Chapter
Chapter 2
• Section 4
Modern Economies
Objectives You may wish to call students’ attention to the objectives in
the Section Preview. The objectives are
reflected in the main headings of the
section.
Bellringer Ask students how they
would feel if they had to pay a
monthly book-rental fee at their community library or buy a ticket to use
most highways. Explain that in this
section they will learn that mixed
economies offer many advantages not
found in a pure free market economy.
Modern
Economies
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with
revised
SE page!
Preview
Objectives
Section Focus
Key Terms
After studying this section you will be able to:
It is doubtful that any nation can exist
successfully under a pure centrally
planned economy or a pure market
economy. Most modern economies
mix features of both systems. The
economy of the United States is
based on the principles of the free
market.
laissez faire
private property
free enterprise
continuum
transition
privatize
1. Explain the rise of mixed economic
systems.
2. Interpret a circular flow model of a mixed
economy.
3. Compare the mixed economies of various
nations along a continuum between
centrally planned and free market
systems.
4. Understand the role of free enterprise in
the economy of the United States.
ou cannot find today any economic
system that relies exclusively on central
planning or the individual initiative of the
free market. Instead, most economies are a
mixture of economic systems. Most
contemporary mixed economies blend the
market with government intervention, or
involvement, in the marketplace.
Y
Vocabulary Builder Ask students to
write definitions for those key terms
which they already understand. Have
them check their definitions against
those in the margins of this section and
make corrections as necessary. Then
have them copy the definitions of any
terms they did not know and use the
terms in sentences.
The Rise of Mixed Economies
No single economic system has all the
answers. Centrally planned economies are
Lesson Plan
Guided Reading and Review
Unit 1 folder, p. 19 asks students to
identify the main ideas of the section
and to define or identify key terms.
40
Adam Smith and other early free market
philosophers believed that, left to its own
devices, the free market system would
provide the greatest benefit for consumers
and raise the standard of living. They
Most public parks
rely on government
dollars for support.
BU
I L D I NG
Graphing the Main Idea
EY
K
1. Focus Remind students that no one
economic system can adequately satisfy everyone’s wants and needs. That
is why most modern economies are a
mix of economic systems.
2. Instruct Discuss with students the
concept of laissez faire and how it works
in modern economies. Be sure that students understand government participation by examining the circular flow
diagram in this section. Finally, discuss
the advantages and drawbacks of the
economies of North Korea, China, Hong
Kong, Sweden, and the United States.
3. Close/Reteach Remind students that
government intervention is a feature of
all economies to some degree. Have
students create charts comparing the
levels of government intervention in
North Korea, China, Hong Kong,
Sweden, and the United States.
The Limits of Laissez Faire
S
Teaching the Main Concepts L3
cumbersome, do not adequately meet
consumer needs, and limit freedom.
Traditional economies have little potential
for growth or change. Even market
economies, with all their advantages, have
certain drawbacks.
C ON CE P
T
Economic Systems To build understanding of
economic systems and the differences among
them, have students use a double web graphic
organizer like the one at the right to show the
differences between the economy of North Korea
and that of the United States. Tell students that a
double web can be used to compare and contrast
information about two groups.
Section Reading Support Transparencies A template and the answers for this graphic organizer
can be found in Chapter 2, Section 4 of the Section
Reading Support Transparency System.
preached laissez faire, the doctrine that
government generally should not intervene
in the marketplace. (See the Profile of
Adam Smith on page 33.) Even Smith
acknowledged, however, the need for a
certain limited degree of government intervention in the economy.
As market economies have evolved since
Smith’s time, government intervention has
become greater because some needs and
wants of modern society are difficult to
answer in the marketplace. How well, for
example, could the marketplace provide
for national defense or for roads and
highway systems?
Some needs that markets could meet fall
to governments so that all members of
society can participate. Education is one
example. Other needs that could fall into
this category are health care and mass
transit.
Governments create laws protecting
property rights and enforcing contracts.
There would be little incentive to develop
new products without property rights or
patent laws (laws that give the inventor of a
new product the exclusive right to sell it for
a certain period of time). Without laws
insisting on competition, many people fear
that some firms would dominate others in
their industry and be able to charge
consumers any price.
You will recall from your study of
American history that the 5th and 14th
amendments to the Constitution declare
that no person may be deprived of “Life,
liberty, or property, without due process of
law.” The 5th Amendment also says that
“just compensation” must be paid to
owners when private property is taken for
public use. Private property is property that
is owned by individuals or companies, not
by the government or the people as a
whole. The Framers of the Constitution
ensured that the United States government
would protect this fundamental right.
These
kindergarten
students in this
school lunch
program are enjoying
a benefit of government intervention.
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Balancing Control and Freedom
better met by the open market and others
are better met by government action. In
addition, societies must evaluate the opportunity cost of pursuing each goal.
