An Overview of Major Economic Powers of the World Video

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  • 0:01 What Kind of…
  • 0:55 Capitalism & Socialism
  • 2:50 Five Largest Economies…
  • 5:02 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

There are 196 countries in the world, meaning there are nearly as many economic systems. While the narrative is often 'capitalism or socialism,' in this lesson we'll learn about how many of the world's largest countries are really somewhere in the middle.

What Kind of Differences Are There?

If someone were to ask, 'What is the economic system of the United States?' most, if not all, people would say 'capitalism,' and for the most part, they would be right. But that question is much more complex than any single word could answer. The same would be true if the same question was asked about Cuba or China; the initial answer would be 'socialism,' but that easy answer doesn't even begin to tell the whole story.

What about France or Italy or Germany? What type of economic system do they each have? How does their involvement in the European Union (E.U.), a political/economic union of 28 member countries, impact their own economy? As we start talking about specific countries and their respective economic systems, remember the fundamental question that economics seek to answer: 'What is the most efficient way to allocate scarce resources?'

The Extremes - Capitalism and Socialism

Some countries can be used as fairly strict examples of the two ends of the economic spectrum. For example, in the United States, capitalism is the name of the game. In a capitalist economy scarce resources are allocated by the free market, or what Adam Smith would call the 'invisible hand.' Essentially, scarce resources are allocated to the highest bidder. Think of living space in New York City - there are more people that want it than the market can provide, so prices go up. If you have the money, you get the resource (apartment), and if you don't, you don't. Regulations may exist, but for the most part, the producers set their prices and consumers decide what to buy.

On the flip side, pre-1989, East Germany and China are examples of socialism, sometimes confused with communism. Socialism is an economic system, while communism is a political system. They obviously interact, but it's an important distinction. In a socialist economy, the government allocates resources through regulation. This may be done by actually managing certain resources, such as nationalized airlines, health care systems, and even manufacturing sectors. Or, it can be done by allocating resources to private companies, such as giving land grants or charters to operate in certain geographic areas. Of course, depending on the sector and country, a combination of these two systems can be combined.

Five Largest Economies in the World

Before we show you, take a guess: what do you think the five largest economies, measured as per country gross domestic product (GDP), were in 2014? GDP is the market value of all goods and products produced in that country over a given time period. For the sake of this exercise, don't count the E.U. as one economy - each member country stands on its own. Have you made your guesses? Let's reveal the five largest economies in the world as measured by GDP in 2014.

Coming in at number five, just beating U.K. by about a half-trillion dollars, is France, with a GDP of $2.9 trillion. A full $900 billion ahead of France, with a GDP of $3.8 trillion, coming in at number four, is Germany. Add another $900 billion to Germany's economy and we get our number three: Japan, with a GDP of $4.7 trillion.

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