UNIT 3 ECONOMIC SYSTEMS OVERVIEW

EFFECTIVE ECONOMIC SYSTEMS

MODERN SOCIETY CANNOT FUNCTION EFFECTIVELY WITHOUT

WHAT ARE ECONOMIC SYSTEMS?

• Are the procedures used in the creation, distribution and consumption commodities and services. (Mananay, 2024)

• Is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. It regulate the factors of production, including land, capital, labor, and physical resources. (Corporate Finance Institute)

Throwback to Economic System

• 18th to 19th century - Industrial Revolution

• Economic systems emerged

• Emergence of new manufacturing technologies affected how commodities were PRODUCED

MAIN CATEGORIES OF ECONOMIC SYSTEMS

1. Market Economies

2. Command Economies

3. Mixed Economies

MARKET ECONOMY

An economic system in which economic decisions and the pricing of goods and services are guided by the interactions of a country's individual citizens and businesses.

1. Supply and demand decide prices

• Less supply, High demand

• More supply, Low demand

2. Scottish economist & philosopher Adam Smith's theories

Influential in the growth of the market economy

3. Adam Smith's "The Wealth of Nations"

Skill specialization and the division of labor promoted economic prosperity

Adam Smith

• June 16, 1723

• Born in Scotland

• Was Scottish moral philosopher

• Considered to be Father of Economics

• He began delivering public lectures in 1748 in University of Edinburgh

• In 1762, the University of Glasgow conferred on Smith the title of Doctors of Laws (L. L. D.)

Command Economy

• An economic system in which a central government dictates permissible levels of production and prices.

• The gov't regulates every area of the economy

• Also known as a Planned Economy, requires that a nation's central government owns and controls the means of production. Private ownership of land and capital is nonexistent or severely limited.

Mixed Economic System

• A system that combines aspects of both capitalism and socialism.

• Market and command economies are both present.

• Specifically refers to a mixture of private and public ownership of industry and the means of production. It is described as a "middle path" or transitional state between capitalism and socialism but can also refer to a mixture of state capitalism with private capitalism.

WHAT IS INTERNATIONAL TRADE?

• An exchange of a good or service among different countries. The exchanges can be imports or exports.

• An import refers to a good or service brought into the domestic country.

• An export refers to a good or service sold to a foreign country.

WHAT ARE INTERNATIONAL CAPITAL FLOWS?

• Are the financial side of international trade.

• When someone imports a good or service, the buyer (the importer) gives the seller (the exporter) a monetary payment. If total exports were equal to total imports, these monetary transactions would balance at net zero: people in the country would receive as much in financial flows as they paid out in capital flows. But generally the trade balance is not zero.

• The most general description of a country's balance of trade, covering its trade in goods and services, income receipts, and transfers, is called its current account balance.

• If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other real property ownership claims. This net financial flow is called its capital account balance.

• When a country's imports exceed its exports, it has a current account deficit.

• Its foreign trading partners who hold net monetary claims can continue to hold their claims as monetary deposits or currency, or they can use the money to buy other financial assets, real property, or equities (stocks) in the trade-deficit country.

WHAT IS GLOBAL ECONOMIC GOVERNANCE?

• Is the set of rules, agreements, and institutions that countries use to manage the global economy. It involves countries and other actors working together to promote economic growth, coordinate economic activity, and solve global economic issues.

• The system emerged after World War Il and includes organizations like the International Monetary Fund (IMF), the World Trade Organization (WTO), and the World Bank.