Everything but the kitchen sink:

ECONOMICS of Africa, Asia, and Southwest Asia

ECONOMIC SYSTEMS

Command Economy Market Economy Traditional Economy

What to produce?Whatever the government decides

What to produce?What people want to buy and sell (if people are willing to buy it, then businesses will make it)

What to produce?What people need to survive

How to produce?However the government decides

How to produce?Laws of Supply and demand

How to produce?Hunting, farming, & gathering (social roles determine who does what)

For whom to produce?Class reward systemWaiting in line / rations

For whom to produce?Determined by how much someone is willing to pay for it

For whom to produce?Make their own products(what they have always made)

Characteristics Government or other central authority makes decisions about and determines how natural, capital, and human resources will be used. Change can occur easily, because its government drivenLittle individual freedomNo competition between businessesBusiness are not run to create a profitConsumers have few choices in the marketFactories are concerned about meeting quotas (not profit)Shortages often occur because of poorly run factories and farmsGovernment determines your jobGovernment sets the price of goods and services

CharacteristicsResources (capital and natural) are owned by individualsEconomic decisions are made by individuals competing to earn a profitIndividual freedom is considered very importantProfit is the motive for increased workCompetition between businessesMany economic freedoms and choice in the market placeCompetition determines prices which increase the quality of the product No government intervention in the economy (hire kids, pollute, unsafe conditions)ALSO CALLED CAPITALIST ECONOMY

CharacteristicsFound in rural, non-developed countries (some parts of Asia, South America, and Africa)Customs govern the economic decisionsTechnology not usedFarming, hunting, and gathering are done the same way as the generation beforeActivities are centered toward the family or ethnic unitMen and women have different economic roles and tasks

Command Economy Market Economy Traditional Economy

MIXED ECONOMIC SYSTEMS An economic system is the way society organizes the production

and consumption of goods and services. Every economic system answers three basic economic questions: What to produce? How to produce? and For whom to produce? How a society answers the three basic economic questions determines the society’s economic system.

Historically, there are three types of economic systems—tradition, command, and market (price) system. These economic systems answer the basic economic questions in different ways. In an economic system based on tradition, decisions are based on past behavior. In a command economy, decisions about production and consumption are made by a central planning unit, such as the government. A market system answers the basic economic questions in the marketplace. A market economy is an economic system where most goods and services and resources are exchanged through transactions by people and businesses.

Most economies contain some features from a market and command economic systems; this is called a MIXED ECONOMY. Mixed economic systems are best because a mixture best satisfies the economic goals of a society - such as economic freedom, equity, and economic security.

“More Command than Market” “More Market than Command”

What to produce?Government decides what to produce, BUT private/individual ownership of small business is allowed in limited amounts

What to produce?Business owners / leaders decide what to produce based on sales, BUT the government controls some of the decision making

How to produce?Government controls most of the means of production (factories and tools), BUT small business owners /leaders make limited decisions on how to produce items

How to produce?Business owners / leaders decide how to produce, BUT the government sets minimum safety requirements, minimum wage, and age to start work (child labor laws). Government also sets guidelines for product safety

For whom to produce?Government determines who receives which goods and services BUT a few items available outside the governments control (black market)

For whom to produce?Consumer’s incomes determine who gets which goods and services (whoever can buy it) BUT government provides welfare benefits for the needy

EXAMPLESNorth Korea, Iran

EXAMPLESSouth Africa, Nigeria, China, India, Israel, Saudi Arabia, Japan

MIXED ECONOMIC SYSTEM CONTINUUM

0% 100%Pure Pure Command Market

Place the following countries on the continuum.

South Africa (64%)Nigeria (55%)China (53%)India (54%)

Israel (68%)Saudi Arabia (64%)Iran (45%)Japan (73%)North Korea (2%)

Pick one of the countries that are 70% or higher on the continuum and describe why it is so much more market than command. Use your notebooks to help you.

Pick one of the countries that are in the 50% on the continuum and describe why it is almost equally market and command. Use your notebooks to help you.

Pick the country that is below 50% on the continuum and describe why it is so much more command than market. Use your notebooks to help you.

ECONOMIC SYSTEMS SAMPLE QUESTIONSThe economic system of communist countries is most closely related to which of the following?

A. command B. market C. traditional D. supply and demand

You are a small business owner and you sell computer gaming consoles. You have chosen to sell this product to teenagers and young adults. You decided to sell consoles because they are easy to build, are popular and make a high profit. You decide on the prices for your consoles based ONLY on the following factors:

How many consoles you have in your warehouse, and How many consoles you are sell each week

Which type of economy do you have? A. subsistence B. command C. market D. closed

What do the economic systems of the Japan and Israel have in common?

