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U.S. Economic System

U.S. Economic System . Helen Naughton Department of Economics University of Montana. Economics. Economy—in Greek “Household management” Microeconomics—study of household and firm decisions Macroeconomics— study of country-level indicators (government interest rates, unemployment).

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U.S. Economic System

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  1. U.S. Economic System Helen Naughton Department of Economics University of Montana

  2. Economics • Economy—in Greek “Household management” • Microeconomics—study of household and firm decisions • Macroeconomics—study of country-level indicators (government interest rates, unemployment)

  3. The Economic Questions • What goods and services are produced? • Which resources are used in production? • Who gets to consume the goods and services?

  4. Economic System • The system for answering The Economic Questions: • Does the government choose what and how much is produced or is it market-driven? • Who decides which resources are used? • Who decides how goods are distributed?

  5. Traditional System • Economic decisions based on customs and beliefs handed down through generations

  6. Command System • The economic system where government answers most of The Economic Questions for its people. • Former Soviet Union • North Korea

  7. Business in a Command System • The government answers The Economic Questions: • The government determines what inputs to use • The government determines the quality of inputs • The government sets employees wages • The government sets business hours

  8. Market System • The economic system where markets are allowed to operate freely: • Goods and services are produced if people are willing to pay for them in the market. • Input markets drive which resources are used in production. • Those who are willing to pay for the goods and services receive them.

  9. Business in a Market System • I answer The Economic Questions: • I determine what inputs to use • I determine the quality of my inputs • I set my employees wages • I set my business hours

  10. US Economic System • A little bit of each—MIXED SYSTEM! • Some markets are allowed to operate freely. • Some production and allocation decisions are made by the government. • Some economic decisions are made based on tradition.

  11. Business in a Mixed System • I and the government answer The Economic Questions: • I determine what inputs to use • The government determines the quality of my inputs • Minimum standards for food safety and other health hazards (no lead in paint or gasoline). • I set my employees wages • The government sets the minimum wage • I set my business hours • The government decides if I am safe to operate

  12. Traditional System Natives/Aborigines North Korea US Market System Command System

  13. Economic Systems Across Countries • It is reasonable to state that US is more market-based system than most countries overall. • Yet, we could likely find specific markets where the US government interferes more than other governments. • For example, the US government has a tradition of offering support to US steel workers to protect the industry jobs and income.

  14. Why has the US (mostly) embraced the market economy? • To promote efficiency • To make the economic benefit/pie as big as possible • To minimize waste

  15. Why not operate fully on the market system? • Markets do not ensure that goods and services are allocated fairly (or that everyone gets enough to eat). • Costs and benefits of the goods and services may be external to the market. • A person who does not pay for fireworks can easily enjoy the fireworks. (External benefits) • A person who does not use a car can get sick from pollution emitted by cars. (External costs)

  16. Government’s Roles 1. Increase equity • Tax income and wealth • Provide goods and services to the poor

  17. Government’s Roles 2. Provide goods with external benefits (private markets underprovide these goods) • National security • Infrastructure (roads and bridges) • Educated and healthy citizenry

  18. Government’s Roles 3. Regulate goods with external costs (private markets overproduce these goods) • Ensure copper mining pays for all costs (including the cost of polluted water in the river) • Control hazardous waste disposal • Charge gasoline taxes to help pay for the external cost of air pollution from cars

  19. Balancing Roles of the Market and the Government • Hotly debated in the US political system • Problems with finding the balance: • External costs and benefits are difficult to measure. • While redistributing income may reduce inequality, it also lowers incentives for work (some argue especially for the highly productive).

  20. Traditional System Market System Command System

  21. Thank you!

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