The Market System and the Circular Flow

Definition: An economic system is a set of institutional arrangements and a coordinating mechanism that addresses the economic problem of scarcity.
Differences in systems exist by:
- Ownership of Factors of Production: Who owns the land, labor, capital, and entrepreneurial ability.
- Method of Coordination: The approach used to motivate, coordinate, and direct economic activity.

Key Characteristics:
- Government Ownership: The government owns most, if not all, factors of production.
- Central Planning: Economic decisions (what to produce, how, for whom) are made by a central planning board.
Current Examples: North Korea and Cuba are the last remaining large centrally planned economies.
Global Impact (North Korea vs. South Korea - Global Snapshot 2.1): This comparison highlights the stark differences in economic outcomes.
- North Korea (Command System - based on purchasing power equivalencies to the U.S. dollar):
  - GDP: 40 ext{ billion}*
  - GDP per Capita: 1,800*
  - Exports: 4.4 ext{ billion}
  - Imports: 5.6 ext{ billion}
  - Agriculture as a % of GDP: 37\%
- South Korea (Market System - based on purchasing power equivalencies to the U.S. dollar):
  - GDP: 1.6 ext{ trillion}*
  - GDP per Capita: 35,700*
  - Exports: 638 ext{ billion}
  - Imports: 524.1 ext{ billion}
  - Agriculture as a % of GDP: 2.3\%

Key Characteristics:
- Private Ownership: Resources are primarily owned by private individuals and firms.
- Market-Based Decisions: Economic decisions are largely determined by the interaction of supply and demand in markets.
- Varied Government Role: The government plays an active but limited role, primarily providing a legal framework, correcting market failures, and ensuring stability.

Private Property: Individuals and firms have the right to own, use, and dispose of private property. This includes intellectual property and resources.
Freedom of Enterprise and Choice:
- Freedom of Enterprise: Entrepreneurs and businesses are free to obtain and use resources to produce goods and services of their choice, and to sell them in markets.
- Freedom of Choice: Resource owners are free to dispose of their property and labor as they see fit. Consumers are free to buy the goods and services that best satisfy their wants.
Self-Interest: Each economic unit (households, firms, resource owners) seeks to achieve its own particular goals, which usually involve maximizing utility (for households) or profit (for firms).
Competition: The presence of independently acting buyers and sellers in each market, coupled with the freedom of firms to enter or leave industries, ensures that no single buyer or seller can control market prices to a significant degree.
Markets and Prices: Markets are central mechanisms where buyers and sellers interact to determine prices and quantities of goods, services, and resources.

The degree of economic freedom varies significantly across countries, measured by factors like trade freedom, business freedom, investment freedom, and property rights.
Examples of Ranks (1=Free, 178=Repressed):
- Hong Kong: 1 (Free)
- New Zealand: 3 (Free)
- Switzerland: 5 (Free)
- United States: 12 (Mostly Free)
- Japan: 20 (Mostly Free)
- Colombia: 28 (Mostly Free)
- Brazil: 117 (Mostly Unfree)
- India: 128 (Mostly Unfree)
- Russia: 143 (Mostly Unfree)
- Argentina: 169 (Repressed)
- Iran: 171 (Repressed)
- North Korea: 178 (Repressed)

Encouragement: The market system strongly incentivizes technological advancement and the use of capital goods (tools, machinery, equipment) to increase efficiency and output.
Specialization:
- Division of Labor: Individuals or firms focus on producing a single good or service, or a component of it, for which they are best suited, leading to increased productivity.
- Geographic Specialization: Regions or countries specialize in producing goods and services that they can produce most efficiently due to natural resources, climate, or infrastructure.

Problem with Barter: Direct exchange of goods or services without money requires a