Economic Systems
THE THREE ECONOMIC QUESTIONS
Every country in the world must deal with the basic economic problem. No country has unlimited resources and each one has citizens with important basic needs for food, housing, education, and health care. As economies develop, people have a growing set of wants as well.
In order to determine how available resources will be used to meet the needs and wants, each country must answer three economic questions.
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. What needs and wants will be satisfied with the goods and services produced?
How the questions are answered indicates the type of economic system that exists in each country.
Every country in the world must deal with the basic economic problem. No country has unlimited resources and each one has citizens with important basic needs for food, housing, education, and health care. As economies develop, people have a growing set of wants as well.
In order to determine how available resources will be used to meet the needs and wants, each country must answer three economic questions.
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. What needs and wants will be satisfied with the goods and services produced?
How the questions are answered indicates the type of economic system that exists in each country.
What to Produce?
Countries have differing types and amounts of resources just as individuals differ in their skills and abilities. Some have rich soil and regular rains that yield large food supplies. Other nations have desert climates or long, cold winters that make farming difficult. Some countries have abundant supplies of oil, coal, and other energy sources, while many countries have only a limited supply. The resources of a country are very important in determining what goods can be produced. A country can decide to trade some of its resources with other countries to obtain those it needs.Just as nations differ in the type and amount of resources, they also differ in what they determine to be their important needs and wants. One country may focus on manufacturing a variety of consumer products while another country builds roads and bridges. Some economies focus on improving agriculture while others build their militaries. Some nations have excellent colleges and universities while others have few schools and many unskilled workers.
Deciding how to use resources and what to produce is never an easy decision. If a country spends too much in one area or on one group of people there may not be enough resources to meet other needs. If most resources are used to produce consumer products, not enough attention may be paid to a country's infrastructure of roads, energy, and water systems.
Countries have differing types and amounts of resources just as individuals differ in their skills and abilities. Some have rich soil and regular rains that yield large food supplies. Other nations have desert climates or long, cold winters that make farming difficult. Some countries have abundant supplies of oil, coal, and other energy sources, while many countries have only a limited supply. The resources of a country are very important in determining what goods can be produced. A country can decide to trade some of its resources with other countries to obtain those it needs.Just as nations differ in the type and amount of resources, they also differ in what they determine to be their important needs and wants. One country may focus on manufacturing a variety of consumer products while another country builds roads and bridges. Some economies focus on improving agriculture while others build their militaries. Some nations have excellent colleges and universities while others have few schools and many unskilled workers.
Deciding how to use resources and what to produce is never an easy decision. If a country spends too much in one area or on one group of people there may not be enough resources to meet other needs. If most resources are used to produce consumer products, not enough attention may be paid to a country's infrastructure of roads, energy, and water systems.
How to Produce?
Countries must decide the best ways to use their resources to produce what is needed. As a country develops, tasks that were traditionally performed using human labor, such as farming and mining, are now performed with more efficient tools and equipment. Two centuries ago, more than 80 percent of U.S. citizens were involved in agriculture. Today, less than 3 percent of the U.S. population produces the food the country consumes. The labor needs of the U.S. economy have changed. Today's complex economy requires highly specialized health care professionals, financial managers, computer specialists, and others who can design, produce, and distribute the goods and services that people want.
Each country decides how to use its resources to produce the goods and services it needs. It may rely on unskilled or skilled labor, on advanced or simple technology, on its own resources, or on those it obtains from other countries. Privately owned businesses may be responsible for production or a country may own and manage the resources and businesses.
What Needs and Wants to Satisfy?
Because wants and needs are unlimited, many will remain unmet no matter what goods and services a country decides to produce. Decision makers must determine which needs and wants are the most critical when deciding what to produce. Some countries may decide to invest in capital goods, while others produce more consumer goods. Some countries devote more resources to producing the goods and services important to government activities. Other economies respond to those citizens who have the most money or the most political power.
In the United States, goods and services are plentiful and many decisions are left to individual consumers. What wants and needs you satisfy largely depends on how much money you have and how you choose to spend or save it. The amount of money you have available to spend depends a great deal on your education and abilities as well as how you decide to use them to earn income.
Countries must decide the best ways to use their resources to produce what is needed. As a country develops, tasks that were traditionally performed using human labor, such as farming and mining, are now performed with more efficient tools and equipment. Two centuries ago, more than 80 percent of U.S. citizens were involved in agriculture. Today, less than 3 percent of the U.S. population produces the food the country consumes. The labor needs of the U.S. economy have changed. Today's complex economy requires highly specialized health care professionals, financial managers, computer specialists, and others who can design, produce, and distribute the goods and services that people want.