A. All are examples of pure market economies. B. All are examples of mixed economies that are mostly market economies with some elements of command economies.C. All are examples of mixed economies that are mostly command economies with some elements of market economies. D. All are examples of pure command economies.

In this country a single or centralized government authority decides what is produced. Which term identifies this type of economic system? A. Traditional B. CommandC. Market D. Pubic

South African economic policy is conservative focusing on controlling inflation, maintaining a budget surplus, and using state-owned enterprises to deliver basic services to low-income areas as a means to increase job growth and household income. However, companies are freed to choose what to produce, how to produce, and for whom to produce. Where does this policy place South Africa on a continuum between pure market and pure command?

A. Almost pure traditional B. Pure market C. More market than commandD. Pure command

THE RELATIONSHIP BETWEEN GDP AND PRODUCTIVE RESOURCES

GDP – Gross Domestic ProductWhat is GDP?

-estimate of the total market value of all final goods and services produced in the borders of ONE country in ONE year. Translation: estimate of all the stuff a country makes in a year.

Why do people calculate GDP? (why do we care?)-its an indicator of an economies health

measures a country’s economic output (how much stuff they make in a year)it helps us compare two economieshigher the GDP the better the economy

What factors do not affect GDP?-Imports – they are not made IN the country-Resold or used items; these were counted in the year they were produced when they were new; can’t count twice

Per Capita GDP -GDP divided by the county’s population-Average value of goods and services produced in one country in one year PER PERSON. (This is NOT average income)-Per Capita GDP is a BETTER way to compare two economies than with just GDP. See example:

CHINA GDP – $8.791 trillion Per Capita GDP – $6,500

GERMANYGDP – $2.812 trillionPer Capita GDP – $34,200

Productive Resources:

Human Capital (resource) – labor/work done by people to produce products

Examples: teacher, engineer, lawyer, doctor, waiter, factory worker

Capital Goods (resources) – the machines, tools, factories, and technology that are used to make other goods and services

Examples: flour, drill, oven, truck, gasoline, computer, hammer

Natural Resources – raw materials used to make products or “gifts of nature”

Examples: trees, water, minerals, animals, fruit

INVESTMENT IN HUMAN CAPITAL

Worker have education/training

are healthy and have safe working

conditions

Workers are able to produce a higher

quantity and higher quality goods and

services

More products are made and

international trade increases

GDP goes up

What are the ways a country or business can invest in its human capital?Education and training for its citizensEnsure safe working conditionsInvest in the health of its workforce (healthy workers can go to work)

INVESTMENT IN CAPITAL GOODS

Businesses buy new factories, tools, and

machines

Workers are able to produce faster and more efficiently

More products are made and

international trade increases

GDP goes up

What are the ways a country or business can invest in its capital goods?Encourage building of new factories Uses new machines and toolsEncourage use of high tech tools Improve its infrastructure (roads, bridges, electricity grids, etc)

ABSENCE OR PRESENCE OF NATURAL RESOURCES

A country has no or limited natural

resources

The country must import the natural

resources they need

Importing resources adds to the cost of

producing goods and service (makes more

expensive)

Countries that import their natural

resources tend to have lower

standards of living

Countries that have formidable obstacles (climate, terrain, and distance which hinder exploitation of natural resources and countries that lack of access to) natural resources tend to have lower standards of living. The lack of natural resources also hinders trade.

Brazil is building new factories and using newer technology. These are examples of A.Opportunity costs. B.Gross domestic product. C.Investment in human capital. D.Investment in capital goods.*

A sixth−grade class decides to open a popcorn stand. The stand and the popcorn popper are examples of which factor of production? A.natural resources B.human resources C.capital resources* D.entrepreneurship

EntrepreneurshipEntrepreneurs are people who have an idea for a business, are willing to take a risk, and combine human, natural, and capital resources to produce a new good or service. Entrepreneurs are only able to succeed in a more market system (closer to market than command on the economic continuum), where they have the freedom to control their own economic decisions.

Benefits of Entrepreneurship in an economyCreates new jobs / hires more peopleCreates new products and increases tradeTax money from their business helps the government

Encouraging Entrepreneurship in an EconomyMake the laws to ensure it is quick and easy to start a new businessHave courts and laws that protect privately owned property and investments

A country’s laws make it easier for the entrepreneur to start a

business and have laws to protect

their investments

An entrepreneur believes their idea for

a new product will earn a profit and want

to risk their $ and resources to start a

business

If the business is successful, the

entrepreneur will create new

products and hire new workers (creates

new jobs)

GDP goes up. International trade increases. Taxes

are collected to help the government earn

money

Why is entrepreneurship important to a country’s economy?

