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Unit 5 - economic systems & monetary theory Flashcards

1
Q

what are the 3 questions all economic systems answer

A
  1. What do we produce
  2. How do we produce it?
  3. For who do we produce it for?
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2
Q

what is an economic system?

A

how societies/governments organize & distribute goods & services. They all deal with scarcity (an organized method to answer the 3 questions)

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3
Q

What is a market?

A

A place where all economic decisions are left to individuals in society
A structure that allows buyers and sellers to exchange goods/services

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4
Q

What is a pure command economy?

A

Government owns all:
* answers 3 q’s
* owns factors of production
* controls income
Consumer choice is very limited
Eg: China, Cuba, North Korea

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5
Q

What is a Mixed Economy?

A

Blend of market & command economy
Private ownership
large consumer choice
government provides goods/services when Market Failure occurs
competition difuses economic power
eg: Australia, England

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6
Q

What is a Pure Market?

A

Governed by supply and demand (S/D determines all prices)
Prices determine what gets produced
Individuals make economic decisions
Invisble hand regulates
no examples

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7
Q

what are trade offs?

A

a product of scarcity – opportunity cost

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8
Q

What is given up in a market economy? What is returned?

A
  • Security (protection)
  • gain: economic freedom
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9
Q

What is given up in a command economy? What is returned?

A
  • individual freedom
  • gain: basic needs = covered, protection
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10
Q

What is given up in a traditional economy? What is returned?

A
  • gain: security, stress free life
  • society has low growth, low standard of living
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11
Q

What is given up in a mixed economy? What is returned?

A

People give up some, not all freedom
gain: more security, saftey net

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12
Q

what is capitalism

A

key idea: winners & losers
a system where government allows citizens to control the economy (completely removed - Laissez faire). The free market regulates itself through supply and demand

economic system

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13
Q

disadvantages of capitalism

A

throughout history, there are too many losers, not enough winners
no saftey net – individuals future depends on self reliance

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14
Q

what is socialism?

economic system

A

means of production are owned and controlled by government (banks, schools)
Aims to shorten the gap between rich and poor by distributing wealth equally among society
How? Tax distribution – more income, more tax
** theory

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15
Q

advantages and disadvantages of socialism

A

advantage:
- smaller gap between rich and poor
- easy access to medical facilities, free healthcare
- efficient minimum basic income
- individuals have greater chances for wealth & success

disadvantage:
- discouraged to work hard due to less incentive
- lower quality of goods and services
- fewer innovation
- can easily be abused
-

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16
Q

what is the modern form of socialism based off of?

A

on the idea that people are compensated based on their level of individual contribution to the economy.

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17
Q

what is communism

A

main objective: create a classless society (true communism = classless society)
Karl Marx: people would be so upset with the idea of capitalism that it would lead to socialism, which leads to communism.
all goods are owned in common

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18
Q

What is the Karl Marx theory?

(Marxism)

A

theory that examines the flaws within capitalism
highlights the struggle between social classes
capitalism as a form of economic and social reproduction is flawed and will fail

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19
Q

what are factors/chain of events that lead to a communist system

A
  1. large government collect means of production and distributes evenly
  2. overtime, government involvement decreases as society becomes more equal

Key!! Communism is only good on paper. Dictators always take over and abuse power due to human error

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20
Q

Why is socialism considered a theory and capitalism isn’t?

A

Socialism is never fully practiced

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21
Q

what is a traditional economy

A

economic decisions are based on customs (farming, gathering, hunting)
Change may be discouraged/punished
Methods of production and distribution may be inefficient
No official currency, no price system
Eg: Amish, Eskimos

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22
Q

Who developed the idea of capitalism?

A

Adam Smith, Friedrich Hayek, Thomas Sowell, Milton Friedman, Ludwig von Mises

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23
Q

Who developed the idea of socialism/Communism?