Each country decides how to use its resources to produce the goods and services it needs. It may rely on unskilled or skilled labor, on advanced or simple technology, on its own resources, or on those it obtains from other countries. Privately owned businesses may be responsible for production or a country may own and manage the resources and businesses.
What Needs and Wants to Satisfy?
Because wants and needs are unlimited, many will remain unmet no matter what goods and services a country decides to produce. Decision makers must determine which needs and wants are the most critical when deciding what to produce. Some countries may decide to invest in capital goods, while others produce more consumer goods. Some countries devote more resources to producing the goods and services important to government activities. Other economies respond to those citizens who have the most money or the most political power.
In the United States, goods and services are plentiful and many decisions are left to individual consumers. What wants and needs you satisfy largely depends on how much money you have and how you choose to spend or save it. The amount of money you have available to spend depends a great deal on your education and abilities as well as how you decide to use them to earn income.
TYPES OF ECONOMIC SYSTEMS
An economic system is the method a country uses to answer the three economic questions. While each country makes decisions in different ways, there are three main types of economic systems. The level of government involvement in the marketplace differs among the three types.
Command Economy
In a command economy , the resources are owned and controlled by the government. Government officials decide what and how goods are produced and how they will be distributed and consumed. They decide how much of the resources will be used to produce goods and services for consumers, such as food, schools, vehicles, and houses. They also decide how much of the resources will be used to produce goods for business and government use including machines, equipment, and factories.
In a command economy, the government may decide to build a superior military or a world-class education system. They may decide to spend money to research new technologies or to build housing for the poor. Some command economies determine the work people do, the education they can obtain, and where and how they live. Personal economic choices are limited in a command economic system.
Market Economy
In a market economy , the resources are owned and controlled by the people of the country. The three economic questions are answered by individuals through buying and selling of goods and services in the marketplace. The marketplace is anywhere that goods and services exchange hands. This includes a supermarket, the Internet, a business office, or even a flea market.
When a business buys a new truck or orders several tons of steel, it is making an economic decision. An individual consumer who orders a movie on a pay-per-view channel, takes a vacation, or enrolls in college is also making an economic decision. No one directs consumers to make a particular purchase or tells businesses what they must produce. The government has limited involvement in a market economy.
Consumers and businesses make decisions based on their own self-interest. Every time consumers buy products in the marketplace, they “vote” with their dollars. They send a message to businesses regarding their buying preferences, helping to direct the use of resources. Businesses make decisions on what goods and services will be produced based on how they decide to use their resources. When they offer the products and services consumers want, they are rewarded with profits. By those independent decisions, individual producers and consumers answer the three economic questions.
An economic system is the method a country uses to answer the three economic questions. While each country makes decisions in different ways, there are three main types of economic systems. The level of government involvement in the marketplace differs among the three types.
Command Economy
In a command economy , the resources are owned and controlled by the government. Government officials decide what and how goods are produced and how they will be distributed and consumed. They decide how much of the resources will be used to produce goods and services for consumers, such as food, schools, vehicles, and houses. They also decide how much of the resources will be used to produce goods for business and government use including machines, equipment, and factories.
In a command economy, the government may decide to build a superior military or a world-class education system. They may decide to spend money to research new technologies or to build housing for the poor. Some command economies determine the work people do, the education they can obtain, and where and how they live. Personal economic choices are limited in a command economic system.
Market Economy
In a market economy , the resources are owned and controlled by the people of the country. The three economic questions are answered by individuals through buying and selling of goods and services in the marketplace. The marketplace is anywhere that goods and services exchange hands. This includes a supermarket, the Internet, a business office, or even a flea market.
When a business buys a new truck or orders several tons of steel, it is making an economic decision. An individual consumer who orders a movie on a pay-per-view channel, takes a vacation, or enrolls in college is also making an economic decision. No one directs consumers to make a particular purchase or tells businesses what they must produce. The government has limited involvement in a market economy.
Consumers and businesses make decisions based on their own self-interest. Every time consumers buy products in the marketplace, they “vote” with their dollars. They send a message to businesses regarding their buying preferences, helping to direct the use of resources. Businesses make decisions on what goods and services will be produced based on how they decide to use their resources. When they offer the products and services consumers want, they are rewarded with profits. By those independent decisions, individual producers and consumers answer the three economic questions.