Each nation decides what it is willing to
give up to meet its goals. What are you
willing to give up? Are you willing to pay
taxes to fund the army? To give money to
people without jobs? To give all people an
education? To subsidize farms? Should the
government establish job-safety guidelines
or a minimum wage?
laissez faire the
doctrine that states that
government generally
should not intervene in
the marketplace
private property
property owned by
individuals or
companies, not by the
government or the
people as a whole
Global Connections
Sweden’s Mixed Economy Sweden’s mixed economy has mixed
benefits for the Swedish people. The Swedish government redistributes more
than half of Sweden’s wealth through social benefit programs. When a child is
born, his or her parents are entitled to a combined 450 days of parental leave,
with three quarters of their base salary paid by the government. Swedish patients
rarely pay more than 1,800 Swedish kronor (about $230) per year for prescriptions.
If you were a teen in Sweden, your new braces would be free. Employers are
required to give employees a minimum of 30 days vacation. The trade-off for
these benefits is the second-highest tax burden of any industrialized country.
Swedes pay around 56 percent of their gross domestic product in taxes,
compared to only 32 percent in the United States. How would you describe the
level of government involvement in Sweden’s economy?
A society must assess its values and prioritize its economic goals. Some goals are
$
Econ 101: Key Concepts Made Easy
Government One of the key concepts in this section is the transferring of money by the government. The government transfers money not to
penalize the rich or to make everyone financial
equals but rather to provide financial assistance
to those who need it most. Offer students this
example: a late-night explosion at an auto parts
factory destroys the building. In that instant the
factory’s workers have lost their income. The
workers then apply for unemployment compen-
sation, a government program that collects
money from employers to fund unemployment
insurance and redistributes the funds to those
who have lost their jobs. The workers will
receive income from the government until they
find new jobs or until their unemployment compensation expires.
Ask students to think of other examples of the
government transferring money. Have them share
their examples with the class.
Chapter
Chapter 2
• Section 4
Background
Economics in History
When Franklin D. Roosevelt became
president in 1933, the nation was in
the grip of the Great Depression. The
prosperity of the Roaring Twenties
had crashed along with the stock
market, and people were looking for
economic salvation. Roosevelt’s policies illustrate one method for balancing economic control and
economic freedom.
Roosevelt saw government action
as the best way to accomplish his
goal of improving America’s ravaged
economy. Toward that end Roosevelt,
his advisors, and members of
Congress developed a plan for government intervention in the economic
crisis. The plan was called the New
Deal. During a period that came to be
known as the Hundred Days,
Roosevelt proposed and Congress
passed sweeping legislation to help
the nation weather the economic
storm. This legislation included the
following:
• Emergency Banking Act—enabled
financially sound banks to reopen
• Glass-Steagall Banking Act—
created the Federal Deposit
Insurance Corporation (FDIC) to
insure bank deposits
• Civilian Conservation Corps and
Public Works Administration—put
people to work, at government
expense, in conservation projects
and the building of courthouses,
dams, bridges, and other public
structures.
The “Second Hundred Days” saw
the passage of the Social Security
Act and the National Labor Relations
Act as well as the creation of the
Works Progress Administration.
The New Deal did not end the
Great Depression, but most economists agree that it did much to relieve
economic suffering and preserve the
basics of the free enterprise system.
Answer to . . .
Global Connections Most students
are likely to describe the level of
government involvement as high,
especially in comparison to the
United States.
41
Chapter
Chapter 2
• Section 4
Figure 2.4 Circular Flow Model of a Mixed Economy
Product market
This circular flow
model shows how
government typically
interacts with
households and
businesses in the
marketplace.
Economic Systems
Explain how
government actions
affect the circular
flow model in a
mixed economy.
monetary flow
physical flow
Households
expenditures
Transparency Resource Package
Economics Concepts, 2F:
Circular Flow Diagram of a Mixed
Economy
expenditures
ax
d
t
Learning Styles Activity
Learning Styles Lesson Plans folder,
p. 10 asks students to prepare written
reports assessing the degree to which
government and free enterprise dominate the mixed economies of selected
countries.
Government
m
rn
ve e
o
g n
ow
Firms
es
p h y s i ca l fl o w
L2
Ask students to create a poster that
arranges the economies profiled in the
“Comparing Mixed Economies” section from the most centrally planned to
the most purely free market. Students
may want to illustrate their work with
pictures of economic activities in each
country. LPR
t
en s
nm ase
r
e ch
r
tax
es
go
pu v
You may wish to have students add
the following to their portfolios. Have
students use an almanac to investigate
four of the world’s economies. Ask
them to create a chart that shows economic data for two countries in which
government intervention dominates
the mixed economy and two countries
in which the market system dominates
the mixed economy. Then have students write a brief report summarizing
the data. Students should create an
economic model using a circular flowchart to illustrate their findings and
should include it with their report.
