Economic Resources

Economic Systems-nations have different economic systems

Four Basic Questions-every nation’s economic system must

answer four basic questions which are answered according to the view of how to best satisfy the needs and wants of its people

1. What goods and services and how much of each should be produced?

-businesses determine the most efficient mix of the factors of production

-for each good and service produced, there is always a trade-off -prices affect decisions about how much

to produce2. Who should produce them? -the type of economic system determine

who will produce -choice of careers

3. How should they be produced? -decision of what available resources

should be combined to get the job done at the least cost

4. Who should share in their use? -distribution of income among all

members of an economic system

Types of Economic Systems-society’s values and goals determine the

type of system -economic systems described as pure or

ideal types (economic models); not examples of real world

1. Traditional System Answers the four basic questions

according to tradition -things are done as they have always been Decisions based on customs, beliefs (often

religious), and handed down from generation to generation

Examples: very limited parts of Asia, Africa, Latin America and the Middle East

2. Command or Controlled System Individual has little influence over the

answers of the four basic questions Government makes all decisions on the

factors of production -choose how resources will be used at

each stage of production, decide, how goods and services will be distributed, decide who will do what (guides certain people into certain jobs)

3. Market or Capitalist System -opposite of command system-government does not intervene-factors of production are owned by

individuals and they decide the answers to the four questions

-economic decisions are made through free interaction of individuals looking out for their own best interest

-buyers and sellers choose with whom to do business with (may be neighborhood to worldwide)

4. Mixed Economic System-contains characteristics of a command and

pure market economy-almost all economic systems are mixed -the mix will vary so that one system

leans more towards one type than another

-the United States tends to be more toward the market system

Producing goods and servicesThe output or amount produced is in the

form of goods (tangible products like computers and fingernail polish) and services (work that is performed by one for another like a manicure or a haircut)

Factors of ProductionResources necessary to produce goods

and services1. Natural resources The gifts of nature that are used to make

products Before a product is transformed into

something else Examples: fertile soil, rainfall, minerals,

forests, etc.

2. Labor Nation’s labor force or human resource Refers to both physical and mental

efforts that people contribute to the production of goods and services

A resource that can vary in size depending on factors such as population growth, immigration, education, disease, and war

Examples: teachers, construction contractors, etc.

T a relative worth

3. Capital Also called capital goods Anything used to make other products Capital goods are unique in the fact that

they are a result of production (someone has to actually make it; it can not be found in nature)

Examples: tools, machinery, buildings Consumer goods satisfy wants directly Examples: computers, cars, foods, etc. Capital goods satisfy wants indirctly by

producing consumer goods

4. Entrepreneur Individuals who start new businesses,

introduce new products, and improve management techniques

Involves being innovative and taking risks in order to profit

Often thought of as the driving force of the American economy because they use the factors of production to create new products

The measure of economic success by the amount of their income and their ability to provide for themselves and their family

Gross Domestic ProductAlso called GDPThe total value in dollars of all the final goods

and services produced in a country in a single year

A final good is the good that is sold to the consumer; intermediate goods are the goods that go into making the final good

Example: final good- car intermediate good- steel

The intermediate goods are not calculated in the GDP- only the final goods and services are calculated by economists

If they counted both intermediate and final goods, they would be double counting or counting a good more than once

Secondhand sales are not counted as part of GDP because no new production is created: Example: the selling and buying of a used car between two people

Measuring GDPA monetary measure used to compare the number of

goods and services produced to get the relative worth

To compute GDP:1. Multiply the number of items produced by the

average price of the item 2. Add the multiple items togetherExample: 2,000 cars sold at average $35,0005,000 trucks sold at average $55,0003,500 SUVs sold at average $42,000GDP: Cars $70,000,000 + Trucks $275,000,000 +

$147,000,000GDP = $492,000,000

If the GDP is higher than in the previous year, then the economy is expanding

If the GDP is lower than the previous year, then the economy is declining

Economists use GDP figures to analyze business cycle patterns

GDP is an important measure of the standard of living

-whenever GDP grows faster than the population, there are more goods and services, on average, for each of us to use

GDP is a reasonable accurate and useful measure of economic performance, but not a measure of society’s overall well-being

Quantity vs QualityGDP measures quantity not quality GDP does not accurately reflect

improvements in the quality of productsExample: A car purchased today at

$45,000 is not the same as a car costing the same amount 5 years ago- the car purchased 5 years ago at the same cost was probably better