A. Build highways B. Improve schools C. Invest in capital goods* D. Provide better health care

Jose is an auto mechanic in a nearby larger town. He has decided his own small town needs its own car repair shop. Jose bought the building and opened his shop. Jose is an example of

A. Trade surplus B. Entrepreneur* C. Gross domestic product D. Opportunity costs

You are watching a speech by the Prime Minister of Australia on T.V. with your parents about improving the Australian economy. In the speech, the Prime Minister says: “We must take make is easier for Australians to open small businesses. My plan will give tax breaks and incentives to Australians who want to start their own small business...” The Prime Minister’s plan is based on the conclusion that:

A. Investing in human capital will increase the country’s gross domestic product (GDP).

B. Promoting entrepreneurship will improve economic development.*

C. Investing in capital goods will increase the country’s gross domestic product (GDP).

D. A tariff on goods imported from other nations will help businesses

TRADE BARRIERStariff - TAX ON IMPORTS

quota - LIMIT ON IMPORTS

embargo - CUTS OFF ALL TRADE

Determine each type of trade barrier below:

The United Kingdom Customs Service has found toxic lead-based paint in toys imported from a Chinese toy-making company. These toys are intended for sale in the United Kingdom. Exposure to the paint over a long period of time could be fatal to children under 6 years old. What type of trade barrier would guarantee that no child in the United Kingdom would be exposed to the deadly lead-based paint?

You are the governor of New South Wales, Australia. Living in Sydney, you have learned that surfing has a huge impact on your state’s local economy. As governor, you have two economic goals: * Protecting local Australian surfboard manufacturers from foreign competition, * Generating more tax revenue for your state government.What type of trade barrier could you use that would accomplish both of these goals?

In order to protect a nation’s car manufacturing industry from foreign car producers, the government allows 50,000 imported cars a year. This is an example of what kind of trade barrier?

embargo

tariff

quota

Why would a country want trade barriers such as tariffs?

Protect local industry and jobs from foreign competition oTariffs make the foreign product more expensive because the cost of the tax is passed on to the consumer

Tariffs generate additional money for the government

Why would a country want trade barriers such as quotas?

Protect local industry and jobs from foreign competition oQuotas force consumers to buy the domestically made product because there is not a lot of the foreign product availableoMake the foreign product more expensive (supply and demand)

Why would a country want a trade barrier such as an embargo?

Force a another government to change its policies or conform to international policy

Why would a country want free trade (no trade barriers)?

Lowers the price of imported goods and servicesStandard of living for the nation improves, although some jobs may be lost

LITERACY RATE & STANDARD OF LIVINGLiteracy rate of a country is the percentage of people over the age of 15 who can read and write. The economy of a nation impacts the ability of a country to improve literacy and standard of living. There is a relationship between literacy to the standard of living and the cultural development of a country. Literacy rate is a factor affecting human capital which in turn impacts standard of living and culture.

Country Total Literacy Rate

for the CountryLiteracy Rate

for MenLiteracy Ratefor Women

IRAN 77% 84% 70%

SAUDI ARABIA 79% 85% 71%

ISRAEL 97% 99% 96%

NIGERIA 68% 76% 61%

SOUTH AFRICA 86% 87% 86%

CHINA 91% 95% 87%

INDIA 61% 73% 48%

NORTH KOREA unavailable unavailable unavailable

JAPAN 99% 99% 99%

The relationship between the literacy rate and standard of living in Nigeria is A. Literacy rate has no affect on the standard of living. B. The higher the literacy rate the higher the standard of living.* C. The standard of living is independent of literacy rate. D. Low literacy rate creates a higher standard of living.

How does the high literacy rate in Japan affect its economy and enhance the standard of living for its citizens?

A. Japan’s high literacy rate contributes to its economic success and promotes a high standard of living.* B. The literacy rate has little effect on Japan’s economy; thus, it does not affect the standard of living. C. Japan’s high literacy rate is the result of its poor economy. D. The small percentage of people who cannot read are hindering most of Japan’s economic growth.

CURRENCY EXCHANGE / EXCHANGE RATES

Currency is the money people use to make trade easier. In the United States, we use U.S. dollars to buy goods and services. When we Americans work at a job, we are paid in dollars. Most of the time, when you are in a different country, you cannot buy goods and services with currency from your own country. So what do you do? You trade it in, or exchange it! With each exchange; however, the bank charges a fee. A business that exchanges a lot of money will pay many fees. We all know that there is not a currency for Earth; each country has its own currency except Europe. For international trade to be successful, countries must agree on a system of how much one currency trades for another. The exchange rate is based off the laws of supply and demand – the more people (traders of currency) are willing to pay for a dollar, the more valuable it becomes. Remember back to our exchange rate simulation. You were willing to give me a lot of other countries’ currency to get a US dollar. In that simulation, the dollar was more valuable than the other currency, because the demand for dollars was higher than the demand for the others. There are many foreign exchange markets where money from around the world is traded many times a day – how well or how poorly a currency is trading in these markets determines the exchange rate. The exchange rate between currencies fluctuates (changes) over the day.

