses organize to earn profits.
In a corporation, owners share in the profit, and their liability is limited to the amount of their investment.
The production of goods and services depends on four basic categories of resources, which are interdependent in the production process.
All production depends on natural resources, which need capital for conversion to usable goods and labor to make the conversion.
The interaction of supply and demand in a market economy determines price.
Source: https://resourcesforhistoryteachers.wikispaces.com/file/view/supply_and_demand.gif/327401004/supply_and_demand.gif
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| Definition | Laws | Determinants | Equilibrium |
Demand | Willingness and ability to buy various quantities of a good or service at various prices | Law of Demand: Quantity demanded varies inversely to price. If all else remains equal, the lower the price, the higher the quantity demanded, and the higher the price, the lower the quantity demanded. | Factors other than price influencing demand: substitutes, complements, number of demanders, consumer preference, income
| Equilibrium is the point where supply and demand balance each other; below this point is a shortage, and above this point is a surplus. |
Supply | Willingness and ability to provide various quantities of a good or service at various prices | Law of Supply: Quantity supplied varies directly with price. If all else remains equal, the lower the price, the lower the quantity supplied, and the higher the price, the higher the quantity supplied. | Factors other than price influencing supply: number of producers, technology, government policies, productivity of resources | Equilibrium is the point where supply and demand balance each other; below this point is a shortage, and above this point is a surplus. |
Let's take another look at the following video (you viewed this earlier in the section Overview). It is short but provides a lot of information in that short time. Before you watched it to just get the gist, so you will want to watch it for understanding this time.
Households, businesses, and government are interdependent in a market economy. Resources, goods and services, and money constantly flow in a market economy.
The interaction of households, businesses, and government are referred to as the "circular flow" of economic activity.
Below is the graphic from the end of the video.
The economies of individual nations are interdependent.
United States businesses have become multinational in their quest for productive resources, markets, and profits. United States firms may move factories to other countries to reduce costs (off-shoring).
The economy of the United States depends on resources and markets around the world for the production and sale of goods and services.
Advances in technology allow businesses to get skilled work, such as engineering and accounting, done by people who remain in their home countries (i.e., to outsource this work). This increases the supply of workers and holds wages and costs of production down.
Immigration brings workers into the country and increases the supply of labor.
As foreign countries develop and grow, they demand more products and natural resources, such as oil, pushing up prices. Total world production is greater when nations specialize in the production of those products that they can produce most efficiently.
When the United States imports more goods and services than it exports, the difference is the trade deficit.
Canada, Mexico, the European Union, China, and Japan are the major trading partners of the United States.
This ends the Unit 4 Section 1—Economics Reading Module. If you have finished answering questions, be sure to click Finish. If you need to return to complete questions, exit this window, and your results will be saved for your next session.