Economic Systems
What Are the 4 Main Economic Systems
Traditional, Command, Market, and Mixed
What does GDP stand for?
Gross Domestic Product.
What is inflation?
A general increase in the overall price level over time.
Name the four main phases of the business cycle in order.
Expansion → Peak → Contraction → Trough.
A factory installs new equipment and workers can now produce 30% more per hour. Which economic indicator improved?
Labor Productivity
In which economic system does the government make most major decisions about what, how, and for whom goods and services are produced?
Command economy.
What does GDP measure?
The total market value of final goods and services produced within a country during a specific period.
When inflation increases, what generally happens to the purchasing power of money?
Purchasing power decreases.
During an expansion, what generally happens to GDP and unemployment?
GDP generally rises and unemployment generally falls.
Interest rates rise significantly. What will usually happen to borrowing?
Borrowing usually decreases because loans become more expensive.
In which economic system do consumers and businesses make most decisions through buying, selling, competition, and profit?
Market Economy
A country's GDP rises from $500 billion to $525 billion. What is the GDP growth rate?
5%. Calculation: (525 − 500) ÷ 500 × 100 = 5%.
What does CPI stand for, and what does it track?
Consumer Price Index. It tracks changes in the prices consumers pay for a representative basket of goods and services.
What is the difference between a peak and a trough?
A peak is the high point before contraction; a trough is the low point before the economy begins expanding again.
Businesses begin laying off workers while fewer goods are being produced and sold. Name two economic indicators that would likely change and give their direction.
Examples: unemployment ↑; GDP/production ↓; consumer spending may ↓.
A country allows private businesses to operate, but the government regulates industries, collects taxes, and provides public services. What type of economic system is this? Explain.
Mixed economy. It combines private market decisions with government involvement.
Which of these counts toward GDP: the sale of a used truck, a newly built house, unpaid babysitting by a family member, or the resale of a used video game? Why?
The newly built house. GDP counts newly produced final goods and services; used goods and unpaid household work are not counted in this example.
The CPI was 120 last year and is 126 this year. What was the percentage increase?
5%. Calculation: (126 − 120) ÷ 120 × 100 = 5%.
GDP is falling, businesses are reducing production, consumer spending is weakening, and unemployment is rising. What phase is the economy likely experiencing?
Contraction.
Country A has GDP growth of 4.5%, unemployment of 3.2%, and inflation of 7%. Identify one positive sign and one major concern.
Positive: strong GDP growth and/or low unemployment. Concern: high inflation.
A community produces the same crops its families have grown for generations. Jobs and production methods are largely determined by customs passed down over time. Identify the system and give two clues.
Traditional economy. Clues include decisions based on customs/traditions and production methods/jobs passed down through generations.
GDP is growing rapidly while inflation is also rising quickly. Explain one reason these two things might occur at the same time.
Strong economic growth can increase consumer and business demand. If demand grows faster than the economy can supply goods and services, prices may rise, contributing to inflation.
Prices across the economy have been falling for several months. Identify the condition and explain why it can be a warning sign for the economy.
Deflation. Falling prices can be associated with weak demand; consumers may delay purchases and businesses may experience lower sales, production, and hiring.
An economy has experienced several years of strong growth. Unemployment is very low, demand is high, inflation is increasing, and GDP growth has started to slow. Where might the economy be in the business cycle? Explain.
Near or at a peak. The economy has experienced strong expansion, but growth is beginning to slow while inflation is elevated.
GDP is growing quickly, unemployment has fallen to 3%, consumer spending is increasing, and inflation has risen from 2% to 6%. Diagnose the economy: What business-cycle phase is it likely in, what problem is developing, and what might higher interest rates attempt to do?
Likely expansion, possibly approaching a peak. Rising inflation is the developing concern. Higher interest rates could discourage borrowing and spending, reducing demand and helping slow inflation.