Economics Key Terms and Comparative Economics of Southwest Asia

Who chooses what to produce in a market economy? A. Based on local customs B. Producers and consumers C. The government D. All the above

Key Vocabulary Analyze- to break down; to look at very closely Economic System- the system of production, distribution, and

consumption. Traditional economy- an economic system where the exchange of

goods or services is based on custom and tradition (a barter system). Market Economy- an economy in which business owner and

consumers make decisions about what to make, sell, and buy. Command Economy- an economy in which the government owns

most of the industries and makes most of the economic decisions about production, distribution, and consumption.

Traditional Economy In a traditional economy, decisions are made based on

customs and traditions. Can you think of an example that you can relate to?

Example: the way that people trade food in the lunch room (barter system)

Command Economy In a pure command

economy the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the government

To help remember this, think military power

Which country in our area of study is considered a command economy?

Example of Command Economy Government officials meet. They decide that bean

production is better for the country than wheat production. They call up local officials and order them to tell farmers to shift to bean production. Farmers make the adjustment.

How could central government control be a problem for local farmers?

What if the soil is not suitable for beans, but better for wheat?

How much input does the farmer have?

One criticism of command economies: Who is better located to decide whether to plant wheat or soybeans?

A. a government official in the middle of Moscow or Beijing or Pyongyang, etc. orB. a farmer who lives on productive land and has a great deal to lose in making an incorrect crop choice.

Three broad types of economic systems can be identified-a market economy, a command economy, and a mixed economy. Soon you will be learning about the economic continuum. The economic continuum is a horizontal line that places a country’s

economy on rating scale of no economic freedom to total economic freedom.

What does total in the statement above mean?

Command vs. Market Economies A Command Economy is the opposite of Market Economy Command Economy means that the government has total control of the

economy. Citizens have no economic freedom. Therefore in a Market economy, government controls how much of the

economy? None In a Market economy, how much economic freedom do citizens have? Total

Market Economy

In a pure market economy the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand.

What is the “market”?

Example of Market Economy

The farmer looks at the market for agricultural futures in his newspaper. Futures are a prediction of what a certain commodity will sell for in the future. The farmer sees that wheat futures are falling and decides that wheat production won’t be as profitable this year. He decides to plant soybeans instead.

Comparative Exercise… Between the two economic systems (command or market), where is the

farmer the happiest? There is no correct answer! The answer depends on how much

government control the farmer desires. How would a command economic system benefit the farmer? Hurt the

farmer? How would a market economic system benefit the farmer? Hurt the

farmer?

What would you call an economy that is neither pure command nor pure market but a mix of the two?

Mixed Economy

Who or what determines What, How, and For Whom to produce in the Economy?

How many basic types of economic systems are there?

Name the economic systems.

Which economic system do most textbooks say is the most common throughout the world?

Answers How many basic types of economic systems are there? 3 Name the economic systems. Traditional, Command,

Market Which economic system do most textbooks say is the most

common throughout the world? Mixed. The GCEE states that mixed is not an economic system but rather a blending of two different types of systems.

What does it mean to produce something? to create value or wealth by producing goods and

services. (“Making stuff”) Examples…

Brainstorm items that are produced

What does it mean to distribute something? Distribute: to transport or sell goods from a

producer to a consumer (“selling stuff”) Examples…

Brainstorm how goods and services are distributed

What does it mean to consume something?

Consume: To purchase and/or use goods and services. (“buying stuff”)

Examples… Brainstorm examples of consumption of goods and services

Match the picture to the term:Producer or Consumer

Producer or Consumer

Society a group of people living together in an enduring and

cooperating social group of people whose members have developed organized patterns of relationships through interaction with one another.

Warm Up: Map reading exercise

Remember that continuum… Continuum – a line with two points fixed on

each end (example: market and command economy) and any point in the middle is mixed economy with some elements of the two fixed points (command and market).

Mixed Economy

Definition- an exchange of goods and services based on at least two other types of economic systems.

Most mixed economies include some elements of a market economy and some elements of a command economy.

Why do most countries have a mixed economy on a continuum in between pure market and pure command? Brainstorming session. Why do you think most

countries have a mixed economy? Possible answers…

Government is often involved with safety and environmental issues, price fixing, and monopolies.

Business owners want government to protect their business interests.

SS7E5c Compare/Contrast economies of Israel, Saudi Arabia, and Turkey

Israel has a mixed (market) economy

What to produce

A large portion of Israel’s GDP comes from high tech manufacturing, financial services, and agriculture.

IsraelHow to Produce Israel has substantial government ownership of

business, but is gradually privatizing companies.

IsraelFor Whom to produce The private sector produces goods and services for

domestic and international markets based on the market price system.

Saudi Arabia has a mixed (command) economy

What to produce

Saudi Arabia is the world’s leading producer of oil. The Saudi government continues to invest in industrial production.

They are a leader in petrochemicals, mining, and refining.

Saudi ArabiaHow to produce Over 95% of the oil industry in the country is operated by the government.

Most other major industries have significant government involvement.

Saudi Arabia relies heavily on specialized labor from other countries. Estimates are that a third of the labor force falls in this category.