A

Karl Marx & Friedrich Engels

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24
Q

How do traditional economies answer the 3 economic decisions

A

what: tradition & family history (farming or fishing)
how: tradition & family history
for who: customs of traditions in society answers this (everyone has a specific task)

by tradition and elders (little individual freedom)

Rural communities/Trible life, Inuit, Africa, South America

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25
What is **Free Market Capitalism **?
* a moral concept: a free exchange of goods and services between individuals * Individuals control what to produce, cost of goods and services, what to buy * 3 economic decisions are made by market prices
26
what are some opposing arguments to free market capitalism?
* gap between rich and poor is too large * doesn't deliver broad based prosperity
27
What is **Crony Capitalism?**
* a concept that is immoral, involves one of two parties being bought off (governemt) * Why is it unfair? Politicans feel they have the ability to spend public money on goods and services not for public interest * distortes broader economy: politized decisions have lots of externalities
28
Where does cronyism take place usually?
healthcare, student loans, farming, and more
29
What are the 3 problems crony capitalism creates?
1. Unfair: Spends public money, not for public interest 2. wasteful: Overpayemnt (stealing from taxpayers money) 3. tempts politicians to break the law
30
How is the goverment bought off? | Cronyism
Will buy from a seller with higher prices due to incentives * wasteful: the gov spends more, the seller spends to lobby the gov, creating DWL
31
What are key outcomes of socialism in practice
* wealth distribution: concern for fairness & equity * higher tax: gov spends for the people * expands money supply, lowers interest rates * certain groups stay employed with subsides * less destitute people (IN THEORY)
32
What are key outcomes of capitalism in practice?
* efficiency: less DWL to society * less tax: markets decided what people want for themselves. Industries rise/fall based on how well they meet demand * individual freedom & property rights * promotes competition (consumer advantage) * less inflation, higher economic growth
33
what is the main idea of mercantilism?
wealth = gold/silver exports = increase in wealth (selling product for money) imports = decrease in wealth (using money for product) | Want and need more exports than imports
34
what is neo-mercantilism?
trade surplus = power
35
what role do colonies play | mercantilism
**how countries gained wealth** mother country takes raw materials from colonies, turns them into manufactured goods to sell to other parts of the world to make money
36
what is the concept in which colonies existed to benefit the mother country?
Mercantilism
37
How did mother countries avoid colonies producing & working together?
colonies had to export raw materials directly through mother country (eg: only allowed to use english ships) | Nagication Acts 1651
38
what is zero sum? | mercantilism
wealth = zero sum * if one side gains, the other side must lose and equal amount --> because gold is a scarce resource | today, trade is viewed as positive sum - both sides gain
39
what was bartering, and what was the problem with it?
* the direct exchange of one good for another * when you try and obtain goods from a producer that doesn't want what you have to offer (solution = money)
40
who were the first group in the Western world to make coins?
The Lydians | 700 BC
41
what was one of the most widely used coins throughout the 18th centurey in Europe?
Spanish 8-reale half coin = 4 bits quater = 2 bits
42
what is **commodity money? **
coins containing precious metals these were traded because the held value (dependant on the amount of gold or silver it contained)
43
who were the first to use paper money
Chinese people (T'ang Dynasty 618-907AD)
44
What is **representative money **?
are tokens or pieces of paper that are not valuable themselves, but can be exchanged for a commodity (gold or silver).
45
what is **Fiat Money?**
Simmilar to representative money, but *cannot* be redeemed for a commodity. (It's not backed by anything physical, but a promise from the gov) | The Federal Reserve notes that are used today are Fiat money
46
What is wealth?
wealth measures the value of all assets owned by a person/country, etc. it is determind by taking the total market value of all assets then subtracting all debts the ability to produce (time & freedom) | the accumulation of scarce resources
47
What is money, really?
a current medium of exchange that symbolizes a perceived value | if it is based on a commodity, it will hold value
48