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fa en
ct t or
s
L3
m o n e t ar y f l o w
Factor market
A Circular Flow Model of a
Mixed Economy
To illustrate the structure of most modern
economies accurately, we need to add
government to our picture of the circular
flow of economic activity. Figure 2.4 illustrates the government’s role in the marketplace in a mixed economy. The government
can enter the circular flow of economic
activity in many ways.
Government in the Factor Market
Just like businesses, the government
purchases land, labor, and capital from
households in the factor market. For
example, the United States government
pays 2.8 million employees $9.7 billion a
year for their labor.
Government in the Product Market
Governments purchase goods and services
in the product market. They need buildings
and office supplies, telephones, computers,
and fax machines, for example.
Governments also provide certain goods
and services through the factor resources
that they combine. The federal, state, and
local governments in the United States, for
example, provide 4 million miles of roads.
Block Scheduling Strategies
Answer to . . .
Building Key Concepts Students
should mention taxes, government
purchases, and various other government expenditures.
42
Consider these suggestions to take advantage of
extended class time:
■ Extend the Bellringer activity on p. 40 by having
students work as a group to compile a list of goods
and services that the government, rather than the
free market, provides. Then discuss how students’
lives would be different if these goods and services
were left up to the free market to provide.
■ Present the Background note on p. 41. Then
have students find and read a short story, an
excerpt from a book, or a contemporary news article that discusses the Depression and Roosevelt’s
economic decisions. Ask students to give short oral
presentations that focus on how control and freedom were balanced during this era.
■ Have students bring the results of the first
activity described on this page to class. Have students compare data and draw conclusions about
which type of mixed economy seems to produce
the best results.
Chapter
Chapter 2
Transferring Money
As you can see from the outer ring
of Figure 2.4, governments collect taxes
from both households and businesses.
Governments then transfer the money they
collect to businesses and individuals for a
variety of reasons ranging from worker
disability to the survival of an industry. The
greatest expenditure of the United States
government is Social Security.
Government owns all the
FAST FAC T
property and all economic
output. State-owned industries
In competition with foreign fast-food
restaurant chains, Chinese
produce 95 percent of North
entrepreneur Shen Qing started his
Korea’s goods. Almost all
own restaurant chain—the Baked
imports are banned, and
Pig Face restaurants. The seasoned
production of goods and
pigs‘ heads, served in a modern
setting, are wildly popular. Mr. Shen
services by foreign companies
benefits by receiving profits, and
is forbidden.
consumers benefit by being able to
In China, where the economy
choose a traditional Chinese dish
over Western-style fast food.
is dominated by government,
one quarter of all enterprises
are at least partly owned by
individuals. China, like many nations that free enterprise an
have relied heavily on central planning in economic system
the past, is in transition, a period of change characterized by private
in which an economy moves away from or corporate ownership
of capital goods;
central planning toward a market-based investments that are
system. To make the transition, state firms determined by private
must be privatized, or sold to individuals, and decision rather than by
then allowed to compete with one another state control; and
determined in a free
in the marketplace. As you will read in market
Chapter 18, economic transition is a difficult, and often painful, process.
continuum a range with
• Section 4
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Comparing Mixed Economies
The foundation of the United States
economy is the free market. An economic
system characterized by private or corporate ownership of capital goods is called
free enterprise. In a free enterprise system
investments are determined in a free
market by private decision rather than by
state control. Figure 2.5 below shows a
continuum of mixed economies. A
continuum is a range with no clear divisions.
On one end of the scale is the centrally
planned economy. On the opposite end is
the free market economy.
Mixed Economies Where Government
Intervention Dominates
Reflecting an economy almost totally
dominated by the government, North
Korea occupies one end of the scale.
no clear divisions
Mixed Economies Where the Market
System Dominates
At the other end of the scale, with one of the
world’s freest markets, is Hong Kong. Hong
Kong, once administered by Great Britain, is
now a special administrative region of China.
It continues, at the beginning of the twenty-
transition period of
change in which an
economy moves away
from a centrally planned
economy toward a
market-based system
privatize to sell state-run
firms to individuals
L3
(Reteaching) Organize the class into
two groups. One group will play the
part of a group of economic planners
from North Korea. The other group
will play economic planners from
Hong Kong. Each group of planners
must address the following situation:
North Korea and Hong Kong
each have 10 idle factories that must
be brought up to full production
within a year. The planners must
answer the questions below and
explain how they arrived at their
answers.
• What will we produce?
• To whom will we sell our
products?
• How will we find workers for the
factories?
• How much will we charge for our
products?
When both groups have formulated their plans, a volunteer from
each should present the plans to the
class. Be sure to remind students that
their plans must reflect the economic
system of the country they represent.