Since the 1980s, the Saudi government has been trying to increase private ownership of business and encourage more joint ventures with private foreign companies.

Since the 1980s, How could we describe Saudi Arabia’s shift on the economic continuum?

Saudi ArabiaFor Whom to produce One third of Saudi Arabia’s GDP is based on exports

to other countries. (This is due to the economy’s reliance on the oil sector.)

Place on the continuum: Saudi Arabia would fall to the command side of center on the continuum.

Turkey has a mixed (market) economy

What to produce

Turkey has a diversified economy with large service, manufacturing, and agricultural sectors.

TurkeyHow to produce Since the late 1980s, Turkey has gradually

moved from a government directed economy to more private enterprise

Turkeyfor Whom to produce One fifth of Turkey’s production is exported. The

remainder is consumed by domestic consumers and the government.

Place on the continuum: Turkey would fall between Saudi Arabia and Israel on the market side of the continuum.

Comparison of Middle Eastern Economies

SS7E6 Vocabulary:Voluntary trade definition- a willing exchange of goods and services

for money or other goods and services How does voluntary trade benefit buyers and sellers in

SW Asia? Voluntary Trade benefits buyers and sellers in SW Asia

because it allows buyers and sellers to choose the types of goods and services that they wish to have.

Specialization Definition- Specialization is when a country focuses on

making or providing one specific good or service because the country can produce the good or service at a lower cost.

How does specialization encourage trade between countries? Specialization allows a nation to be efficient in the production of a few goods and services. It also encourages countries to trade their goods and services for those things they cannot or do not produce well.

Lemonade exercise

SS7E6b: trade barriers Tariff – tax on trade: tax placed on goods when they

are brought (imported) into one country from another country.

Quota – limit on trade: a specific amount or number of a particular product that can be imported or acquired in a given period.

Trade barriers Embargo -- when one country announces that it

will no longer trade with another country in order to isolate the country and cause problems with that country’s economy. (1973 oil crisis; U.S. embargo of Iran due to the Iranian hostage crisis, Cuban embargor)

How do tariffs, quotas, and embargos serve as barriers to trade? Tariffs, quotas, and embargos serve as barriers to trade because they each put some form of limit on the freedom of trading.

What is international trade?

Hop-think. What does international mean? What does trade mean?

International trade is the trade between countries around the world.

What is currency?

Currency – monetary unit of a nation (money of a country)

Why do we need currency exchange?

Why does international trade require a system for exchanging currencies between nations?

exchange rate What is the exchange rate? http://www.x-rates.com/table/?from=USD&amount=1

SS7E6c: OPEC

What is the Organization of Petroleum Exporting Countries (OPEC)?

OPEC is an confederation of countries that have joined together for the common purpose of controlling the price and supply of oil.

OPEC was established in 1960 by five original members: Saudi Arabia, Iran, Kuwait, Iraq and Venezuela.

(Explain the primary function of the Organization of Petroleum Exporting Countries (OPEC).)

OPEC's mission is to coordinate and unify the petroleum policies of Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry.

In Other Words……..Write one sentence that sums up

OPEC’s purpose.

OPEC’s purpose is to control the price and supply of oil in the world.

How does OPEC achieve their purpose of maintaining stable and fair global oil prices?The economic principle of supply and demand.

OPEC adjust its oil production to achieve a balance in supply and demand. OPEC ministers meet at least several times a year to discuss oil production.

Graph analysis. What does this graph tell us about OPEC? Describe the OPEC’s control on the global oil market.

Discuss… Why might oil–exporting countries want to be

a member of OPEC?

Why might some oil-exporting countries NOT want to be a member of OPEC?

Oil is the major export of Saudi Arabia to many different countries. Saudi Arabia’s international trade in oil is made much easier by

A. Use of a world wide currency.

B. A system to exchange currency between countries.

C. Trading only with countries that have the same currency.

D. Trade of oil for other needed goods so currency is not needed.

Opening and class activity Review Vocabulary. In a market economy, what does supply and

demand mean to prices? Pick one of the following products

Pencil Video game Composition books

Concept to consider: trade, specialization, needs vs. wants, barriers to trade, embargo, quota, tariff, supply and demand

Word splash writing activity (turn in at end of the period)

Write to show what you know. Use the following words to demonstrate your

understanding of economic terms: trade, supply, demand, specialization, embargo, tariff

Bonus (must pick two) 1. What is the Economic Continuum? Write your

answer in sentence form. 2. Where would the US be on the continuum? You may

draw a Continuum and place the general area that the US would be. Is it more Market or more Command?

3. What is currency? Why is currency important? What is currency exchange?

Warm Up After the Persian Gulf War, the United Nations imposed an

embargo on Iraq. What would be the reason an embargo was used by the United Nations?

A. To restrict trade with Iraq until they met UN requirements.

B. To increase the cost of Iraqi products to help Iraq’s economy.

C. To protect Iraq’s domestic industry so it would grow after the War.

D. To control the Iraqi economy after the War.

What is Human Capital? Human Capital is the value of

people’s work. Providing education, training, and

healthcare to a worker is an investment in human capital.