Traditional Economy
Before complex economic systems developed, simple economies operated according to tradition or custom. In a traditional economy , goods and services are produced the way it has always been done. The traditional economy is used in countries that are less developed and are not yet participating in the global economy.
In those countries, the answers to the three economic questions are still established by their traditions. Goods are produced the way they have always been produced, generation after generation. Children are taught to use the same methods to make the same goods their ancestors produced. They often use the natural resources readily available to them and the tools they make or can obtain in their communities. They will consume most of what they produce and sell or trade the rest with people who live close to them.
The traditional economy is usually centered on meeting the basic needs of people, such as food, clothing, and shelter. While the global economy has brought change and growth to the farthest corners of the world, there are still communities, and even some countries, that rely on a traditional economy. Because these economies lack the many formal structures found in more advanced systems, they usually have limited individual wealth and limited opportunities to improve their conditions.
Mixed Economies
Most nations of the world operate a mixed economy. A mixed economy combines elements of the command and market economies. While the end of the twentieth century saw a shift away from command economies and toward market economies, various degrees of government involvement in the marketplace exist.
The former Soviet Union disbanded and became 15 independent nations in the early 1990s. For more than 70 years, the Soviet Union operated under a command economic system called communism. Under communism, the Soviet Union developed a series of government-led plans to direct resources toward economic growth. This led to a limited choice and supply of consumer goods. Often, consumers found it difficult to find basic products such as bread or a hammer.
During the past decade, several of the Eastern European nations that had used a command economy have made major progress in changing over to a mixed economy. Some of these countries made such economic progress that they were granted membership into the European Union.
More than 1.3 billion Chinese citizens have a communist government that controls most of the resources and decisions. The economy of China is adopting elements of a market system for a growing number of economic decisions. Entire regions of the country, particularly the eastern cities bordering the ocean, are enjoying a booming consumer economy based on greater individual freedom of choice. China is fast becoming a world leader in goods and services produced. The country's developing education system is producing many skilled workers who are earning money to pay for the goods and services they want.
As many countries with traditional economies develop, they often adopt mixed economies. The government makes many of the decisions about how the country's resources will be used to develop schools, hospitals, roads, and utilities. As people become educated and develop new skills, they are able to obtain better jobs and earn more money. They then have the resources to purchase more goods and services. Often businesses from other countries will begin to sell products and services in the developing country or even open a business there, offering jobs and locally produced products to the citizens.
Before complex economic systems developed, simple economies operated according to tradition or custom. In a traditional economy , goods and services are produced the way it has always been done. The traditional economy is used in countries that are less developed and are not yet participating in the global economy.
In those countries, the answers to the three economic questions are still established by their traditions. Goods are produced the way they have always been produced, generation after generation. Children are taught to use the same methods to make the same goods their ancestors produced. They often use the natural resources readily available to them and the tools they make or can obtain in their communities. They will consume most of what they produce and sell or trade the rest with people who live close to them.
The traditional economy is usually centered on meeting the basic needs of people, such as food, clothing, and shelter. While the global economy has brought change and growth to the farthest corners of the world, there are still communities, and even some countries, that rely on a traditional economy. Because these economies lack the many formal structures found in more advanced systems, they usually have limited individual wealth and limited opportunities to improve their conditions.
Mixed Economies
Most nations of the world operate a mixed economy. A mixed economy combines elements of the command and market economies. While the end of the twentieth century saw a shift away from command economies and toward market economies, various degrees of government involvement in the marketplace exist.
The former Soviet Union disbanded and became 15 independent nations in the early 1990s. For more than 70 years, the Soviet Union operated under a command economic system called communism. Under communism, the Soviet Union developed a series of government-led plans to direct resources toward economic growth. This led to a limited choice and supply of consumer goods. Often, consumers found it difficult to find basic products such as bread or a hammer.
During the past decade, several of the Eastern European nations that had used a command economy have made major progress in changing over to a mixed economy. Some of these countries made such economic progress that they were granted membership into the European Union.
More than 1.3 billion Chinese citizens have a communist government that controls most of the resources and decisions. The economy of China is adopting elements of a market system for a growing number of economic decisions. Entire regions of the country, particularly the eastern cities bordering the ocean, are enjoying a booming consumer economy based on greater individual freedom of choice. China is fast becoming a world leader in goods and services produced. The country's developing education system is producing many skilled workers who are earning money to pay for the goods and services they want.
