ECON CH 2-4 MODERN ECONOMIES

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Study the introduction to this unit above. What are you expected to learn from this unit? Enter your answer on the right.
Also, study the vocabulary words and look for them as you work your way through this unit.
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You cannot find today any economic system that relies exclusively on central planning or the individual initiative of the free market. Instead, most economies are a mixture of economic systems. Most contemporary mixed economies blend the market with government intervention, or involvement, in the marketplace.	The Rise of Mixed Economies No single economic system has all the answers. Centrally planned economies are cumbersome, do not adequately meet consumer needs, and limit freedom. Traditional economies have little potential for growth or change. Even market economies, with all their advantages, have certain drawbacks.

Which statement below is true?

a.	Most economies today are free market economic systems	c.	Most economies today are centrally planned systems
b.	Most economies today are free market with some government intervention	d.	Traditional economies are the most successful economic systems in the world today

What is the main drawback of traditional economies?

a.	They change too easily therefore people do not have confidence in them	c.	They are reluctant to change so they are unable to keep up with social changes
b.	They are undemocratic	d.	The people who participate in traditional economies are usually uneducated

The Limits of Laissez Faire
Adam Smith and other early free market
philosophers believed that, left to its own
devices, the free market system would
provide the greatest benefit for consumers
and raise the standard of living. They preached laissez faire, the doctrine that
government generally should not intervene
in the marketplace. (See the Profile of
Adam Smith on page 33.) Even Smith
acknowledged, however, the need for a
certain limited degree of government intervention in the economy.

As market economies have evolved since
Smith’s time, government intervention has
become greater because some needs and
wants of modern society are difficult to
answer in the marketplace. How well, for
example, could the marketplace provide
for national defense or for roads and
highway systems?

Some needs that markets could meet fall
to governments so that all members of
society can participate. Education is one
example. Other needs that could fall into
this category are health care and mass
transit.

The Nine Most Terrifying Words:
“I’m from the government and I’m here to help.”

Ronald Reagan

Governments create laws protecting
property rights and enforcing contracts.
There would be little incentive to develop
new products without property rights or
patent laws (laws that give the inventor of a
new product the exclusive right to sell it for
a certain period of time). Without laws
insisting on competition, many people fear
that some firms would dominate others in
their industry and be able to charge consumers any price. It is ironic that a philosophy that advocates no government regulation needs regulation to remain viable.

You will recall from your study of American history that the 5th and 14th amendments to the Constitution declare that no person may be deprived of “Life, liberty, or property, without due process of law.” The 5th Amendment also says that “just compensation” must be paid to owners when private property is taken for public use (eminent domain). Private property is property that is owned by individuals or companies, not by the government or the people as a whole. The Framers of the Constitution ensured that the United States government would protect this fundamental right.

Adam Smith believed that government participation in the economy should

a.	be limited	c.	be promoted
b.	be forbidden	d.	be democratic

The authors believe that

a.	central planning is the most efficient method of providing economic and social needs	c.	free markets can provide all of the economic and social needs of society
b.	mixed economies are weak	d.	there are some social/economic needs that free markets are not able to provide

The authors argue that free market capitalism needs ______ to guarantee that markets remain competitive and free.

a.	the stock market	c.	money (investments)
b.	laws	d.	banks

What guarantees that Americans have a right to private property (property rights)?

a.	The congress	c.	The U.S. Constitution
b.	The Declaration of Independence	d.	The president

From the quote above it is clear that Ronald Reagan believed in

a.	Socialism	c.	Capitalism
b.	Traditional Economies	d.	Communism

Balancing Control and Freedom
A society must assess its values and prioritize
its economic goals. Some goals are
better met by the open market and others
are better met by government action. In
addition, societies must evaluate the opportunity cost of pursuing each goal.
Each nation decides what it is willing to
give up to meet its goals. What are you
willing to give up? Are you willing to pay
taxes to fund the army? To give money to
people without jobs? To give all people an
education? To subsidize farms? Should the
government establish job-safety guidelines
or a minimum wage?

Societies have different economic goals.What economic factors do they have to consider when deciding which goals to pursue?

a.	opportunity costs	c.	political power
b.	philosophical frameworks	d.	political transparency

A Circular Flow Model of a Mixed Economy
To illustrate the structure of most modern
economies accurately, we need to add
government to our picture of the circular
flow of economic activity. Figure 2.4 illustrates
the government’s role in the marketplace
in a mixed economy. The government
can enter the circular flow of economic
activity in many ways.

Government in the Factor Market
Just like businesses, the government
purchases land, labor, and capital from
households in the factor market. For
example, the United States government
pays 2.8 million employees $9.7 billion a
year for their labor.

Government in the Product Market
Governments purchase goods and services
in the product market. They need buildings
and office supplies, telephones, computers,
and fax machines, for example.

Governments also provide certain goods
and services through the factor resources
that they combine. The federal, state, and
local governments in the United States, for
example, provide 4 million miles of roads.

Transferring Money
As you can see from the outer ring
of Figure 2.4, governments collect taxes
from both households and businesses.
Governments then transfer the money they
collect to businesses and individuals for a
variety of reasons ranging from worker
disability to the survival of an industry. The
greatest expenditure of the United States
government is Social Security.

