Mixed Economy:



Mixed Economy

There are no pure command or market economies. All modern economies have characteristics of both systems and are mixed economies. However, most economies are closer to one type of economic system than another.

In a truly free market economy, for example, the government would not be involved at all. There would be no laws to protect workers from unfair bosses. There would be no rules to make sure that credit cards were properly protected. Many societies have chosen to have some rules to protect consumers, workers, and businesses. These rules reduce the freedoms that businesses have, but they also protect the workers and consumers.

The following diagram shows some world economies on a scale. The ones on the left are most restricted (lots of government control) and the ones on the right are mostly free (little government control).

Mixed Economy Continuum

COMMAND MARKET

Cuba Russia Germany UK US

Mixed Economy:

1. Which country has the most economic restrictions? The least economic restrictions?

2. When countries have both command (government control) and market economies they are said to be what type of economy?

3. Of the countries listed which European country has the most government control?

Comparing Economies

| |United Kingdom |Germany |Russia |

|Who owns businesses & farms? |Private citizens & businesses |Private citizens & businesses |Government owns large industries; |

| | | |shipping, oil & natural gas, and |

| | | |aerospace. Private businesses in other |

| | | |areas |

|Who decides what & how much to produce? |Private citizens & businesses |Private citizens & businesses; some |Private citizens & businesses; government|

| | |government regulation of agriculture, |has many restrictions on businesses and |

| | |energy, & telecommunication |controls many of the larger ones |

|Who decides how goods/services will be produced? |Private citizens & businesses |Private citizens & businesses; some |Private citizens & businesses; government|

| | |government regulation of agriculture, |has many restrictions on businesses and |

| | |energy, & telecommunication |controls many of the larger ones |

|Who decides how goods/services will be distributed? |Private citizens & businesses |Private citizens & businesses; some |Private citizens & businesses; government|

| | |government regulation of agriculture, |has many restrictions on businesses and |

| | |energy, & telecommunication |controls many of the larger ones |

|Who sets the price for goods/services? |Buyers & sellers, based on |Private citizens & businesses; government|Private citizens & businesses; government|

| |supply & demand |regulates the prices of some products |regulates prices of some products |

|How easy is it to start your own business |Very easy (days) |Very easy (days) |Time-consuming (months) |

|(entrepreneur)? | | | |

Using the chart “Comparing Economies” answer the following questions:

4. Which country would it be most difficult to start a business? Which country would it be the easiest?

5. In which economy does supply and demand determine prices?

6. Why would it be easier to start a business in the UK compared to Russia?

Trade Barriers: Tariffs, Quotas, and Embargos

Trade is a voluntary exchange of goods and services among people and countries. Trade and voluntary exchange occur when buyers and sellers freely and willingly engage in market transactions. When trade is voluntary, both parties benefit and are better off after the trade than they were before the trade.

Countries sometimes try to limit trade with other countries by creating trade barriers. The most common types of trade barriers are tariffs (taxes on imported goods/services) and quotas (limiting the amount of goods imported into a country). The third kind of trade barrier is an embargo which is a government order to stop trade with another country. This is usually done to put political pressure on a country.

The European Union is a large free-trade-zone. There are not tariffs between the countries in the zone. This means that goods can be bought for a lower price. In Russia there are tariffs on many imports. The Russian government hopes that the tariffs will help Russian workers and businesses. Tariffs prevent competition and cause foreign countries goods/services to be more expensive and local products to be cheaper.

Russia produces a lot of steel. Steelmakers in the EU many worry that if too much Russian steel comes into the EU, the price of steel will go down. If the price goes down, the companies would have trouble making enough money to stay in business. The EU might decide to put a quota on steel imports (again preventing competition). That would stop the flow of steel into EU countries and keep the prices stable for businesses.

7. Which trade barrier limits the amount of goods brought into a country?

8. Local farmers in Russia want to sell more food to their citizens and impose a tax on foreign foods imported into their country. What type of trade barrier is this an example of?

9. If an embargo is put into place and no trade is allowed to take place, how does this trade barrier affect the citizens within that country?

International Trade and the exchanging of Currencies:

Currency is the money people use to make trade easier. In the United States, we use the U.S. dollars to buy goods and services. Russians use the Ruble, the United Kingdom uses the Pound, and EU members use the Euro. When we Americans work at a job, we are paid in dollars. When you travel to another country most of the time you can not buy goods/services with your country’s currency. You have to trade it in or exchange it at a bank for the currency of that country you are in. With each currency exchange, the bank charges a fee. So, it costs you more money than the price of the item to buy goods and services in a foreign country. Trade is much easier with a single currency and this is why the EU member countries use the Euro.

10. What is the problem with exchanging money from one country to another?

Human Capital and the Gross Domestic Product

The Gross Domestic Product (GDP) of a country is the total value of all the goods and services produced in a country in one year. The GDP is one way to tell how rich or how poor a country is. The GDP can be used to tell if the economy of a country is getting better or getting worse. Raising the GDP of the country can mean a higher standard of living (economic level) for the people in the country. To increase the GDP, countries must invest in human capital. This resource includes the education, training, skills and health of the workers in a business or country.

Russia, Germany, and the United Kingdom have made large investments in human capital. The literacy rate of each country is nearly 100%. The workforce is very well trained and educated, which has helped the standard of living in these countries improve over time.

Russia has the most poverty of the three countries. The Russian government is spending large amounts of money to train workers and to educate youth so that they will have more opportunities to be successful in the economy. In the former Soviet Union, everyone was assigned a job. Today, in Russia, workers must show they are skilled and valuable to the business in order to keep their jobs.

Capital Investments and the Gross Domestic Product (GDP)

To raise the GDP, countries must invest in physical capital. Physical capital refers to the factories, machines, technologies, buildings, and property needed by businesses to operate. If a business is to be successful, it cannot let its equipment break down or have its buildings fall apart. New technology can help a business produce more goods for a lower price.

The former Soviet Union did not do a good job of investing in physical capital. Highways and buildings are in need of repair. Factory equipment and technology are out of date. These conditions are keeping workers from being as productive as workers in the EU. Today, the Russian Federation has the job of helping companies overcome this problem. To solve the problem, the government has a plan to invest $1 trillion over the next few years in capital improvements.

11. What is an example of investing in human capital?

12. What happens if a country does not invest in human capital?

13. Russian workers are not as productive compared to other European workers. Why?

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