As many countries with traditional economies develop, they often adopt mixed economies. The government makes many of the decisions about how the country's resources will be used to develop schools, hospitals, roads, and utilities. As people become educated and develop new skills, they are able to obtain better jobs and earn more money. They then have the resources to purchase more goods and services. Often businesses from other countries will begin to sell products and services in the developing country or even open a business there, offering jobs and locally produced products to the citizens.
THE U.S. ECONOMIC SYSTEM
From the descriptions provided, can you identify the economic system of the United States? Because individual businesses and consumers make most of the decisions about what will be produced and consumed, the U.S. system best fits the definition of the market economy.
Another name for the U.S. economic system is capitalism. Capitalism refers to the private ownership of economic resources by individuals, rather than by the government. Individual owners are free to decide what to produce with the resources they own. Individual consumers are also free to decide how they want to use their money to purchase products and services. This economic freedom lends itself to other names often associated with the U.S. economy--free enterprise or private enterprise. Individual choices and decisions are vital to the success of the U.S. economy.
The U.S. economic system is based on four important principles. They are private property, freedom of choice, profit, and competition.
Private Property
The right of private property means you can own, use, or dispose of things of value. In the United States, you can own anything you want and decide what you want to do with it, as long as it does not violate the law. If you invent something of value, you are protected from others taking your idea.
Freedom of Choice
Freedom of choice means that you can make economic decisions independently and must accept the consequences of those decisions. Business owners can decide where to open a business, what to sell, and how to operate the company. Consumers can decide where to shop, what to buy, and what they want to spend. Only when individual decisions unfairly harm others will there be restrictions on freedom of choice.
Profit
Businesses invest resources and take risks for one primary purpose—to earn a profit. Profit is the money left from sales after all of the costs of operating a business have been paid. Because businesses are not guaranteed a profit, investors may lose the money they have put into the business. They are challenged to plan carefully, invest wisely, and produce goods and services that customers want in order to make a profit.
While earning a profit is at the heart of the private enterprise system, it is not the only reason for investing money and operating a business. People enjoy the challenge and freedom of business ownership, as well as the satisfaction of providing goods and services that other people want.
Competition
The rivalry among businesses to sell their goods and services is known as competition . Consumers have many choices of products and services and will select the ones they believe will provide the greatest satisfaction for the money they must spend. Businesses work to improve their products and control their costs. If customers are not satisfied with one company's offerings, they will look for another choice. Competition encourages businesses to improve products, keep prices low, provide effective customer service, and improve business practices.
From the descriptions provided, can you identify the economic system of the United States? Because individual businesses and consumers make most of the decisions about what will be produced and consumed, the U.S. system best fits the definition of the market economy.
Another name for the U.S. economic system is capitalism. Capitalism refers to the private ownership of economic resources by individuals, rather than by the government. Individual owners are free to decide what to produce with the resources they own. Individual consumers are also free to decide how they want to use their money to purchase products and services. This economic freedom lends itself to other names often associated with the U.S. economy--free enterprise or private enterprise. Individual choices and decisions are vital to the success of the U.S. economy.
The U.S. economic system is based on four important principles. They are private property, freedom of choice, profit, and competition.
Private Property
The right of private property means you can own, use, or dispose of things of value. In the United States, you can own anything you want and decide what you want to do with it, as long as it does not violate the law. If you invent something of value, you are protected from others taking your idea.
Freedom of Choice
Freedom of choice means that you can make economic decisions independently and must accept the consequences of those decisions. Business owners can decide where to open a business, what to sell, and how to operate the company. Consumers can decide where to shop, what to buy, and what they want to spend. Only when individual decisions unfairly harm others will there be restrictions on freedom of choice.
Profit
Businesses invest resources and take risks for one primary purpose—to earn a profit. Profit is the money left from sales after all of the costs of operating a business have been paid. Because businesses are not guaranteed a profit, investors may lose the money they have put into the business. They are challenged to plan carefully, invest wisely, and produce goods and services that customers want in order to make a profit.
While earning a profit is at the heart of the private enterprise system, it is not the only reason for investing money and operating a business. People enjoy the challenge and freedom of business ownership, as well as the satisfaction of providing goods and services that other people want.
Competition
The rivalry among businesses to sell their goods and services is known as competition . Consumers have many choices of products and services and will select the ones they believe will provide the greatest satisfaction for the money they must spend. Businesses work to improve their products and control their costs. If customers are not satisfied with one company's offerings, they will look for another choice. Competition encourages businesses to improve products, keep prices low, provide effective customer service, and improve business practices.