Economic System

Comparisons

Market Economy

Economic decisions are made by individuals and are based on exchange or trade. The choices made by individuals determine what gets made and how, as well as who consumes the goods and services produced.

Command Economy

(Centrally Planned Economy) The central government alone decides how to answer all key economic questions. The government makes all decisions on the production and consumption of goods and services.

Example: Former Soviet Union

Traditional Economy

Economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services. There is little room for innovation or change, it revolves around the family.

Mixed Economy

Market based economic system with limited government involvement.

A mix between Socialism and Capitalism. It is a hodgepodge of freedoms and regulations, constantly changing because of the lack of principles involved.

Economic Philosophies

Capitalism

A. Adam Smith: Wealth of Nations

i. Laissez Faire: “hands off”

ii. Invisible Hand: The economy will

regulate itself

B. Karl Marx: Communist Manifesto & Das Kapital

i. Struggle between workers and owners

ii. Workers add value to goods but do not receive the profits

against market economies

Socialism & Communism

SocialismA social and political philosophy

associated with centrally planned economies. It is based on the belief that democratic means should be used to distribute wealth evenly throughout a society. Political and social equality.

Communism

a political system that arose out of the philosophy of socialism. It is characterized by a centrally planned economy with all economic and political power resting the in the hands of the central government.

It enslaves the entire population, and rules through fear. Because it destroys property rights, it makes the production of wealth almost impossible.

FascismA system of government marked by centralization of authority under a dictator, strict socio-economic controls, suppression of the opposition through terror and censorship, and typically a policy of aggressive nationalism and racism.

Oppressive, dictatorial control

Keynesian Theory

Aggressive Fiscal Policy

Cut Taxes while increasing government spending.

This will increase deficit spending

Gov’t spending more than it is taking in

Monetary & Fiscal Policy

Federal Reserve Bank

•Central Bank for U.S•12 district banks•Regulates the banking industry•Tracks and manages the national monetary supply•Issues paper currency•Clears personal checks

• Banks earn a profit on money depositedBank lends part of deposited money and charges interest

Characteristics of money

Durability = withstand wear and tearPortabilityDivisibility Uniformity = count and measure accuratelyLimited SupplyAcceptability

Fiscal PolicyU.S. has an operating budget of about $1.7 – 2 TrillionFederal Budget

Document indicating the amount govt. expects to receive and spend in a yearFiscal year = Oct. 1 to Sept. 30

Office of Management and Budget (OMB) = prepares the federal budget

Expansionary Fiscal Policy

Increase OutputTax Cuts

Encourage economy to expandIndividuals have more money to spendBusinesses keep more profitsIncrease demand, prices and output

Contraction Fiscal Policy

Purpose is to decrease outputRaise taxes

Individuals have less moneyFirms keep less of profitDecrease in spending, labor and capitalSlows GDP

Monetary PolicyMonetary Policy: How much it restricts or releases the flow of money into the economy

Interest Rate: a % that determines how much money one must pay a lender in exchange for a loan (Good credit = better interest rates)

Federal Deposit Insurance

CommissionAlso know as FDICCame after the Great Depression when many banks had to close after masses withdrew their moneyFDIC helps prevent mass withdrawals by assuring depositors that their money is insured by the government up to a certain amountThey have to keep a certain amount of money on hand in their bank. This is called the reserve requirement.

CreditDebit card:

card that looks like a credit cardserves the same function as writing a checkconvenient way to access $

Credit card: loanspaying interest on purchases at a later date (usually 30 days)

Time deposits/Certificates of Deposits: putting money in an account for a certain amount of time and cannot withdraw it for that amount of timewhile getting interest off of it while bank holds onto it.

PoliciesLoose Money Policy: Low reserve requirement increases $ supply, because more people can borrow and spend $.

Tight Money Policy: High reserve requirementlimits the money supply