Economy
Economic Systems
All Economic Systems seek to answer the three basic economic questions
1) What to produce?
2) How to produce?
3) For whom to produce?
Traditional Economies
Basic economic questions answered by what has been done in the past. Traditions are maintained. The economic system in which resources are allocated by inheritance, and which has a strong social network and is based on primitive methods and tools. It is strongly connected to subsistence farming. Ritual, Habit, and Custom. Individual roles and choices are defined by the customs of elders and ancestors. These economies are usually based in societies of hunter/gatherers. Sharing is a big part of these economies.
How do traditional economies answer the three basic questions?
1) What to produce? Whatever ritual, habit or custom dictates
2) How to produce? However ritual, habit or custom dictate
3) For whom to produce? For whomever ritual, habit or custom dictate
Command Economies - The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government or centralized authority. Basic economic questions answered by the government (central authority)
How do command economies answer the basic economic questions?
1) What to produce? Whatever the government says to produce
2) How to produce? However the government tells you to produce
3) For whom to produce? For whomever the government tells you to produce
Market Economies - In a market economy, national and state governments play no role. Consumers and their buying decisions drive the economy. Basic economic questions answered by consumers by deciding what to buy and private businesses by deciding what to make and sell
How do market economies answer the basic economic questions?
1) What to produce? Whatever consumers will buy
2) How to produce? In whatever way is most cost effective to produce goods or services that consumers will buy
3) For whom to produce? For whomever will buy the product
Three Middle Eastern Economies
Israel
What to produce?
A large portion of Israel’s GDP comes from high tech manufacturing, financial services, and agriculture.
(2) How to produce?
Israel has substantial government ownership of business, but is gradually privatizing companies.
(3) For whom to produce?
The private sector produces goods and services for domestic and international markets based on the market price system.
Place on the continuum: Israel would fall in the middle of the market side on the continuum.
Saudi Arabia
What to produce?
Saudi Arabia is the world’s leading producer of oil. The Saudi government continues to invest in industrial production. They are a leader in petrochemicals, mining, and refining.
(2) How to produce?
Over 95% of the oil industry in the country is operated by the government. Most other major industries have significant government involvement.
Saudi Arabia relies heavily on specialized labor from other countries. Estimates are that a third of the labor force falls in this category.
Since the 1980s, the Saudi government has been trying to increase private ownership of business and encourage more joint ventures with private foreign companies.
(3) For whom to produce?
One third of Saudi Arabia’s GDP is based on exports to other countries. (This is due to the economy’s reliance on the oil sector.)
Place on the continuum: Saudi Arabia would fall to the left of Israel on the continuum.
Turkey
What to produce?
Turkey has a diversified economy with large service, manufacturing, and agricultural
sectors.
(2) How to produce?
Since the late 1980s, Turkey has gradually moved from a government directed economy to more private enterprise.
(3) For whom to produce?
One fifth of Turkey’s production is exported. The remainder is consumed by domestic consumers and the government.
Place on the continuum: Turkey would fall to the left of Saudi Arabia and Israel on the market side of the continuum.
Specialization – “Do what you do best; trade for the rest!”
• Attempting to produce everything you want to consume yourself limits both your production and consumption possibilities.
• To specialize you must figure out what you “do best.” Economists define “best” as that which you produce at the lowest opportunity cost.
• “Trading for the rest” by “selling” the goods or services you can produce at the lowest opportunity costs and then “buying” things you would produce at a high opportunity cost requires division of labor.
• Specialization and trading goods services with others can help everyone. Specialization encourages trade and can be a positive factor in a country’s economy. Specialization occurs when one nation can produce a good or service at a lower opportunity cost than another nation.
Sometimes, specialization has not functioned as expected. What are the potential problems of over-specialization such as single-resource economies and lack of diversification? How can this impact a region’s economy?
Currency Exchange
Before people from different countries can buy or sell anything to each other, they have to solve a basic problem. Buyers have to be able to change their money from their country's currency to the seller’s national currency. This is called "foreign exchange." Each currency, whether it's the US dollar or the Haitian gourde, has a value in terms of other currencies. This is the "exchange rates." Without a reliable supply of foreign exchange in each country, and without relatively stable exchange rates, world trade would drop drastically. You wouldn't be wearing tennis shoes made in Asia, or eating an apple grown in New Zealand.
Exchange rates provide a procedure for determining the value of one country’s currency in terms of another countries’ currency. Without a system for exchanging currencies, it would be very difficult to conduct international trade.
Barriers to Trade
A tariff is a tax placed on goods that one nation imports from another. Many nations use tariffs to protect their industries from foreign competition. Tariffs provide protection by acting to raise the price of imported goods. Thus, tariffs encourage domestic firms to r their production, and consumers are forced to pay higher prices for the protected goods.
Import quotas offer another means of protectionism. These quotas set a limit on the amount of certain goods that can be a country and tend to be more effective than protective tariffs which do not always stop consumers who are will to pay a higher price for an imported good.
An embargo is an order designed to stop the movement of goods. An embargo, issued by the government of one country, may restrict or suspend trade between that country and another nation.
A government may impose an embargo to hamper the military efforts of another government. For example, the United States prohibits the export of weapons to countries that sponsor terrorism. Sometimes a government imposes an embargo to express its disapproval of actions taken by another government. The embargo is intended to pressure the offending government to change its actions.
Middle East – Economy Vocabulary
Gross national product (GNP) – value of all goods and services that a country produces in one year within or outside the country
Gross domestic product (GDP) - value of all goods and services produced within a country
Industrialized countries – countries that rely more on industry than agriculture
Literacy rate - percent of people who can read and write
Developing countries – countries in different stages of moving toward development
Third-world countries – developing countries that lack economic opportunities
Free enterprise – an economic system in which people, not government, decide what to make, sell, or buy
Market economy – an economy in which business owners and consumers make decisions about what to make, sell, and buy
Command economy – an economy in which the government owns most of the industries and makes most of the economic decisions
Tradition-based economy – exchange of goods or services based on custom and tradition
One-crop economy – economy based on a single crop, such as bananas, sugarcane, cacao
Exports – products a country sells to other countries
Imports – products a country buys from other countries
Interdependence – depending upon another country for resources or goods and services
Population density – the average number of people living within a set area
Overpopulation – more people than a region or country can self-support
Birthrate – number of births per 1,000 people in a year
Death rate – number of deaths per 1,000 people in a year
Migration – movement of people
Emigrant – person who leaves one place for another
Immigrant – person who arrives from another country
Tariff – a duty levied by a government on imported or exported goods; a list of fees fares, or other prices charged by a business.
Quota – a maximum number or quantity that is permitted or needed
Embargos – a government order restricting or prohibiting commerce, especially trade in a given commodity or with a particular nation
Currency exchange – the act of exchanging money from one currency to another
Example: dollar to a euro
Investment – the outlay of money, e.g. by depositing it in a bank or by buying stock in a company, with the object of making a profit
Economics – Economics is the study of the production and distribution of goods and services, it is the study of human efforts to satisfy unlimited wants with limited resources.
Opportunity Cost - the value of the next best choice that one gives up when making a decision; cost of passing up the next best choice when making a decision; the value of the next-highest-valued alternative use of that resource. ...