Economic SystemsDifferent Approaches to Economics in Comparative Government & Politics

Economic Systems

• Economic System – an organized way of providing for the wants and needs of a people.

Three Major Forms1) Command Economy2) Market Economy3) Mixed Economy

Economic System

• Economic Systems – an organized way of providing for the wants and needs of a people.

Command Economy• Command (Planned) Economy – a central

government determines the price of goods and services using a fixed price system.

• ADVANTAGES1. Can change economic direction drastically2. Stability; no ‘market downturns’3. Eliminates individual profit motives4. Can provide public services/goods at a low cost

Command Economy• Command (Planned) Economy – a central

government determines the price of goods and services using a fixed price system.

• DISADVANTAGES1. Ignore the basic wants & needs of consumers2. Incentives based on quotas, not necessarily quality3. Large decision-making bureaucracy, inefficient 4. No rewards for individual initiative

Market Economy• Market Economy – goods and services are

determined in a free price system set by supply and demand.

• ADVANTAGES1. High degree of individual freedom & consumer

satisfaction2. Lack of government interference3. Variety of goods and services4. Able to adjust to change gradually

Market Economy• Market Economy – goods and services are

determined in a free price system set by supply and demand.

• DISADVANTAGES1. High degree of uncertainty

Market Adjustments, Recessions, Depressions

2. Does not provide for everyone; basic goods & services

3. Produces class division

Mixed Economy• Mixed Economy – economic system that

combines free market elements with an active governmental role.

• ADVANTAGES1. Compromise of two extremes (market & command)2. Provides assistance to those in need3. Provide stability, while encouraging innovation

• DISADVANTAGES 1. Higher costs (taxes) for citizens2. Role of Government? – difficult to balance3. Somewhat less efficient

Measuring Economic Success1. Gross Domestic Product (GDP) – all the goods

and services produced by a country’s economy in a given year (excluding income earned outside the country) .

Country Gross Domestic Product (2009)

United States $14.25 trillion

United Kingdom (Britain) $2.165 trillion

Russia $2.103 trillion

China $8.767 trillion

Iran $876 billion

Mexico $1.473 trillion

Nigeria $353.2 billion

Measuring Economic Success2. Gross National Product (GNP) – like GDP, but also

includes income earned outside the country by individuals and/or companies.

3. GDP/GNP per capita – divides GNP by the population of the country

Country GDP per capita (2009)

United States $46,400

United Kingdom (Britain) $35,400

Russia $15,200

China $6,500

Iran $12,900

Mexico $13,200

Nigeria $2,400

Measuring Economic Success1. Gross Domestic Product (GDP) – all the goods and

services produced by a country’s economy in a given year (excluding income earned outside the country) .

2. Gross National Product (GNP) – like GDP, but also includes income eared outside the country by individuals and/or companies.

3. GNP per capita – divides GNP by the population of the country

4. Purchasing Power Parity (PPP) – like GNP, however it also takes into consideration what people can buy using their income in their local economy.

5. The Gini Index – a formula that measures the amount of economic inequality in a society.

Measuring Economic Success4. Purchasing Power Parity (PPP) – like GNP,

however it also takes into consideration what people can buy using their income in their local economy as compared to prices in the U.S.

5. Human Development Index (HDI)– a formula that measures the well-being of a country’s people by factoring adult literacy, life expectancy, and educational levels in addition to the GDP.

6. The Gini Index – a formula that measures the amount of economic inequality in a society.

Trends of Global Economics1) Economic Liberalization – the general

trend/movement of global economies toward market economies. – WHY? – • (1) Belief that government is too big• (2) Lack of success of command economies.

Trends of Global Economics2) Globalization – the increasing interdependence

of economies, political systems, and societies on a global scale through the utilization of technological innovations. ADVANTAGESo Rapid overall economic growtho ‘Global Access’ to information, technology, capitalo Spread of democracy and human rightso Sense of global citizenship

Trends of Global Economics2) Globalization – the increasing interdependence of

economies, political systems, and societies on a global scale through the utilization of technological innovations. DISADVANTAGESo Exploitation of poorer countries – Multinational Corporations

(MNCs) o MNC account for 1/3 world’s exports; top 10 MNCs have sales greater

than GDP of 170 countries; Pakistan nuclear test & Cokeo Erosion of state sovereigntyo Actions in one nation now affect all nations

o SARS outbreak in China or Swine Flu in Mexicoo Negative environmental impacto “Americanization” – spread of American culture – backlash?

Trends of Global Economics3) Industrial vs. Post Industrial Value Shift – – Modernism – a set of values that comes along with

industrialization• Secularism• Emphasis on reasoning• Materialism• Technology• Emphasis on freedom rather than collective equality

– Worker Distribution• Small Service Sector (technology, health care, finance, education)

• Large Industrial Sector (factories, industry creating tangible goods)

• Shrinking Agricultural Sector (farming, food creation)

Trends of Global Economics4) Industrial vs. Post Industrial Value Shift – – Post-Modernism – a set of values that that comes

along with post-industrialism • Quality of life over material gain• Preservation of the environment• Promotion of health care & education

– Worker Distribution• Large Service Sector (technology, health care, finance, education)

• Shrinking Industrial Sector (factories, industry creating tangible goods)

• Very Small Agricultural Sector (farming, food creation)

Trends of Global Economics