L3
Figure 2.5 Continuum of Mixed Economies
Centrally planned
Free market
Mexico
Iran
China
North Korea
Cuba
Russia
France
South Africa
Poland
Japan
United Kingdom
Canada
Hong Kong
Singapore
United States
Source: 2003 Index of Economic Freedom, Bryan T. Johnson, Kim R. Holmes, and Melanie Kirkpatrick
The degree of government intervention in the marketplace varies among nations.
Economic Systems How would you explain China’s position on this continuum?
Why is Hong Kong, technically part of China, so far to the right on this diagram?
✓
Economic Detective Activity
Unit 1 folder, p. 23, “Economic
Recovery in Sunnhilla,” provides an
integrated application of chapter
concepts.
Economic Video Library
Video segment “Internet Impact”
discusses the impact of the Internet
on modern business.
Preparing for Standardized Tests
Have students read the section titled “Comparing Mixed Economies” and then answer
the question below.
Which of the following is true of North Korea’s economy?
A
B
C
D
After students have read this section,
ask them to create a web graphic
organizer that shows the significance
of free enterprise in the economy of
the United States.
Private enterprise produces 95 percent of its goods.
North Korea imports many foreign goods.
“Black markets” do not exist.
Its economy is almost completely state controlled.
Answer to . . .
Building Key Concepts China is in a
transition, moving away from central planning toward a marketbased system. Hong Kong is a
special administrative district of
China that uses a largely free economic system.
43
Chapter
Chapter 2
• Section 4
foreign trade. Banks in Hong Kong operate
independently of the government, and
foreign-owned banks have nearly all the
same rights as domestic ones.
What type of
GTE
Guide to the Essentials
Chapter 2, Section 4, p. 9 provides
support for students who need additional review of the section content.
Spanish support is available in the
Spanish edition of the guide on p. 9.
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economic system do
you see reflected in
this busy mall?
The United States Economy
Quiz Unit 1 folder, p. 20 includes
questions to check students’ understanding of Section 4 content.
Presentation Pro CD-ROM
Quiz provides multiple-choice
questions to check students’ understanding of Section 4 content.
Answers to . . .
Section 4 Assessment
1. Laissez faire is the doctrine that states
that government should not intervene
in the marketplace.
2. Some centrally planned nations are
switching to free enterprise systems
in order to keep pace with the evolving global economy.
3. Privatization is usually a slow process
in centrally planned economies
because, typically, few enterprises or
businesses exist when privatization
begins.
4. Answers should focus on the freedoms inherent in the U.S. free enterprise system. And on the fact that
individuals, not government, make
economic decisions.
5. Citizens would probably gain more
economic freedom and consumer
choices.
6. Students should locate articles from
reliable sources and be able to place
them appropriately on the bulletin
board.
first century, largely under the free economic
system it enjoyed under British rule.
In Hong Kong, the private sector rules.
The government protects private property
and rarely interferes in the free market,
aside from establishing wage and price
controls on rent and some public services.
It is highly receptive to foreign investment
and imposes virtually no barriers on
Section 4 Assessment
Key Terms and Main Ideas
1. What is laissez faire?
2. Why have some nations begun a transition to free
enterprise?
3. Why are nations with centrally planned economies sometimes slow to succeed when they privatize industry?
4. Compare the U.S. free enterprise system with other
economic systems you have read about in this chapter.
Applying Economic Concepts
The United States has a free enterprise
economy. Still, the government intervenes
to keep order, provide vital services, and to
promote the general welfare. Some people
argue for more government services, while
others say that the government already
intervenes too much in the economy.
Nevertheless, the United States enjoys a
high level of economic freedom.
United States law protects private
property. The marketplace operates with a
low level of government regulation.
Foreign investment is encouraged. So, too,
is free trade, although the United States
does protect some domestic industries and
does retaliate against trade restrictions
imposed by other nations. The banking
industry operates under relatively few
restrictions, and foreign-owned banks have
few additional restrictions. In the next
chapter, you will read in detail about the
government and the free enterprise
economy of the United States.
Progress Monitoring Online
For: Self-quiz with vocabulary practice
Web Code: mna-1028
6. Try This Survey newspapers and magazines to find
articles describing life in different economic systems.
Construct a bulletin board of the continuum of
economies in Fig. 2.5. Place each article on the appropriate location on the continuum.
PHSchool.com
For: Research Activity
Visit: PHSchool.com
Web Code: mnd-1024
5. Critical Thinking What benefits might citizens of a
centrally planned economy derive from a move toward a
market-based system?
Progress Monitoring Online
For additional assessment, have students access
Progress Monitoring Online at Web Code: mna1028
Answer to . . .
Photo Caption the free enterprise
system
44
Typing in the Web Code
when prompted will bring students directly
to detailed instructions for this activity.