EXAMPLE: You own Olympic Fish Company, a fleet of fishing ships in the islands of Greece. Greece is a member of the European Union, and uses the Euro as its currency. You make your living selling fish to your customers, mostly in other countries. Today you have received two orders:

Order #1 To: Olympic Fish Co. Piraeus, Greece From: Champs Elysees Fish Market, France1oo tons of sea bass Note: France is an EU member nation using the Euro.

Order #2 To: Olympic Fish Co. Piraeus, Greece From: Red Lobster Atlanta, Georgia USA 100 tons of sea bass Note: Payment in U.S. dollars ONLY.

Based on what you see in the two orders above, which of the orders is easier for you to fill? A. Order #1, because trade with the France is easier since it uses the Euro. B. Order #1, because the United States has placed an tariff on fish imported from Greece. C. Order #2, because France has placed a quota on fish imported from Greece. D. Order #2, because trading with the United States is easier since is uses the U.S. dollar.

SPECIALIZATION**Specialization encourages trade between nations**

The division of labor refers to the practice that the tasks of producing a good or service are divided up into separate tasks. When workers focus on performing separate tasks, specialization occurs. Within the economy as a whole, the division of labor explains why even if you bake your own bread, you typically don't grow your own wheat, grind it into flour, build your own oven, make your own bread-pans and so on. Instead, people specialize in a few skills and then take the wages that they earn from those skills to purchase the other products that they desire from other specialists.

There are three reasons why the division of labor increases output:

workers who specialize on one job become much better at doing it;

with specialization, the time that it would take to switch between jobs is eliminated

workers who specialize on one job often invent more effective ways or new machines for doing the job.

Specialization benefits everyone when the skills and strengths of people match their job in a community. Keep in mind that when people do what they are good at and then trade their output with others who are doing what they are good at, we are better off than we would be if everyone tried to do everything for themselves. It’s better for the overall economy if individual people produce one thing well and trade it, than to produce poorly everything they use in day themselves. Specialization encourages trade and can be a positive factor in a country’s economy. Specialization occurs when one nation can produce a good or service at a lower opportunity cost than another nation. However, one drawback is that we end up depending on each other to create the goods or services we need. But specialization is possible only when people are able to coordinate their production and consumption decisions with each other.

Define it:

When a country focuses resources on creating fewer specific products and services than they consume; make one thing well and trade for everything else

Draw a Picture:

Benefits:

Greater variety of products with tradeProduce more in less timeBetter qualityMore free time for workers

Drawbacks:

Dependent on others for important itemsOver-specialization (one-crop economies and lack of diversification) can lead to economic trouble

SPECIALIZATION

OPEC (organization of petroleum exporting countries)

import – products brought into a country for sale

export – products leaving a country for sale

trade – voluntary exchange of goods and services

free trade – trade that does not have trade barriers (quotas, tariffs, embargos)

What is OPEC? The Organization of Petroleum Exporting Countries (OPEC) was created in 1960 by some of the countries with large oil supplies who wanted to work together to try to regulate the supply and price of oil they export to other countries. The central organization of the world oil trade is the OPEC. OPEC is an international organization that has many members; not all oil producing nations are OPEC members and not all OPEC members are Middle Eastern countries. The members of OPEC include the Southwest Asian countries of Iran, Iraq, Saudi Arabia, and Kuwait. OPEC’s purpose is to help its members develop policies on oil production and trade that will benefit each other. The organization manipulates the price of oil according to market demand, availability, and other factors.

Function of OPEC? By controlling the production of oil, OPEC lowers or raises the price of oil (based on the laws of supply and demand). OPEC decides how much oil they will produce and that determines the price on the world market. When they produce less, the price on the world market goes up. When they increase production, the price on the world market goes down.

Role of oil in the economies of SWASome countries in SWA have access to oil fields while others do not. By comparing the GDPs of Israel, Iran, and Saudi Arabia and the presence or absence of oil, you should notice an impact on the GDP. Be able to explain how the presence or absence of oil affects economic development. While oil is a extremely valuable resource, countries like Israel have made up for the lack of oil by creating a highly developed industrial sector producing high-tech goods.

Israel GDP— $170.3 billion (2008 est.) Oil – No significant proven reserves.

Saudi Arabia GDP— $527 billion (2008 est.) Oil – Largest producer and exporter of oil in the world. Approximately 90% of government revenues come from the oil industry.

Iran GDP— $852.6 billion (2008 est.) Oil – The economy relies primarily on the oil industry. Over 85% of government revenues come from this sector. Over 80% of exports are petroleum and petroleum products.