Ch. 19 Ch. 19 The American EconomyThe American Economy

Section 1Section 1

Economic ResourcesEconomic Resources

Goods and ServicesGoods and Services

►Goods:Goods: Tangible products; you can touch. Tangible products; you can touch. Ex. Books and automobilesEx. Books and automobiles

►Services:Services: Work performed for someone Work performed for someone else. else. Ex. Hair stylist, mechanic, masseuseEx. Hair stylist, mechanic, masseuse

► For any goods or services to be provided to For any goods or services to be provided to the public, the public, 4 Factors of Production4 Factors of Production must must be present and necessary.be present and necessary.

Factors of ProductionFactors of Production

►Natural Resources: Natural Resources: All theAll the gifts of gifts of nature that make production possible. Ex. nature that make production possible. Ex. land, rain, forest, mineralsland, rain, forest, minerals

►Labor:Labor: The nation’s workforce or human The nation’s workforce or human resource. It includes the physical and resource. It includes the physical and mental talents of the people who help mental talents of the people who help produce goods and servicesproduce goods and services

► population growthpopulation growth, , education, and war can education, and war can affect quantity and quality of laboraffect quantity and quality of labor

Factors of Production (cont.)Factors of Production (cont.)

►Capital: Capital: Money used to start a business Money used to start a business or Tools, buildings, and machinery used or Tools, buildings, and machinery used to help workers change resources into to help workers change resources into finished products.finished products.

►Capital goods aid in the production of Capital goods aid in the production of Consumer goods (things we enjoy Consumer goods (things we enjoy directly).directly).

►Ex. Hammer used to build a house or Ex. Hammer used to build a house or oven used to bake a pizza.oven used to bake a pizza.

Factors of Production (cont.)Factors of Production (cont.)

► Entrepreneurs:Entrepreneurs: Individuals who start new Individuals who start new businesses; innovators. The Managers. They are the businesses; innovators. The Managers. They are the driving force. Help the economy by creating jobs. driving force. Help the economy by creating jobs. Willing to take the risks.Willing to take the risks.

Measuring the EconomyMeasuring the Economy

► Economists are always trying to measure Economists are always trying to measure the economy to see how it is doing.the economy to see how it is doing.

►GDP:GDP: Gross Domestic Product: Gross Domestic Product: is is the value of all goods and services produced the value of all goods and services produced in a country in a single year.in a country in a single year.

► Final goods are goods sold to their users. Final goods are goods sold to their users. Ex. Loaf of breadEx. Loaf of bread

► There are limitations to GDP…There are limitations to GDP…

GDP GDP

►GDP does not count:GDP does not count: Intermediate goods or components of a Intermediate goods or components of a

final good. Ex. Milk or eggs within the final good. Ex. Milk or eggs within the loaf of breadloaf of bread

Sale of used goods. Not new production; Sale of used goods. Not new production; counted in a previous year.counted in a previous year.

*GDP is always expressed in terms of *GDP is always expressed in terms of money. This helps us to compare the money. This helps us to compare the relative worth of goods and services.relative worth of goods and services.

GDPGDP

► To compute GDP, first…To compute GDP, first… Identify all goods and services produced Identify all goods and services produced

and their average pricesand their average prices Multiply the # produced of each item by Multiply the # produced of each item by

its average priceits average price Add everythingAdd everything

• If the new GDP is higher than the If the new GDP is higher than the previous one, the economy is expanding; previous one, the economy is expanding; If it is lower, the economy is declining.If it is lower, the economy is declining.

Standard of LivingStandard of Living

►GDP is an important indicator of… GDP is an important indicator of… ►standard of livingstandard of living or the quality of or the quality of

ones life based on the possession of ones life based on the possession of necessities and luxuries that make life necessities and luxuries that make life easier.easier.

►When GDP grows faster than a nation’s When GDP grows faster than a nation’s population, there are more goods and population, there are more goods and services on average for us to enjoy.services on average for us to enjoy.

Quantity vs QualityQuantity vs Quality

►A shortcoming of GDP is that it does not A shortcoming of GDP is that it does not account for improvement of product account for improvement of product quality from one year to the next.quality from one year to the next.

►Sheer number is all GDP tracks, not if Sheer number is all GDP tracks, not if it’s a quality product.it’s a quality product.

►GDP also does not take into account a GDP also does not take into account a societies overall well-being.societies overall well-being.

Section 2 Section 2 Economic Activity and Economic Activity and

ProductivityProductivity► A A Market Market is a location or other situation is a location or other situation

that allows buyers and sellers to exchange that allows buyers and sellers to exchange certain economic products.certain economic products.

