1/15/20151TOPIC III:ECONOMIC SYSTEMS1“The inherent vice of capitalism is the unequal sharing of blessings. The inherent vice of communism is the equal sharing of miseries.” Winston ChurchillOutline of the DayI. A (very) broad look at an economy•How households and businesses interactII. A (very) broad look at the U.S. economy•How we measure a country’s output•How we measure a country’s standard of livingIII. A (very) broad comparison of economic systems2I. The Circular Flow ModelBA 361 3HouseholdsProduct MarketsGoods/ServicesLabor/Other InputsRevenueIncome1/15/20152What is output and how do you measure it?OutputAmountIn PhysicalUnitsCars15,000,000New homes800,000Computers2,000,000TotalIn Monetary Terms15 million @ $30,000$450 million800,000 @ $250,000$200 billion2 million @ $700$1.4 billionTotal•Output & production comes in units• Barrels of oil, tons of steel, etc.•However, you can’t aggregate those into a meaningful statistic•So, all final production is •This number is GDP, and represents 4Standard of Living & Economic Well-Being•Is the U.S. the ‘richest’ country in the world?•Economists measure Economic Well-Being as the • Rich countries have a high standard of living because they have high GDP per person• Poorer countries have less GDP per person•Is this even the best way to measure ‘economic well-being?• What does that even mean?5Standard of Living = II. OVERVIEW OF THE U.S. ECONOMY61/15/20153II. The U.S. Economy•What does the U.S. do?•How big is the U.S. economy?•How well off is the average U.S. citizen?•Where do people work?7•U.S. contains about 7% of world’s total land•U.S. is the •U.S. contains less than 5% of the world’s total population•U.S. is the •U.S. produces between 1/5 or ¼ of world’s total output (22%)•U.S. is the 82013 Population, selected countries1,360 1,250 315 250 200 180 175 155 65 50 30 15 10 - 200 400 600 800 1,000 1,200 1,400 1,6009Source: World Bank, World Development Indicators, numbers in millions1/15/201542013 Nominal GDP, selected countries$16,800 $9,250 $4,900 $3,625 $2,725 $2,525 $2,250 $1,300 $525 $275 $125 $50 $15 $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,00010Source: World Bank, World Development Indicators, numbers in billionsUS Indexed Real GDP and Population11040080012001600Source: Bureau of Economic Analysis; US Census Bureau2013 Real GDP per person, selected countries$77,850 $65,200 $58,400 $55,500 $54,550 $54,100 $46,250 $45,850 $45,100 $44,150 $23,400 $8,500 $3,600 $1,150 $150 $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000Burundi12Source: World Bank, World Development Indicators1/15/20155U.S. Employment by Industry, 201014%11%11%10%9%9%7%7%5%5%5%3%2%2%0%Health CareRetailProfession & BusinessManufacturingEducationLeisure & HospitalityFinanceConstructionTransportation & UtilitiesGovt.Other ServicesWhoesale tradeInformationAgricultureMining13Source: Statistical Abstract of the U.S., 2012Percent of World Manufacturing0%5%10%15%20%25%30%1970 1975 1980 1985 1990 1995 2000 2005 2010Source: UN, National Accounts Main Aggregates DatabaseValue of U.S. Manufacturing$0$250$500$750$1,000$1,250$1,500$1,750$2,0001970 1975 1980 1985 1990 1995 2000 2005 2010Source: UN, National Accounts Main Aggregates Database; numbers in billions1/15/20156III. ECONOMIC SYSTEMSWhat is capitalism?What is socialism?How do they compare?16III. Economic Systems•Different ways to address scarcity and the Three QuestionsEconomic System: The organization and methods used • Determine what goods & services are produced, • Determine how they • Ultimately determine how to •Three main types1. Traditional economies2. Command economies3. Market economies173 Questions for Society1. What goods/services should we make?• How many?• How many acres of corn to plant? How many of wheat?• How many SUV’s? How many tanks? How many Prii?2. How should we make the goods/services?• What is the best (most efficient) combination of inputs to make the good/service?3. How do we allocate the goods/services we made?• How do we divide up the goods/service we made?• Who gets the Bentley, who gets the Ford, and who gets the bus?181/15/20157Our Fundamental Problem!19Physical Capital(man-made goods)Resources/Raw Materials(lumber/iron/copper/crude oil/etc)Goods(shoes/jeans/food/etc)Services(medical care/car maintenance/haircuts/etc)Govt. Provided(roads/education/defense/etc)Labor(time/effort/energy)Human Capital(experience/education)Hopper(some economic system)Traditional EconomyTraditional Economy: answers the Three Questions they way • Follow the rules and ways of the past• “if it was good enough then, it is good enough now”• How crops are planted, how they are harvested, how the food is divided up, etc. has changed little over time• Examples• Amish in America, Ainu in Canada, some tribes in the AmazonPros and Strengths• Less • Everyone understands and accepts their role• High sense of• Your sense of self worth it tied to the harmony and smooth functioning of the communityCons and Weaknesses• Restriction on individual freedom and initiative• Slow (if any) • Slow (if any) • Slow (if any) 20Command EconomyCommand Economy: answers the Three Questions through the decisions of • Central planners map out the workings of the economy, own the factors of production and• determine how much to produce• determine how to produce• determine the allocation• Requires • Examples• .Pros and Strengths• Can institute change rapidly!• There is no debate or discussion• Can provide • Food, clothing, shelter, education, medical care, safety, etc.• Can make distribution of income Cons and Weaknesses• Extremely difficult (impossible) to accurately calculate and produce the correct amount of G&S• Almost always • Quality usually suffers• Lends itself 211/15/20158Market EconomyMarket Economy: answers the Three Questions through the use of • PRICES will answer our Three Questions• How much food to produce, how many houses to build, how many teachers, farmers, mechanics, etc.• How to produce them• How to split them up• All is accomplished through • Very little role for • Examples•Pros and Strengths• Produces the • Larger variety of• Tends to lead to faster economic growth and higher standard of livingCons and Weaknesses• The division of resources / incomes / wealth can be • Possible • Making beanie