Unit 2: Economic Systems

1
Unit 2 Economic Systems

• IES Lluís de Requesens (Molins de Rei)?
• Batxillerat Social
• Economics (CLIL) Innovació en Llengües
  Estrangeres
• Jordi Franch Parella

2
Objectives

• In this unit, the students will learn the main
  characteristics of the three different economic
  systems
• - Free market economy
• - Mixed economy
• - Planned economy
• They will also learn the key points in the
  thought of their intellectual fathers.

3
Adam Smith
(Click here)?

• Adam Smith (1723-1790) is considered the
  father of modern economic theory.
• He is the author of The Wealth of Nations
  (1776).
• He truly understood the importance of saving
  and established the law of supply and demand. But
  he was wrong with the objective theory of the
  labour-value, that influenced Marx.

4
Richard Cantillon
(Click here)?

• Recent research has discovered that Richard
  Cantillon (1680-1734) can be considered the
  father of the free market economy with his work
  Ensayo sobre la naturaleza del comercio. He was
  the first to understand the effects of the
  increment in the quantity of money (inflation)
  and the process involving changes in the relative
  prices and distributing the income unfairly.

5
Karl Marx
(Click here)?

• Karl Marx (1818-1883) is the author of Das
  Kapital (1867) and is the father of planned
  economy or communism. He claimed that the labour
  was the unique source of value and that
  capitalists took it away from workers. He was
  also wrong in believing that a false divide is
  between labour and capitalist classes. In a
  planned economy there is no private property and
  all belongs to the state, that decides for you
  what to study, where to work and whether you have
  a right to life.

6
John Maynard Keynes
(Click here)?

• Keynes (1883-1946) was the author of the General
  Theory (1936) and the father of mixed economy.
  He mistrust free market for reaching full
  employment and supported the role of government
  to interfere society both fiscal and monetary.
  The former involves public spending, deficits and
  huge debts and the latter the creation of money
  out of thin air, to fix interest rates
  artificially low and the expansion of credit.

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Market Economies

• Resources are owned and controlled by individuals
• Economic decisions are made by individuals
  competing to earn profits
• Individual freedom is considered very important
• Economic decisions are made by the basic
  principals of supply and demand
• Profit is the motive that guides firms in their
  attempts to serve the consumers

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Market Economies

• Also called capitalist economies
• There are many economic freedoms
• There is competition among businesses
• Competition determines price which increase the
  quality of the product

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Command Economies

• The government or other central authority makes
  decisions and determines how resources will be
  used
• There is no private property, nor markets, nor
  supply and demand, nor prices
• There is little individual freedom
• There is no competition
• Businesses are not run to create a profit

10
Command Economies

• Consumers have few choices in the market place
• Factories are concerned with quotas
• Shortages are common because of poorly run
  factories and farms
• The government dictates the job in which you work

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Command Economies

• The government sets the prices of goods and
  services
• Examples of command economies Cuba, North Korea
  and the Peoples Republic of China

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Mixed Economies

• Private property is allowed, but the government
  takes an active role in society
• It does mean that the ratio public spending / GDP
  is high (40 USA, more than 40 Spain, 50
  Germany, 55 France, 60 Sweden ...)?
• It involves that the government commits itself to
  provide public education, public health, public
  pensions ... (Welfare state)?
• In monetary terms, the Central Bank fixes
  interest rates, inflates monetary supply and
  takes control of commercial banks in
  orchestrating credit expansion

13

Review

• Three Types of Economies
• Market Economies
• Planned Economies
• Mixed Economies