►Markets can be:Markets can be:

locallocal

regionalregional

nationalnational

globalglobal

4 Economic Sectors of the 4 Economic Sectors of the EconomyEconomy

► Economic decision makers are the Economic decision makers are the

1.1. Consumer sectorConsumer sector

2.2. Business sectorBusiness sector

3.3. Government sectorGovernment sector

4.4. Foreign sectorForeign sector

► A circular flow of activity—resources, A circular flow of activity—resources, goods and services, and money—take goods and services, and money—take place among these groups.place among these groups.

Consumer SectorConsumer Sector

►Consumers earn their income in Consumers earn their income in factor marketsfactor markets—where productive —where productive resources are bought and sold.resources are bought and sold.

►Workers sell their labor for incomeWorkers sell their labor for income►People who own land and capital People who own land and capital

(machinery) loan it in return for rent.(machinery) loan it in return for rent.

Consumer Sector (cont.)Consumer Sector (cont.)

►People spend their income in People spend their income in product product marketsmarkets—where producers offer —where producers offer goods and services for sale.goods and services for sale.

Business SectorBusiness Sector

► Businesses receive payments for their Businesses receive payments for their products from the consumers in the products from the consumers in the product product markets.markets.

► Businesses spend this income in the factor Businesses spend this income in the factor markets on natural resources, labor, and markets on natural resources, labor, and capital.capital.

► Businesses also purchase capital goods in the Businesses also purchase capital goods in the product market to use in production.product market to use in production.

Government SectorGovernment Sector

►Government buys inputs in the factor market Government buys inputs in the factor market to use in creating its own goods and to use in creating its own goods and services.services.

► Unlike business which receives revenue from Unlike business which receives revenue from selling its products, Government receives selling its products, Government receives the majority of it revenue from taxationthe majority of it revenue from taxation

►Government uses its revenue to buy final Government uses its revenue to buy final goods and services in the product marketsgoods and services in the product markets

Foreign SectorForeign Sector

► Foreign sector includes all the countries in Foreign sector includes all the countries in the world.the world.

► The United States exports and imports goods The United States exports and imports goods to other countriesto other countries

► The value of the goods and services the U.S. The value of the goods and services the U.S. buys from and sells to other countries often buys from and sells to other countries often tend to offset one another.tend to offset one another.

► Foreign sector only makes up 4% of U.S. GDP.Foreign sector only makes up 4% of U.S. GDP.

Productivity and Economic Productivity and Economic GrowthGrowth

►When a nation’s total output increases over When a nation’s total output increases over time, the economy grows; the circular flow of time, the economy grows; the circular flow of activity becomes larger among the 4 sectors.activity becomes larger among the 4 sectors.

► The goal of all economies is slow growth; fast The goal of all economies is slow growth; fast growth causes inflation.growth causes inflation.

► Inflation: Inflation: when prices grow faster than when prices grow faster than wageswages

Productivity and Economic Productivity and Economic Growth (cont.)Growth (cont.)

► For businesses to grow they must be For businesses to grow they must be productive productive

► Productivity:Productivity: a measure of the amount of a measure of the amount of output produced by a given amount of output produced by a given amount of inputs in a specific period of time; inputs in a specific period of time; Using Using your resources efficientlyyour resources efficiently

►As productivity goes up profits go up.As productivity goes up profits go up.

Productivity and Economic Productivity and Economic Growth (cont.)Growth (cont.)

► 3 Principals that effect productivity:3 Principals that effect productivity:1.1. SpecializationSpecialization

People, businesses, and countries People, businesses, and countries concentrateconcentrate on the goods or services they on the goods or services they can produce better than anyone elsecan produce better than anyone else

► We specialize because we earn more by We specialize because we earn more by doing the things we do welldoing the things we do well

► Its more efficient to specialize in one thing, Its more efficient to specialize in one thing, rather than doing everything for ourselves.rather than doing everything for ourselves.

Productivity and Economic Productivity and Economic Growth (cont.)Growth (cont.)

2.2. Division of LaborDivision of Labor

The breaking down of a job into separate, The breaking down of a job into separate, smaller tasks performed by different smaller tasks performed by different workers.workers.

► It is a form of specialization in that you It is a form of specialization in that you make use of people’s differences in skill.make use of people’s differences in skill.

Productivity and Economic Productivity and Economic Growth (cont.)Growth (cont.)

3.3. Human CapitalHuman Capital

The sum of all the skills, abilities, and The sum of all the skills, abilities, and motivation of people.motivation of people.

► When businesses invest their money in When businesses invest their money in things likethings like

Employee trainingEmployee training Health care insuranceHealth care insurance

Worker Productivity tends to increaseWorker Productivity tends to increase

Productivity and Economic Productivity and Economic Growth (cont.)Growth (cont.)

