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Intro III: Economic Systems

by: Chip Brothers

Intro III: Economic Systems ECON 201

Chip Brothers

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About this Document

Covers Circular flow model all the way to Capitalism vs Socialism
Intro to Economics
Dr. Ken Baker
75 ?




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This 9 page Bundle was uploaded by Chip Brothers on Wednesday September 21, 2016. The Bundle belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Fall 2016. Since its upload, it has received 18 views. For similar materials see Intro to Economics in Economics at University of Tennessee - Knoxville.


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Date Created: 09/21/16
Intro III: Economic Systems I. What is output and how do you measure it? • Output & production comes in units • Barrels of oil, tons of steel, etc. • However, you can’t aggregate those into a meaningful statistic • So, all final production is converted into its market value (what it sells for) • This number is GDP, and represents the total value of a country’s yearly production  GDP Standard of Living and Economic Well-Being • Is the U.S. the ‘richest’ country in the world? Are we the most well-off? • Economists measure Economic Well-Being as the Standard of Living • Rich countries have a high standard of living because they have high GDP per person  Poorer countries have less GDP per person  Is this even the best way to measure ‘economic well- being? • What does that even mean? II. Overview of the U.S. Economy • U.S. contains about 7% of world’s total land rd • U.S. is the 3 largest country by geography • U.S. contains less than 5% of the world’s total population • U.S. is the 3 most populous country • U.S. produces between 1/5 or ¼ of world’s total output (22%) • U.S. is the largest economy in the world (by most measures) • The US economy is 150x bigger today than in 1930 • The US economy is 2.5x bigger than in 1930 III. Economic Systems • Different ways to address scarcity and the Three Questions Economic System: The organization and methods used by a society to provide for its people (that is, answer its 3 questions) • Determine what goods & services are produced, • Determine how they are produced, and • Ultimately determine how to split them up amongst its members • Three main types: • Traditional economies • Command economies • Market economies 3 Questions for Society 1. What goods/services should we make? • How many? • How many acres of corn to plant? How many of wheat? • How many SUV’s? How many tanks? How many Prii? 1. How should we make the goods/services? • What is the best (most efficient) combination of inputs to make the good/service? 1. How do we allocate the goods/services we made? • How do we divide up the goods/service we made? • Who gets the Bentley, who gets the Ford, and who gets the bus? Traditional Economy Traditional Economy: answers the Three Questions the way they have always been answered! • Follow the rules and ways of the past • “if it was good enough then, it is good enough now” • How crops are planted, how they are harvested, how the food is divided up, etc. has changed little over time • Examples • Amish in America, Ainu in Canada, some tribes in the Amazon Pros and Strengths • Less friction in society • Everyone understands and accepts their role • High sense of community • Your sense of self worth it tied to the harmony and smooth functioning of the community Cons and Weaknesses • Restriction on individual freedom and initiative • Slow (if any) economic growth • Slow (if any) progress in standard of living • Slow (if any) technology advancement Command Economy Command Economy: answers the Three Questions through the decisions of central authority figure (leader/dictator) • Central planners map out the workings of the economy, own the factors of production and • determine how much to produce • determine how to produce • determine the allocation • Requires extensive planning and vast numbers of committees • Examples: Old USSR Pros and Strengths • Can institute change rapidly! • There is no debate or discussion • Can provide • Food, clothing, shelter, education, medical care, safety, etc. • Can make distribution of income/wealth/resources more equitable Cons and Weaknesses • Extremely difficult (impossible) to accurately calculate and produce the correct amount of G&S • Almost always too much of one thing and not enough of another • Quality usually suffers • Lends itself easily to corruption/authoritarianism Market Economy Market Economy: answers the Three Questions through the use of markets and the price system • PRICES will answer our Three Questions • How much food to produce, how many houses to build, how many teachers, farmers, mechanics, etc. • How to produce them • How to split them up • All is accomplished through interactions of countless individual decision-makers • Very little role for tradition or central authority planners • Examples: America, Canada, Japan, western Europe Pros and Strengths • Produces the most possible of the limited resources available • Larger variety of Goods and services produced, and better quality • Tends to lead to faster economic