Chapter 19:
The American
Economy
Goods and Services
• Goods are tangible products we use to satisfy our wants and
needs, they include items such as books and automobiles;
services include work performed for someone else such as
haircuts, home repairs, and entertainment
Factors of
Production
• 1. Natural Resources= “gifts of nature” that make
production possible; include land, water, fish, animals,
forests and minerals
Factors of
Production
• 2. Labor= human resources, workers
Factors of
Production
• 3. Capital= manufactured goods used to make
other goods and services; machines, buildings, tools
• -Consumer goods= directly satisfy wants (clothes,
shoes, etc.)
• -Capital goods= aid in production of consumer
goods
Factors of
Production
• 4. Entrepreneur= an individual who starts a new business,
introduces new products, and improves processes
Henry Ford- Founder of the Ford Motor Company
Gross Domestic
Product
• Gross Domestic Product is the
total value, in dollars, of all the
final goods and services
produced in a country during a
single year
• A final good is a good sold to its
user, the intermediate goods that
go into making it are not
counted in GDP, and the sale of
used goods is not counted in
GDP
Gross Domestic
Product
• To calculate GDP of an economy multiply the price of each
good by the quantity produced and then add the amounts
• Country A makes 10 bicycles at $200 each
• $2,000
• Country A makes 10 computers at $1,500 each
• $15,000
• Country A makes 10 watches at $100 each
• $1,000
• What is the GDP of Country A?
• $18,000
Gross Domestic
Product
• GDP is an important indicator of standard of living, the
quality of life based on the possession of necessities and
luxuries that make life easier
Gross Domestic
Product
• GDP measures quantity, it does not reflect
improvements in the quality of products;
economists must account for quality improvement
• The loss of value because of wear and tear to
durable goods, such as automobiles is called
depreciation; GDP does not take this into account
Gross Domestic
Product
• Net Domestic Product (NDP) accounts for depreciation; it
takes GDP and subtracts the total loss in value of capital
goods caused by depreciation
GDP- Gross Domestic Product
–
Depreciation
______________________
NDP- Net Domestic Product
Economic Sectors and
Circular Flow
• A market is the free exchange of goods and services between
buyers and sellers; they may be local, regional, national, or
global
• In a market system, the flow of resources, goods and
services, and money is circular; this represents economic
decision making in the market
Economic Sectors and
Circular Flow
• 1. The Consumer Sector= consumers earn income in factor
markets, the markets where productive resources are
bought and sold; workers earn wages, salaries, and tips in
exchange for their labor
Economic Sectors and
Circular Flow
• 2. The Business Sector= individuals spend income in
product markets where producers offer goods and services
for sale
Economic Sectors and
Circular Flow
• 3. The Government Sector= made up of all three levels of
government-federal, state, and local; government receives
revenue from services it sells and uses it to purchase goods
and services in the product markets
Economic Sectors and
Circular Flow
• 4. The Foreign Sector= represents all countries in the
world; we buy and sell products there
Promoting
Economic Growth
• Economic growth occurs when a nation’s total output of
goods and services increases over time; growth is a way to
tell if our economy is healthy
Promoting
Economic Growth
• Productivity is a measure of the amount of output produced
by a given level of inputs in a specific period of time
Promoting
Economic Growth
• Specialization takes place when people, businesses, regions,
or countries concentrate on goods or services they produce
better than anyone else
Promoting
Economic Growth
• Division of Labor is breaking down a job into small tasks
performed by different workers (ex. Assembly Line)
Promoting
Economic Growth
• Productivity increases when businesses invest in human
capital, the sum of people’s skills, abilities, and motivation
Promoting
Economic Growth
• Our economy displays a strong degree of economic
interdependence, we rely on others, and others rely on us, to
provide goods and services
Capitalism
• The economy of the US is known as capitalism, an
economic system in which private citizens own and use the
factors of production to seek a profit
• In a free enterprise economy, competition is allowed to
flourish with a minimum of government interference
What Makes
Capitalism Work?
1.
Markets
2.
Economic Freedom
3.
Private Property Rights= the freedom to own and use our
property as we choose as long as we do not interfere with
the rights of others
4.
Competition= the struggle between buyers and sellers to
get the best products at the lowest prices; keeps prices low
and quality high
5.
Profit Motive= the possibility of financial gain leads
many to take risks in hopes of earning a profit, the
amount of money left over after costs have been paid
6.
Voluntary Exchange= the act of buyers and sellers freely
engaging in market transactions
History of Capitalism
• In 1776, Adam Smith, a Scottish philosopher and
economist wrote The Wealth of Nations which described
economic principles for the first time
History of Capitalism
• From the writings of Smith came the idea of laissez-faire
economics, government should not interfere in the
marketplace; government ensures free competition