Economic Systems Around the World
A Canadian business is different in many ways from one in China. An economic system allocates a
nations resources among its citizens.
Factors of Production
The key difference between economic systems is the way in which they manage the factors of
production- the basic resources that a country’s businesses use to produce goods and services.
The people who work for a company represents the first factor of production, labour.
Sometimes called human resources, labour is the mental and physical capabilities of people
Employees who are well trained and knowledgeable can be a real competitive advantage
Obtaining and using labour and other resources requires capital- the financial resources needed to
operate an enterprise
You need capital to start a new business and keep it running and growing
A major source of capital for small business is personal investment by owners.
Investments can come from individual entrepreneurs, from partners who start a business
together, or from investors who buy stock
The people who accept the opportunities and risks involved in creating and operating businesses are
An entrepreneur has the technical skills to understand a product, the conceptual skills to see
a products future potential, and the risk-taking acumen to bet one’s own career and capital
on the idea
Land, water, mineral deposits, and trees are examples of natural resources.
Newer perspectives however, tend to broaden the idea of “natural resources” to include
For an oil company natural resources would not only include the crude oil, but also the land
where the oil is located, as well as for the refineries
Information Resources While the production of tangible goods once dominated most economic systems, today information
resources play a major role.
Information resources include information such as market forecasts, economic data, and
specialized knowledge of employees that is useful to a business and that helps it achieve its goal.
Businesses themselves rely heavily on these types of information
Much of what they do results in either creation of new information or the repackaging of
existing information for new users and different audiences
Types of Economic Systems
Different types of economic systems manage the factors of production in different ways. In some
systems, ownership is private; in others, the government owns the factors of production.
Economic systems also differ in the way that decisions are made about production and allocation
Command Economy: an economic system in which government controls all or most factors of
production and makes all or most production decisions
Market Economy: an economic system in which individuals control all or most factors of
production and make all or most production decisions
Two main forms of command economies:
Communism: a type of command economy in which the government owns and operates all
industries. For example, North Korea
Proposed by the 19 century German economist Carl Marx
Marx envisioned a society in which individuals would ultimately contribute according to
their abilities and receive economic benefit according to their needs
He also expected government ownership to only be temporary, and once society had
matured, government would “wither away”
Socialism: a kind of command economy in which the government owns and operates the
main industries, while individuals own and operate less crucial industries. For example, Cuba
More than 50% government control.
Although workers in socialist countries are usually allowed to choose their occupations or
professions, a large proportion generally work for the government
Government operated enterprises are inefficient since management positions are frequently
filled based on political considerations rather that ability
Extensive public welfare systems have also resulted in very high taxes Market Economies
A market is a mechanism for exchange between the buyers and sellers of a particular good or
service. Basically, both buyers and sellers enjoy freedom of choice
Capitalism: a kind of market economy offering private ownership of the factors of
production and of profits from business activity
It encourages entrepreneurship by offering profits as incentives
The economic basis of market processes is the operation of demand and supply
Mixed Market Economy
In their pure forms, command and market economies are often viewed as two extremes or opposites
Most countries rely on some form of mixed market economies: an economic system with elements
of both command economy and a market economy; in practice, typical of most nations’ economies.
Less than 50% government control.
Most countries of the former Eastern Bloc have now adopted market mechanisms through a process
called privatization: the process of converting government enterprises into privately owned
What privatization usually does is reduce payroll, boost efficiency and productivity, and
quickly become profitable
Interactions Between Business and Government
How Government Influences Business
Government as Customer
Government buys thousands of different products and services from business firms
Many businesses depend on government purchasing, if not for their survival, at least for a
certain level of prosperity
The government is also the largest purchase of advertising in Canada
Government expenditures on goods and services amount to billions of dollars each year
Government as Competitor
Government also competes with business through Crown corporations, which are accountable to a
minister of parliament for their conduct Crown corporations exist at both the provincial and federal level, and account for a significant and
wide variety of economic activity in Canada
Government as Regulator
Federal and provincial governments in Canada regulate many aspects of business activity
Government regulates business through many administrative boards, tribunal, or commissions
For example, the Canadian Radio-television, and Canadian Transport Commission (CTC)
There are several important reasons for regulating business activity
Protecting competition, protecting consumers, achieving social goals, and protecting the
Government as Taxation Agent
Taxes are imposed and collected by federal, provincial, and local governments
Revenue Taxes: taxes whose main purpose is to fund government services and programs.
Example, income taxes
Progressive Revenue Taxes: Taxes levied at a higher rate in higher-income taxpayers and at a
lower rate on lower-income taxpayers.
Regressive Revenue Taxes: taxes that cause poorer people to pay a higher percentage of income
than richer people pay. Example, sales tax
Restrictive Taxes: taxes levied to control certain activities that legislators believe should be
controlled. Example, taxes on alcohol, tobacco, and gasoline
Government as Provider of Incentives
Federal, provincial, and municipal governments offer incentives programs that help stimulate
In Quebec, for example, Hyundai Motors received $6.4 million to build a production facility
and an additional $682,000 to train workers
Governments also offer incentives through many services