By Himashi De Mel BA (Hons),CIMA Passed Finalist

Transcription

1 By Himashi De Mel BA (Hons),CIMA Passed Finalist

2 No economy ever stands still. Sir Roy Harrod, The British Economy

3 Definition of Economy The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. Source : Investopeida

4 Economic Systems An economic system describes how a country s economy is organized. Due to scarcity, every country needs a system to determine how to use its productive resources. Scarcity = Excess of human wants over what can actually be produced to fulfill these wants

5 Economic Systems Therefore, a society/economy must answer 3 questions What to produce? How to produce? Whom to produce?

6 What to produce? Economic Systems What kind of goods and services should be produced? How to produce? What productive resources are used to produce goods and services? Whom to produce? Who gets to have the goods and services?

7 Types of Economic Systems Traditional Economy Command Economy Market Economy Mixed Economy

8 An economic system in which economic decisions are based on customs and beliefs. People will make what they always made & will do the same work their parents did. Exchange of goods is done through bartering (trading without using money).

9 Traditional Economy What to produce? People follow their customers and make what their ancestors made. How to produce? People grow and make things the same way that their ancestors did Whom to produce? People in the village who need them

10 Traditional Economy Examples Australian Aborigines Inuit of Northern Canada Mbuti in Central Africa

11 Traditional Economy Advantages Less uncertainty : Everyone knows what role to play Life is generally stable & predictable Disadvantages Tend do discourage new ideas and new ways of doing things Lack of progress & as a result lower standard of living

12 Command system Government makes all economic decisions & owns most of the property and other resources. Governmental planning groups determine such things as the prices of goods/services & the wages of workers.

13 Command system What to produce? Government makes all economic decesions How to produce? Governments decide how to make goods and services Whom to produce? Whoever the government decides to give them to

14 Command system Countries with communist governments have Command economies. Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba. *Germany and Russia have moved away from having a Command economy since Now they have a Mixed economy

15 Command Econmy Advantages In a complete command economy it is possible to guarantee everyone a job. Disadvantages Lack of investment There is no uncertainty (people are told when and how to work). No incentive to productivity Government will decide the distribution of income. Wastage of resources Black markets

16 Free Market Economy An economic system in which production and distribution questions are answered by prices and profits (supply and demand). Most of the resources are owned by private citizens. Economic decisions are based on Free Enterprise (competition between companies). Govt. does not tell a business what goods to produce or what price to charge.

17 Free Market Economy What to produce? Businesses base decisions on supply and demand and free enterprise (PRICE). How to produce? Businesses decide how to produce goods. For consumers Whom to produce?

18 Free Market Economy There are no truly pure Market economies, but the United States is close.

19 Free Market Economy Advantages Adjusts to change based on consumer wants. High degree of individual freedom. Wide variety of available goods & services Low levels of government interference. Because individuals (with money) make the decisions, everyone (with money) has a voice in the way the economy runs. Many choices = high degree of consumer satisfaction. Disadvantages Poverty: only those with money can participate. Market does not provide for people s basic needs. Governments must attempt to do this (think Katrina, Minneapolis bridge, etc.). High degree of uncertainty people lose jobs, businesses fail. Greed based system puts profit before people (think about the loss of manufacturing jobs in different parts of a country. What caused it?).

20 Moving from MARKET ECONOMY to MIXED ECONOMY.. In a truly free market economy, the government would not be involved at all There would be no laws to protect workers form unfair bosses. Many societies have chosen to have some rules to protect consumers, workers, and businesses (MIXED) These rules reduce the freedoms that businesses have, but they also protect the workers and consumers

21 Mixed Economy Market+ Command = Mixed

22 Mixed Economy There are no pure command or market economies. To some degree, all modern economies exhibit characteristics of both systems and are often referred to as mixed economies. Most economies are closer to one type of economic system than another. Businesses own most resources and determine what and how to produce, but the government regulates certain industries.

23 Mixed Economy Businesses decide What to produce? How to produce? Businesses, but the government regulates certain industries For consumers Whom to produce?

24 Mixed Economy Most democratic countries fall under this category (there are no truly pure Market or Command economies). Examples: Sri Lanka, Brazil, Mexico, Canada, UK, US, Germany, Russia, Australia, etc

25 Economy Continuum

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