Classifying Economies

Question 1

What is an economic system?

Answer 1

A society that attempts to address the economic problem while obtaining maximum utility for its citizens. It is a way of organising resources to answer key economic questions and achieve an improved quality of life.

Question 2

How do economic systems vary?

Answer 2

They vary in terms of who owns and controls resources, and how and by who economic decisions are made.

Question 3

Identify the two extreme economic systems

Answer 3

A centrally planned economy is completely operated by government intervention, while a pure market economy has no government intervention, and is completely influenced by market forces.

Question 4

What are the characteristics of a market economy?

Answer 4

Market system - product markets and factor markets
Price mechanism
Private ownership of property
Consumer sovereignty
Freedom of enterprise
Competition

Question 5

What type of economy is Australia’s economy?

Answer 5

It is a mixed economy, where decisions concerning production and distribution are made by a mix of market forces and government decisions.

Question 6

Why do governments intervene in market economies?

Answer 6

They intervene to reduce the impacts of negative externalities of market forces. They will reallocate resources, redistribute income, and stabilise economic activity.

Question 7

Describe the role of government in resource allocation

Answer 7

The government may provide goods and services not provided by the private sector, they may also restrict the production of harmful goods.

Question 8

Describe the role of government in income distribution.

Answer 8

Through social welfare payments and progressive income tax, the government aims to create a fairer society and look after those who cannot contribute to the production process.

Question 9

Describe the role of government in economic stability

Answer 9

Governments will employ macroeconomic policies to smooth out fluctuations in the business cycle and avoid the negative effects of booms and recessions.

Question 10

How does the government address the economic question: What to produce?

Answer 10

The government provides goods including collective wants, it may encourage production through subsidies, and tax incentives, and it may discourage or prohibit production.

Question 11

How does the government address the economic question: How much to produce?

Answer 11

The government can limit production through licensing. It can encourage the production of merit goods through funding. It can implement protection policies to increase domestic production.

Question 12

How does the government address the economic question: How to produce?

Answer 12

The government can influence the cost of the factors of production. (Eg. minimum wage - cost of labour, or environmental controls)

Question 13

How does the government address the economic question: How to distribute?

Answer 13

The government intervenes in distribution through its tax and welfare system, but also intervenes in factor markets by imposing a minimum wage.

Question 14

What are two key criteria used to classify economies?

Answer 14

Level of government intervention, and level of development.

Question 15

How is the quality of life of an economy measured?

Answer 15

Measured by the Human Development Index, taking into account income, material living standards, life expectancy, and educational attainment

Question 16

How is the employment of an economy measured?

Answer 16

Measured by participation rate, unemployment rate and rates of labour underutilisation. Affected by size of population and labour force. The structure of employment also considered (primary, secondary industries)

Question 17

Describe the trend of income distribution in pure market economies.

Answer 17

Pure market economies tend to have very unequal distribution of income, as it solely depends on the quantity and quality of the factors of production that an individual controls.

Question 18

How is the income distribution of an economy measured?

Answer 18

Measured by the Gini Coefficient (0-1, closer to zero, more even distribution).

Question 19

What factors are taken into account when assessing an economy’s environmental sustainability?

Answer 19

Biodiversity, use of resources (such as water), rates of deforestation, CO2 emissions.

Question 20

How is the role of the government in education and social welfare measured?

Answer 20

Measured by the percentage of expenditure in the budget on these areas, or spending as a percentage of GDP.