The more educated and healthy your workforce is, the better the employees productivity will be.

What does this mean? Tell me in your own words.

Investment “Investment” refers to the use of resources by businesses, individuals,

or government to increase productive capacity by developing new technology, obtaining new capital resources, or improving the skills of the work force.

Define Investment in your own words “to put out money in order to gain profit” Examples:

A restaurant buys new stoves in which to bake bread An individual buys tools to make some repairs. A school buys new computers and textbooks.

What does it mean to have an investment in Human Capital? To spend time and money to develop better

education and training of the people in the workforce.

Does a company make an immediate profit by using work (productivity) time and spending money to educate an employee? Yes or No? Explain

Does a company make a long-term profit by using work time and spending money to educate an employee? Yes or No? Explain

What is Gross Domestic Product (GDP)? GDP – the value of those goods and services

produced within a country over a specific time frame.

What is the relationship between investment in human capital (education and training) and gross domestic product (GDP)?

By investing (putting time and money into) in human capital (education and training), the gross domestic product will rise due to the increased level of experience and skills of the employees.

SS7E7b: Capital and GDP

What is Capital? Capital – factories, machinery, and

technology

What does it mean to have an investment in Capital? To put money and time into developing better

factories, machinery, technology. What are the advantages of putting time and

money into investing in capital? Disadvantages?

What is the relationship between investment in capital (factories, machinery, and technology) and gross domestic product (GDP)? When you spend time and money on developing

better factories, machinery, and technology (capital), the value of all goods and services in a country (GDP) will increase.

SS7E7cRole of Oil in Israel, Saudi Arabia, and Iran

What is the most abundant natural resource in Southwest Asia?

What is the role of oil in Israel?

Oil does not have much of role in the economy of Israel since there are no significant proven reserves.

Israel depends on other industries to provide income and GDP growth.

What is the role of oil in Saudi Arabia?

Saudi Arabia is the largest producer and exporter of oil in the world. Approximately 90% of government revenues come from the oil industry.

What is the role of oil in Iran?

Iran’s 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.

In Iran, the economy is highly centralized and there are a lot of regulations about private individuals opening and operating businesses. However, Saudi Arabia has made owning and operating a business very easy compared to the world average. What impact does this have on the role of entrepreneurs in both countries?

A. Entrepreneurs are not affected by government regulations.

B. It will limit efforts of entrepreneurs in both Iran and Saudi Arabia.

C. Entrepreneurs will be able to make significant contributions to Saudi Arabia’s economy but not to Iran’s economy.

D. Both Iran and Saudi Arabia will benefit greatly from the efforts of entrepreneurs.

What are Entrepreneurs?

A person who organizes a business venture and assumes the risk for it.

Which SW Asian country would have the most entrepreneurs? Why?

Saudi Arabia The government makes opening, operating,

and closing a business easy compared to the world average.

Determining a countries Economic Freedom Index Just for info… One source for information on entrepreneurship in various countries is

The Heritage Foundation’s Economic Freedom Index. The index ranks countries based on scores in ten economic categories, one of which is Business Freedom. Since the same criteria are used for all countries, the index can help with comparisons of entrepreneurship. For over a decade, The Wall Street Journal and The Heritage Foundation have tracked the march of economic freedom around the world with the Index of Economic Freedom.

Additional information can be found at http://www.heritage.org/index/

What is the role of entrepreneurship in Southwest Asia?

Israel – moderately open to entrepreneurship

It is relatively easy to start a business but still takes longer than the world average.

Private property rights are well protected by law. Foreign investment is encouraged, but is limited in some sectors.

http://www.heritage.org/index/country/israel

What is the role of Entrepreneurship in Saudi Arabia? increasingly open to entrepreneurship. The government makes opening, operating, and

closing a business easy compared to the world average.

There is good protection of private property rights and foreign investment is encouraged, although some investors must have Saudi citizens as partners to operate legally.

http://www.heritage.org/index/country/saudiarabia

What is the role of Entrepreneurship in Iran? not very open to entrepreneurship. The economy of Iran is highly centralized and

regulations make it difficult for individuals to open, operate, and close businesses.

There is little protection of private property rights, and the government allows very little foreign direct investment.

http://www.heritage.org/index/country/iran

Independent Activity It is time to “think like an Entrepreneur”. Have you every thought of a product or service

that you would like to create or sell? Now is the time to put pencil to the paper and make your ideas a reality.

Write down your idea or just create a product or service (you are only limited by your creativity)

What do you need to create your product or service? Capital? Investment? Resources? Specialization?

How will you market or sell your product? What are the risks to selling your product or

service?

Exploring the CIA World Factbook

https://www.cia.gov/library/publications/the-world-factbook/

Use the CIA World Factbook to research the countries on the chart in your packet.

Type in www.tinyurl.com/ciafact and select country to begin

Economic Information: SW Asia

Economic Information: SW Asia

Use your chart to answer the following questions. Which country has the highest literacy rate? Which country has the highest GDP? Which country spends the most on capital? Which country spends the most on human

capital?

Wrap up and review…

Take a moment to look over your student note packet. Where do you need extra help?