Ch. 19
The American Economy
Section 1
Economic Resources
Goods and Services
► Goods: Tangible products; you can touch.
Ex. Books and automobiles
► Services: Work performed for someone else.
Ex. Hair stylist, mechanic, masseuse
► For
any goods or services to be provided to the
public, 4 Factors of Production must be present
and necessary.
Factors of Production
► Natural
Resources: All the gifts of nature
that make production possible. Ex. land, rain,
forest, minerals
► Labor: The nation’s workforce or human
resource. It includes the physical and mental
talents of the people who help produce goods and
services
growth, education, and war can affect
quantity and quality of labor
► population
Factors of Production (cont.)
►Capital: Money used to start a business or
Tools, buildings, and machinery used to help
workers change resources into finished
products.
► Capital goods aid in the production of
Consumer goods (things we enjoy directly).
► Ex. Hammer used to build a house or oven
used to bake a pizza.
Factors of Production (cont.)
► Entrepreneurs: Individuals who start new businesses;
innovators. The Managers. They are the driving force. Help
the economy by creating jobs. Willing to take the risks.
Measuring the Economy
► Economists
are always trying to measure the
economy to see how it is doing.
► GDP:
Gross Domestic Product: is the
value of all goods and services produced in a
country in a single year.
► Final goods are goods sold to their users. Ex.
Loaf of bread
► There
are limitations to GDP…
GDP
► GDP
does not count:
 Intermediate goods or components of a final
good. Ex. Milk or eggs within the loaf of bread
 Sale of used goods. Not new production;
counted in a previous year.
*GDP is always expressed in terms of money.
This helps us to compare the relative worth of
goods and services.
GDP
►
To compute GDP, first…
 Identify all goods and services produced and
their average prices
 Multiply the # produced of each item by its
average price
 Add everything
•
If the new GDP is higher than the previous
one, the economy is expanding; If it is lower,
the economy is declining.
Standard of Living
► GDP
is an important indicator of…
► standard of living or the quality of ones
life based on the possession of necessities
and luxuries that make life easier.
► When
GDP grows faster than a nation’s
population, there are more goods and
services on average for us to enjoy.
Quantity vs Quality
►A
shortcoming of GDP is that it does not
account for improvement of product quality
from one year to the next.
► Sheer
number is all GDP tracks, not if it’s a
quality product.
► GDP
also does not take into account a
societies overall well-being.
Section 2
Economic Activity and Productivity
►A
Market is a location or other situation that
allows buyers and sellers to exchange certain
economic products.
► Markets
can be:
local
regional
national
global
4 Economic Sectors of the Economy
►
1.
2.
3.
4.
►
Economic decision makers are the
Consumer sector
Business sector
Government sector
Foreign sector
A circular flow of activity—resources, goods and
services, and money—take place among these
groups.
Consumer Sector
► Consumers
earn their income in factor
markets—where productive resources are
bought and sold.
► Workers
sell their labor for income
► People who own land and capital
(machinery) loan it in return for rent.
Consumer Sector (cont.)
► People
spend their income in product
markets—where producers offer goods and
services for sale.
Business Sector
► Businesses
receive payments for their products
from the consumers in the product markets.
► Businesses
spend this income in the factor
markets on natural resources, labor, and capital.
► Businesses
also purchase capital goods in the
product market to use in production.
Government Sector
► Government
buys inputs in the factor market to
use in creating its own goods and services.
► Unlike
business which receives revenue from
selling its products, Government receives the
majority of it revenue from taxation
► Government
uses its revenue to buy final goods
and services in the product markets
Foreign Sector
► Foreign
world.
sector includes all the countries in the
► The
United States exports and imports goods to
other countries
► The
value of the goods and services the U.S. buys
from and sells to other countries often tend to
offset one another.
► Foreign
sector only makes up 4% of U.S. GDP.
Productivity and Economic Growth
► When
a nation’s total output increases over time,
the economy grows; the circular flow of activity
becomes larger among the 4 sectors.
► The
goal of all economies is slow growth; fast
growth causes inflation.
► Inflation:
when prices grow faster than wages
Productivity and Economic Growth
(cont.)
► For
businesses to grow they must be productive
► Productivity: a measure of the amount of output
produced by a given amount of inputs in a specific
period of time; Using your resources
efficiently
► As
productivity goes up profits go up.
Productivity and Economic Growth
(cont.)
3 Principals that effect productivity:
1. Specialization
People, businesses, and countries concentrate on
the goods or services they can produce better
than anyone else
►
We specialize because we earn more by doing
the things we do well
► Its more efficient to specialize in one thing,
rather than doing everything for ourselves.
►
Productivity and Economic Growth
(cont.)
2.
Division of Labor
The breaking down of a job into separate,
smaller tasks performed by different workers.
►
It is a form of specialization in that you make
use of people’s differences in skill.
Productivity and Economic Growth
(cont.)
3.
Human Capital
The sum of all the skills, abilities, and motivation
of people.
►
When businesses invest their money in things
like


Employee training
Health care insurance
Worker Productivity tends to increase
Productivity and Economic Growth
(cont.)
► Because
of specialization, the American economy
displays a high degree of economic
interdependence
► we rely on others and they rely on us to provide a
variety of goods and services
► Events
in one region of the world can essentially
effect other parts of the world economically.
Section 3
Capitalism and Free Enterprise
► Our
economy is based on the principals of
capitalism and free enterprise.
► Capitalism
– an economic system in which
private citizens own and use the factors of
production to seek a profit.
► Free
Enterprise – an economy in which
competition is allowed to flourish with a minimum
of government interference
What Makes Capitalism Work?
1.
Markets/Consumer Sovereignty
Businesses try to produce what the people want;
because of this the consumer “rules” the market.
Demand determines what will be produced
2.
Economic Freedom
We have the right to choose our occupation, what we
want to buy. Businesses choose what they will produce
and sell.
Both consumer and entrepreneur have to deal
with the consequences of their choices
►
What Makes Capitalism Work?
(cont.)
3.
Private Property Rights
We are free to own, use, and dispose of
our own property as we wish as long as
we do not interfere with the rights of
others.
It gives us the incentive to work, save, and
invest our money if we know that we can
have the right to own.
What Makes Capitalism Work?
(cont.)
4.
Competition
The struggle between buyers and sellers to get
the best products at the lowest prices.
Between sellers – reduces production costs and
increases product quality (win-win for the
consumer)
Competition rewards efficient producers and
forces the least efficient out of business.
What Makes Capitalism Work?
(cont.)
5.
Profit Motive
Any money left over after all costs of production
have been paid is known as profit.
It’s the driving force behind free enterprise and
capitalism
We are willing to invest in business ventures and
risk losing it all for the chance to earn a profit.
What Makes Capitalism Work?
(cont.)
6.
Voluntary Exchange
The act of buyers and sellers freely and willingly
engaging in market transactions.
Who benefits from a transaction??
Buyer or Seller?
Its both or the exchange would not have
happened in the first place; Both sides must feel
like they benefit or what is the point of doing it.
The History of Capitalism
► Wealth
of Nations, (1776) written by Adam Smith,
Scottish economist and philosopher.
► Described
the basic principles of economics for the
first time; believed that individuals, if left alone to
make profit, end up benefiting society as a whole.
► People
left to their own self-interest would be
guided by an “invisible hand” to use resources
more efficiently.
The History of Capitalism (cont.)
►
From Smith and others came the idea of laissez faire,
which means “to let alone”
►
This philosophy dictates that government should not
interfere in the market place.
►
The role of the government is to ensure free competition
►
The founders of this country were greatly influenced by
Adam Smith’s book.