growth and higher standard of living Cons and Weaknesses • The division of resources / incomes / wealth can be egregiously uneven • Possible ‘misallocation’ of resources • Making beanie babies when should be making food • Markets can ‘fail’ under a variety of conditions • Pollution, worker exploitation/no public goods Adam Smith and the Invisible Hand • Much of the market system was introduced to the world via Adam Smith • Adam Smith: considered the father of modern economics • An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 • Every modern economics textbook can trace its content to ideas from him and that book • Of many, one of the most notable ideas is The power of everyone’s individual self-interest to somehow guide the economy to utilize its resources in the most efficient way possible An Inquiry into the Nature and Causes of the Wealth of Nations • Individuals motivated by nothing but promoting their own self-interest • When individual buyers and sellers compete to further their own private interests, society actually benefits; in fact, you actually make society better off; better off than if you had actually planned it! • Thousands (or millions) of individuals, acting selfishly and with no regard for one another or society as a whole, can do a better job of organizing an economy than any benevolent planner. What is the U.S.? Mixed Economy: where society answers its Three Questions through some combination • There is hardly any functioning society that is either all traditional, or all command, or all market • In truth, almost every functioning society operates in some sort of mixture between all three Capitalism An economic system characterized by: • No state planning of economic activity • Resources of production are privately owned and controlled • Private citizens decide how to employ resources and inputs (determine What society makers) • Private citizens reap the benefits (and costs) of their use in the form of profits and wages (guided by greed and profit to determine How goods/services are made) • No pre-set plan of how to allocate the goods and services • Private citizens, through voluntary exchange, determine For Whom goods/services are made (how things are divided) • Underlying theme: More concerned with Private Self-interest Strengths: • Economic efficiency • Society is capable of producing the biggest economic ‘pie’ as possible • Motivated by greed, self-interests, and profits, goods and services are produced at lowest possible cost • Prices determine the correct allocation of resources and correct amount produced • Economic freedom • Consumers and businesses free to choose; free to make their own decisions and choices Weaknesses: • Has a (natural) tendency towards an unequal distribution • Everyone rewarded to their own abilities • But people have varying abilities • Over time, wealth concentrates into fewer and fewer hands • Cases of market ‘failure’ • When market doesn’t work as advertised • Too much or too little is produced • Poor ability to protect environment, working conditions, discrimination • Poor provider of public goods (schools) Karl Marx: Capitalism’s Strongest Critic • Strong proponent of socialism (and communism) • Strong critic of capitalism and the greed that fuels the market system • Most noted works • Communist Manifesto • Das Kapital • Believed the forces of capitalism sowed the seeds of its own demise and was inherently unstable Karl Marx: Capitalism’s End Divide people into two groups: 1. Capitalists • Own the factories • Hire the workers • Paid in profits 2. Workers • Hired by capitalists • Paid in wages by capitalists Only capitalists benefit from the free market • Paid higher in profits than wages, become increasingly more wealthy and powerful • Workers increasingly left out • Paid in lower wages, become increasingly less powerful and marginalized • Capitalists, following greed, will increasingly exploit workers until workers finally revolt • System ultimately collapses through actual revolution Socialism An economic system characterized by: • Fairly high level of state involvment • Resources of production are a mix of state own/controlled and private ownership • State may own and control the larger or more ‘vital’ industries in order to better provide for the public good • Common ones are electricity/energy, banking, agriculture, mines, healthcare • Many industries can be privately owned and controlled • Heavy centralized authority involved in the final allocation of goods and services • State may try to even out final distribution through taxes • heavily tax the richer members and give to the poorer members • Note: There are LOTS of way to implement the above, and thus there is a LARGE variety of socialist economies • Underlying theme: more concerned with public interest Strengths: • More equitable distribution • The economic ‘pie’ is split more equitably • Economic Freedom • Consumer businesses free to choose; fre to make their own decisions and choices Weaknesses: • Not as efficient • Economic ‘pie’ is smaller • Less impetus for individual innovation and achievement • When market doesn’t reward and push economic decisions as much as under capitalism


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