and the rich. For a comparison of capitalism and social-
ism, read the Analyzing Key Concepts on page 737.
COMMUNISM
An economic system based on one-party rule,
government ownership of the means of production,
and decision making by centralized authorities.
Under communism there is little or no private owner-
ship of property and little or no political freedom.
Government planners make economic decisions, such as
which and how many goods and services should be pro-
duced. Individuals have little say in a communist econo-
my. Such a system, Communists believe, would end
inequality. For more information on the ideas on which
communism is based, read Chapter 25, Section 4.
During the 20th century, most communist
economies failed to achieve their goals. Economic
decisions frequently were made to benefit only
Communist Party officials. Also, government econom-
ic planning was inefficient, often creating shortages of
goods. Those goods that were available were often of
poor quality.
People became discontented with the lack of pros-
perity and political freedom and began to call for
change. These demands led in the late 1980s and early
1990s to the collapse of communist governments in the
Soviet Union and Eastern Europe.
Even governments that clung to communism—China,
for example—have introduced elements of free enter-
prise.The picture above shows people lining up at
automated teller machines (ATMs) in Shanghai, one of
China’s largest free-enterprise zones. (For information
on free enterprise in Shanghai, read the Connect to
Today on page 806.) While China has allowed greater
economic freedom for its citizens, it has not given
them more political freedom.CONSUMER PRICE INDEX (CPI)
A measure of the change in cost of the goods and ser-
vices most commonly bought by consumers. In some
countries, the CPI is called the retail price index.
The CPI is calculated by surveying the prices of a
“basket” of goods and services bought by typical con-
sumers. In Germany, the CPI follows the prices of
more than 750 goods and services bought by average
consumers on a regular basis. Items on which con-
sumers spend a good deal of their income, such as
food, are given more weight in the CPI than items on
which consumers spend less.
Price changes are calculated by comparing current
prices with prices at a set time in the past. In 2003, for
example, the German CPI used the year 2000 as this
base. Prices for this year are given a base value of 100.
The prices for subsequent years are expressed as per-
centages of the base. Therefore, a CPI of 103 means
that prices have risen by 3 percent since 2000. The
graph below illustrates changes in the German CPI
from 1992 to 2002.CORPORATION
A company owned by stockholders who have owner-
ship rights to the company’s profits.
Stockholders are issued stock, or shares of ownership in
the corporation. A corporation sells stock to raise money
to do business. Stockholders buy stock in the hope that
the corporation will turn a profit. When a corporation
does make a profit, stockholders often receive a divi-
dend, a share of the corporation’s income after taxes.808590951001051992 1994 1996 1998 2000 2002CPI(2000=100)Consumer Price Index
in Germany, 1992–2002Source: Federal Statistical Office GermanyECONOMICSHANDBOOKR65