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Factors Determining Economic Activity

Factors Determining Economic Activity & Economic Systems

Factors Influencing Economic Growth

  • Key Idea: A country's ability to grow its economy is influenced by various characteristics and resources.
  • Demand-Side Factors:
    • Examples: Consumer spending, investment, government expenditure.
    • Impact: Affect the demand for goods and services.
  • Supply-Side Factors:
    • Examples: Productive capacity, natural resources, skilled workforce.
    • Impact: Affect the ability to produce goods and services.
  • General Idea: Both demand and supply-side factors determine a country's economic potential.

Economic Systems: How Resources are Allocated

Economic systems are the methods countries use to solve the fundamental economic problem of what, how much, how, and for whom to produce.

1. State-Controlled (Planned/Command) Economies

  • Definition: The government decides what to produce, how to produce it, and how it is distributed.
  • Key Feature: Central planning replaces market forces.
  • Example: The Soviet Union (historical).
  • Perceived Advantages:
    • Lower levels of inequality and unemployment.
    • Common good prioritised over profit.
  • Disadvantages:
    • Potential for large inequalities.
    • Excessive bureaucracy and lack of flexibility.
    • Reduced individual choice.
    • Tendency for inefficiency

2. Market Economies

  • Definition: Supply and demand determine resource allocation.
  • Key Feature: Businesses produce goods and services to meet consumer demand.
  • How it Works:
    • Market-Clearing Price: Price at which supply and demand are balanced.
    • Oversupply: Prices fall, some producers leave.
    • Undersupply: Prices rise, new producers enter.
    • Markets exist for goods, services, capital, labor (wages), and money (interest rates).
  • Competition:
    • Businesses compete for customers.
    • Individuals compete for jobs.
    • Scarce resources command high prices.
    • Unsuccessful businesses may fail and those with limited skills may need to seek alternative career paths.

3. Mixed Economies

  • Definition: Combination of market economy with some state control.
  • Key Feature: Governments provide welfare and essential services.
  • Government Role:
    • Provides a safety net for vulnerable people.
    • Funds areas like defence, education, healthcare, transport, and police.
  • Government Funding:
    • Direct taxes (from wages and companies).
    • Indirect taxes (sales tax, fuel, alcohol, etc.).
    • Borrowing in capital markets.

4. Open Economies

  • Definition: Few barriers to trade or controls over foreign exchange.
  • Key Feature: Encourages free trade with other countries.
  • Trade Tensions:
    • Disputes arise when countries believe others have unfair trade policies.
    • Retaliatory actions may include sanctions and tariffs.
    • Protectionism: When a country prevents free trade to protect its domestic market.
  • Role of WTO:
    • World Trade Organization promotes free trade between economies.
    • Arbitrates trade disputes.
  • Trade Agreements:
    • Many regional and bilateral trade agreements go beyond WTO commitments to increase trade and boost economic growth.

In Summary

A country's economic success is determined by a combination of factors influencing production and demand. The economic system adopted dictates how resources are used and can range from state-controlled to market-driven. Most economies operate as a mix of both, and international trade plays an important role. Open economies promote free trade, with bodies like the WTO resolving disputes and promoting economic growth.

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