Economic systems Examples of Traditional Economies

Essential Learning: Economic systems and Aborigines - a member of any of the

theorists indigenous people

The Big Three Questions Advantages

Every economic system in the world, past ● Economic roles are set
and present, has to answer these three ● Stable, predictable, and continuous
questions:
● What to produce? (How did Disadvantages
economists answer this question?) ● Discourages new ideas
● For whom to produce it? ● Lack of progress
● How to produce it? (Who owns the ● Lower standard of living
factors of production?)
Does a traditional economy answer the
4 Different Economic Systems big three questions?
● Traditional
● Command/Socialism What will be produced?
● Capitalism/Market - Whatever tradition, values, and
● Mixed rituals dictate
How will it be produced?
Traditional Economic System - However tradition, values, and
- Economic system is based on customs and rituals dictate
traditions (handed down from 1 generation For whom will it be produced?
to another). - Whomever tradition, values and
- Allocation of scarce resources stems from rituals dictate
ritual, habit, or customs

BARTER!! Means trade! No money! Command Economy

- This is the authoritative system wherein
A traditional economy is a system that decision-making is centralized in the
relies on customs, history, and time-honored government or a planning committee
beliefs. Tradition guides economic - Government decides the needs of the
decisions such as production and people, the best way to produce it and for
distribution. Societies with traditional everyone!
economies depend on agriculture, fishing,
hunting, gathering, or some combination of This economy holds true in dictatorial,
them. Socialist and communist nations
Examples: Africa, parts of India, the
Australian Aborigines Examples: North Korea, Cuba, China
 - Decisions are made on what goods and
Advantages services to produce. People ‘s preferences
● Basic Needs taken care of are reflected in the prices they are willing to
● Education, public health, other pay in the market and are therefore the basis
services cost very little if anything of the producer’s decision on what goods to
● Very little unemployment produce.

Disadvantages Examples: Canada, South Korea,

● Doesn’t meet wants Singapore, Germany, Great Britain, and the
● No incentives UNITED STATES!
● Requires a large bureaucracy
● New and different ideas are Advantages
discouraged ● Individual Freedom for all
● No room for individuality ● Lack of government interference
● Incredible variety to choose from
Does a command economy answer the big ● High degree of consumer satisfaction
three questions?
Disadvantages
What is being produced? ● Rewards only productive people
- Whatever the government decides ● Workers and businesses face
How is it being produced? uncertainty (Competition)
- The government will tell someone to ● Not enough public goods (Education,
make it health, defense)
For whom is it being produced? ● Unemployment
- Whomever the government decides ● Must guard against market failure
needs it
Answer the big three…
Capitalism/Market
- System that relies on consumption choices What will be produced?
made by consumers - Whatever the consumer wants
- The most democratic form of economic
system. How will it be produced?
- Entrepreneurs will respond to
- Consumers dictate what is produced, how demand
much is produced, and how much things
cost For whom will it be produced?
- Whomever is willing to work for it
(or afford it)
Mixed Economy Positive economics deal with what is –
- A mix of all of the other three economies things that are actually happening such as
- Some government involvement, consumer the current inflation rate, number of
driven, aspects of economy based on unemployed labor and the level of GNP or
traditional values the gross national product.
Normative economics, refers to what
This is really what the US is…. should be that which embodies the ideal
Examples: Obama Care, Bail outs yet such as the ideal rate of population growth
consumer driven. Family owned stores and or the most effective tax system.
corporations.
Positive economics is an overview of what
What kind of economic system does the is happening in the economy that is possibly
Philippines have? far from the what is ideal.
- The Philippines has a mixed Normative economics focuses on policy
economic system which includes a formulation that will help to attain the ideal
variety of private freedom, combined situation.
with centralized economic planning
and government regulation. GNP and GDP
Philippines is a member of the
Asia-Pacific Economic Gross national product (GNP)
Cooperation (APEC) and the - is an estimate of total value of all the final
Association of Southeast Asian products and services turned out in a given
Nations (ASEAN) period by the means of production owned
by a country's residents.
Positive vs Normative Economics - It is also the market value of the final
products both sold and unsold, produced by
Normative economics focuses on the value resources of the economy in a given period.
of economic fairness, or what the economy
"should be" or "ought to be." Market value
- is determined by supply and demand
Positive economics is based on fact and while economy’s resources are those
cannot be approved or disapproved, belong to Filipino citizens and
normative economics is based on value corporations. Not all resources belonging to
judgments the economy are in the economy, like the
capital and entrepreneurship brought the SM
to china. Conversely , not all resources in
the economy are belong to the economy like
the capital and entrepreneurship brought to
the country by multinationals like Nestle and
Procter and Gamble P&G
GNP = Household and individual Import M is to introduce or bring goods
consumption C + Government expenditure from one country to be sold in another.
on goods and services G +
Net Factor Income - Net factor income
GNP = {C + G + I + { X – M } = GDP} + from abroad= Factor income earned by
Net factor income our residents from the rest of the world

Household and individual consumption - Factor income earned by non- residents

C Household final consumption in our domestic territory.
expenditure covers all purchases made by Net factor income (NFFI) is the difference
resident households (home or abroad) to between a nation's gross national product
meet their everyday needs: food, clothing, (GNP) and gross domestic product (GDP).
housing services (rents), energy, transport,
durable goods (notably cars), spending on GDP gross domestic product
health, on leisure and on miscellaneous - is defined as the market value of final
services. product produced within the country’s
boundary.
Government expenditure on goods and - GDP is the net of GNP after deducting the
services net factor income from abroad or by
G health insurance (Medicaid and deducting factor income from abroad and
Medicare), retirement benefits (Social adding back factor payment to other
Security), national defense, interest on the countries.
debt and "other spending" (a broad category
that covers spending on education, housing,
transportation, agriculture, etc.).

Capital formation
I is a term used to describe the net capital
accumulation during an accounting period
for a particular country. The term refers to
additions of capital goods, such as
equipment, tools, transportation assets, and
electricity and inventory changes which are
the stocks (unused) for the future use from
all stages produced in that year Export X are
the goods and services produced in one
country and purchased by residents of
another country