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COMPARING AND ASSESSING ECONOMIC SYSTEMS PowerPoint PPT Presentation

COMPARING AND ASSESSING ECONOMIC SYSTEMS Comparing Real-World Systems Comparing real-world systems involves understanding the forces influencing systems how they operate how they perform Forces Influencing Economic Systems

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COMPARING AND ASSESSING ECONOMIC SYSTEMS

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Comparing and assessing economic systems l.jpg

COMPARING AND ASSESSING ECONOMIC SYSTEMS


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Comparing Real-World Systems

  • Comparing real-world systems involves understanding

    • the forces influencing systems

    • how they operate

    • how they perform


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Forces Influencing Economic Systems

  • Operation and performance of systems affected by many factors such as

    • level of economic development

      • systems work differently at different levels of economic development

      • as economies develop, their systems change

    • social and cultural forces

      • traditions and customs

      • social stratification by sex, race, caste, religion, etc.

    • environment

      • climate, population, access to sea, natural resources, proximity to other systems


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How They Work

  • Determination of social preferences

    • voting at ballot box

    • voting with dollars

    • decisions of non-elected rulers

  • Institutions

    • fundamental organizational arrangements for undertaking economic activity

      • perfect competition

      • private ownership

      • central planning


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Policy Instruments

tools used by the state to achieve social or political goals

fiscal instruments

taxes, transfers, government spending

monetary instruments

open market operations

reserve requirements

discount rates

exchange rate manipulations


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Direct controls

regulations

production orders

fixing prices and wages

direct allocation of resources to factories

Changes in the institutional framework

property rights

rules for operation of markets


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Resource allocation and income distribution

complementary approaches stressing different aspects of the same process

centralized versus decentralized decision making and information

command versus exchange

administrative orders versus market activity

planning versus market

manner and extent of state intervention in the economy


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How They Performance

  • Which system works best?

  • Two steps involved

    • select criteria to be used to compare performance

    • assign weights to these criteria

      • according to one’s own preferences

      • according to system’s preferences

    • weighting not a problem if one system superior in all respects; otherwise, weights are critical


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Commonly used criteria

economic growth

efficiency

distribution of income

economic stability

economic development

Qualitative criteria that cannot be measured statistically

economic freedom

economic security

continuation of national existence


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Economic Growth

  • Economy grows when its production capacity increases (outward shift of production possibilities curve)

  • An increase in output may not be growth

Growth

Increased Output

Without Growth

Capital

Capital

0

0

Consumption

Goods

Consumption

Goods


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Economic Efficiency

  • No wasted resources

  • Getting the most output for given inputs

  • On production possibilities curve

Capital

Efficient

Not efficient

0

Consumption

Goods


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Measuring Efficiency

  • Ideal measure: distance to PPC

  • Practical measure: factor productivity

PPCs represent two countries with same

resources, both operating at point A.

They are equally productive, but one

is efficient, the other is not.

Capital

A

0

Consumption

Goods


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Distribution of Income

  • How equally is income distributed?

  • The Lorenz Curve and Gini Coefficient

  • What is the ideal distribution?

100%

Gini Coefficient =

Area A

(Area A+Area B)

Percent income

A

Lorenz Curve

B

0%

100%

Households ranked by income


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Economic Stability

  • Various measures

    • volatility of business cycle

    • unemployment

    • inflation


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Economic Development

  • Stages of development

  • Which system best facilitates the structural changes needed for economic development


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Continuation of National Existence

  • Was the break-up of the Soviet Union and Yugoslavia an inevitable consequence of their economic systems?

  • Must the remaining planned socialist economies abandon planned socialism if they are to survive?


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Economic Freedom and Economic Security

  • Milton Friedman’s “Free to Choose”

    • freedom of occupational choice, consumption, ownership

  • The security of knowing where one’s next meal is coming from

    • certainty of employment and income

  • The importance of keeping straight the different values of the three systems


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Difficulties Assessing Systems

  • Some criteria easy to define but hard to measure

    • distinguishing growth from business cycle

    • measuring efficiency

    • flawed measures of unemployment and inflation, especially with planned socialism

  • Distribution of income easy to measure but hard to assess

    • what is the ideal distribution?


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Assigning weights is highly subjective

Difficult to distinguish between effect of system on performance and effects of other determinants of performance such as

level of development

population differences

educational differences

climate

politics

proximity to other systems


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