10.

What does figure 2.4 above illustrate?

a.	poverty rates	c.	supply and demand
b.	government involvement in the economy	d.	availability of natural resources

11.

In what way does the government participate in the product and factor markets?

a.	award research grants to colleges and universities	c.	pay taxes to households and businesses
b.	purchase of automobiles from General Motors	d.	collect taxes from households and businesses

12.

What is the biggest government expenditure?

a.	Social Security payments for retirement and disability	c.	interest on the dept
b.	military spending	d.	government salaries

13.

The government leases land to a company so they can drill for oil. This is an example of

a.	government purchases	c.	government expenditures
b.	government owned factors	d.	taxes

Comparing Mixed Economies
The foundation of the United States economy is the free market. An economic system characterized by private or corporate ownership of capital goods is called free enterprise. In a free enterprise system investments are determined in a free market by private decision rather than by state control. Figure 2.5 below shows a continuum of mixed economies. A continuum is a range with no clear divisions. On one end of the scale is the centrally planned economy. On the opposite end is the free market economy.

Mixed Economies Where Government
Intervention Dominates
Reflecting an economy almost totally dominated by the government, North Korea occupies one end of the scale. Government owns all the property and all economic output. State-owned industries produce 95 percent of North Korea’s goods. Almost all imports are banned, and production of goods and services by foreign companies is forbidden.

In China, where the economy is dominated by government, one quarter of all enterprises are at least partly owned by individuals. China, like many nations that have relied heavily on central planning in the past, is in transition, a period of change in which an economy moves away from central planning toward a

market-based system. To make the transition, state firms must be privatized, or sold to individuals, and then allowed to compete with one another in the marketplace. As you will read in Chapter 18, economic transition is a difficult, and often painful, process.

Mixed Economies Where the Market
System Dominates
At the other end of the scale, with one of the
world’s freest markets, is Hong Kong. Hong
Kong, once administered by Great Britain, is
now a special administrative region of China.
It continues, at the beginning of the twenty first century, largely under the free economic
system it enjoyed under British rule.

In Hong Kong, the private sector rules. The government protects private property and rarely interferes in the free market, aside from establishing wage and price controls on rent and some public services. It is highly receptive to foreign investment and imposes virtually no barriers on foreign trade. Banks in Hong Kong operate independently of the government, and foreign-owned banks have nearly all the same rights as domestic ones.

14.

Which country below has the freest markets?

a.	Mexico	c.	Singapore
b.	United States	d.	China

15.

In which country does the government control all economic output, own all property and bans all imports of foreign made goods and services?

a.	China	c.	Korea
b.	Australia	d.	Hong Kong

16.

What is the status of China in the continuum above?

a.	They are stuck in a centrally controlled market economy	c.	They are in transition from a government controlled to a market controlled economy
b.	They are stuck in a market controlled economy	d.	They are in transition from a market controlled to a government controlled economy.

17.

Why is it difficult to transition from a centrally controlled to a market economy?

a.	Financial institutions do not like to deal in government securities	c.	There are seldom enough citizens who want to participate in free markets
b.	Government assets have to be sold or transferred to private individuals and companies	d.	There are not enough opportunity costs to make the transition profitable

18.

Which country provides the greatest economic opportunities for a small business person?

a.	United States	c.	Hong Kong
b.	Mexico	d.	France

The United States Economy
The United States has a free enterprise economy. Still, the government intervenes to keep order, provide vital services, and to promote the general welfare. Some people argue for more government services, while others say that the government already intervenes too much in the economy. Nevertheless, the United States enjoys a high level of economic freedom.

United States law protects private property. The marketplace operates with a low level of government regulation. Foreign investment is encouraged. So, too, is free trade, although the United States does protect some domestic industries and does retaliate against trade restrictions imposed by other nations. The banking industry operates under relatively few restrictions, and foreign-owned banks have few additional restrictions. In the next chapter, you will read in detail about the government and the free enterprise economy of the United States.

19.

The cartoon above is an argument for

a.	income distribution	c.	free markets
b.	price controls	d.	central planning

20.

What do the authors say about private property in the United States?

a.	They are protected by law	c.	The goal of the government is property redistribution
b.	It has to be controlled because of its effect on human rights	d.	property rights are not supported in the Constitution

21.

Laissez-Faire is a

a.	Liberal/Progressive philosophy	c.	Prohibitionist Philosophy
b.	Libertarian/Conservative philosophy	d.	Communist Philosophy

22.

In the cartoon above, why did the pin store go out of business?

a.	Government controls placed on the pin business	c.	It cost more to produce the pins than they were worth
b.	The free market was unfair to the pin business	d.	The pins were too cheap

a.	continuum	d.	laissez faire
b.	private property	e.	privatize
c.	free enterprise	f.	transition

23.

an economic system characterized by private or corporate ownership of capital goods; investments that are determined by private decision rather than by state control; and determined in a free market

24.

period of change in which an economy moves away from a centrally planned economy toward a market-based system

25.

the doctrine that states that government generally should not intervene in the marketplace

26.

to sell state-run firms to individuals

27.

a range with no clear divisions

28.

property owned by individuals or companies, not by the government or the people as a whole