Are money and wealth the same thing?
Money is an idea and represented by coins and banknotes eg: $100 bill is a piece of paper. In a store, you are exchanging value and idea for the items with money. | Money is a tool and form of exchange
49
Are money and currency the same thing?
No. Currency is not a store of value. Money has a store of value: Gold (is always consistent) -- *there is a limited supply of money*
50
what are similarites of money & currency?
1. medium of exchange 2. unit of account 3. durability 4. portable 5. divisible
51
Define store of value
money cannot lose it's valye over time. If it can store value well, others accpet it
52
Define medium of exchange
people use it to aqquire goods and services from others
53
define unit of account
if a certain form of money is widely used, the value of goods and services in an economy are measured in terms of that money
54
define fractional reserve banking
Banks accept deposits, and must keep a portion of the deposits as reserves. They have the ability to lend out the remaining money, and grow their funds eg: keep 9% of deposits, other 91% is lent out again (the money in your account is just a numer)
55
explain how the money that doesn't exist is loaned into existence by banks
fractional reserve banking
56
how is "money" essentially contracts of debt? | money *is* debt
loans are a form of debt, and any bank operation is through loan transactions to create more money. All of the money that a person has is debt to the bank, or the bank is in debt to you
57
What is a bank run? Why do they exist?
when large amounts of people want to withdraw paper money from their accounts value, and the bank is unable to pay. The bank then loses trust of millions of customers
58
When and why did the gold standard end?
during/after WWI, governements saw printing money as a way of raising gov revenue -- high costs during war forced central banks to end currency exchanges to gold
59
what 2 things do bank reserves consist of?
1. Cash reserve ratio - banks must maintain a certain % of deposits as reserve 2. Statutory Liquidity Ratio: A certain % of deposits must be kept in bank in form of cash or gold Combination of the two is Legal Reserve Ratio (LRR).
60
what are bank reserves?
cash minimums that banks must have on hand in order to meet central bank requirements (real paper money held in bank)
61
what is classical economics?
long run economic processes (economic growth, distribution of income over time, etc) Core idea: Laissez Faire (let it be)
62
Who are the main classical economists?
Adam Smith (1776 - 1790) David Ricardo (1772 - 1823) John Stuart Mill (1806 - 1873)
63
Who is Adam Smith?
"Father of Economics" * how markets function * how growth operates * what policies accelerate growth * how economies interact
64
What was Adam Smiths biggest impact?
Promoting and popularizing the economic policy and worldview of **free market capitalims w/ limited governement intervention** provided analysis and understanding of the benefits of the free markets and competition
65
What is Smith's economic policy? | based on theory, and historical/political circumstance
there is a natural process at work in the economy, which leads from private self interest to the public good for society (working thru invisible hand) * humans maximize their own interest * competitive markets exist
66
What does the invisible hand do?
process of market competition -->Results in goods being produced at lowest feasible cost improved allocation of resources between secctors
67
What does "Laissez-faire" imply? | Let it be ## Footnote Smith's arguments
a free market based economy with no intervention (w/ exeptions for the justice system, national defense) opposed monopolies
68
What is Smith's theory of economic growth?
Wealth of a nation = annual flow of material goods (should be measured in terms of *per capita* consumption (not production) is the end of economic activity
69
What causes the wealth of a nation?
1. productivity of labour --> division of labour 2. ratio of productive to unproductive labour leads to the accumulation of capital
70
What is Smith's value theory?
problem: what determines prices of goods? * value in exchange (market price of good) vs value in use (power of a good to satisfy human wants)
71
What are the theories of exchange value?
1. Labour cost theory of value (determined by quantity of labour required to produce the unit of a good) 2. cost production theory of value (relative price of 2 goods = relative cost of production of those goods)
72
what are the two analytical states/models of the economy?
Primitive economy: 1 factor of production (labour) Advanced economy: 3 factors of production (capital, labour, land)

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