► Because of specialization, the American Because of specialization, the American economy displays a high degree of economy displays a high degree of economic interdependenceeconomic interdependence

►we rely on others and they rely on us to we rely on others and they rely on us to provide a variety of goods and servicesprovide a variety of goods and services

► Events in one region of the world can Events in one region of the world can essentially effect other parts of the world essentially effect other parts of the world economically.economically.

Section 3Section 3Capitalism and Free EnterpriseCapitalism and Free Enterprise

►Our economy is based on the principals of Our economy is based on the principals of capitalism and free enterprise.capitalism and free enterprise.

►Capitalism – Capitalism – an economic system in an economic system in which private citizens own and use the which private citizens own and use the factors of production to seek a profit.factors of production to seek a profit.

►Free Enterprise – Free Enterprise – an economy in which an economy in which competition is allowed to flourish with a competition is allowed to flourish with a minimum of government interferenceminimum of government interference

What Makes Capitalism What Makes Capitalism Work?Work?

1.1. Markets/Consumer SovereigntyMarkets/Consumer Sovereignty

Businesses try to produce what the people want; Businesses try to produce what the people want; because of this the consumer “rules” the market. because of this the consumer “rules” the market. Demand determines what will be producedDemand determines what will be produced

2.2. Economic FreedomEconomic Freedom

We have the right to choose our occupation, what We have the right to choose our occupation, what we want to buy. Businesses choose what they will we want to buy. Businesses choose what they will produce and sell.produce and sell.

► Both consumer and entrepreneur have to Both consumer and entrepreneur have to deal with the consequences of their choicesdeal with the consequences of their choices

What Makes Capitalism Work? What Makes Capitalism Work? (cont.)(cont.)

3.3. Private Property RightsPrivate Property RightsWe are free to own, use, and dispose We are free to own, use, and dispose of our own property as we wish as long of our own property as we wish as long as we do not interfere with the rights as we do not interfere with the rights of others. of others.

It gives us the incentive to work, save, It gives us the incentive to work, save, and invest our money if we know that and invest our money if we know that we can have the right to own.we can have the right to own.

What Makes Capitalism Work? What Makes Capitalism Work? (cont.)(cont.)

4.4. CompetitionCompetitionThe struggle between buyers and sellers to The struggle between buyers and sellers to get the best products at the lowest prices.get the best products at the lowest prices.

Between sellers – reduces production costs Between sellers – reduces production costs and increases product quality (win-win for and increases product quality (win-win for the consumer) the consumer)

Competition rewards efficient producers and Competition rewards efficient producers and forces the least efficient out of business.forces the least efficient out of business.

What Makes Capitalism Work? What Makes Capitalism Work? (cont.)(cont.)

5.5. Profit MotiveProfit Motive

Any money left over after all costs of Any money left over after all costs of production have been paid is known as production have been paid is known as profit.profit.

It’s the driving force behind free enterprise It’s the driving force behind free enterprise and capitalismand capitalism

We are willing to invest in business ventures We are willing to invest in business ventures and risk losing it all for the chance to earn a and risk losing it all for the chance to earn a profit.profit.

What Makes Capitalism Work? What Makes Capitalism Work? (cont.)(cont.)

6.6. Voluntary ExchangeVoluntary ExchangeThe act of buyers and sellers freely and The act of buyers and sellers freely and willingly engaging in market transactions.willingly engaging in market transactions.

Who benefits from a transaction?? Who benefits from a transaction?? Buyer or Seller?Buyer or Seller?

Its both or the exchange would not have Its both or the exchange would not have happened in the first place; Both sides must happened in the first place; Both sides must feel like they benefit or what is the point of feel like they benefit or what is the point of doing it.doing it.

The History of CapitalismThe History of Capitalism

►Wealth of Nations, Wealth of Nations, (1776) written by Adam (1776) written by Adam Smith, Scottish economist and philosopher.Smith, Scottish economist and philosopher.

►Described the basic principles of economics Described the basic principles of economics for the first time; believed that individuals, if for the first time; believed that individuals, if left alone to make profit, end up benefiting left alone to make profit, end up benefiting society as a whole.society as a whole.

► People left to their own self-interest would People left to their own self-interest would be guided by an “invisible hand” to use be guided by an “invisible hand” to use resources more efficiently.resources more efficiently.

The History of Capitalism The History of Capitalism (cont.)(cont.)

► From Smith and others came the idea of From Smith and others came the idea of laissez laissez faire, faire, which means “to let alone”which means “to let alone”

► This philosophy dictates that government should This philosophy dictates that government should not interfere in the market place.not interfere in the market place.

► The role of the government is to ensure free The role of the government is to ensure free competitioncompetition

► The founders of this country were greatly The founders of this country were greatly influenced by Adam Smith’s book.influenced by Adam Smith’s book.