Define: Operates by traditional ways, customs, religion, and beliefs Example: Developing Nations (Third World Nations) - African Nations & Native Americans Advantages:- Keeps tradition and culture alive. - Family Run Disadvantages: - Not able to mass produce in a short period of time. - Not “wealthy” by Western standards
Define: Operates by voluntary exchange in a free market and there is no governmental control. Example: Capitalism. USA is closest thing to a Market Economy Advantages- Encourages private ownership - People can become VERY wealthy Disadvantages: Wealth is NOT distributed equally.
Define: Operates under strict government control, the economy is ENTIRELY controlled by the government Examples: Former Soviet Union, China & Cuba Advantages: ( IN THEORY) Wealth is distributed equally. Everyone is taken care of, no poverty No competition Disadvantages: Everyone is treated equally regardless of work, work ethics, or education.
Define: Most modern economies: Market based with little government intervention Operates by mixing private ownership and public ownership Example: Most Economies*, Socialism Germany, France, United States & Canada Advantages: Government rules and regulations ensures businesses will not get out of control and are held accountable Disadvantages: Governmental rules limits the individuals free reign over their business
Adam Smith: Wealth of Nations Laissez Faire: “hands off” Invisible Hand: The economy will regulate itself
Karl Marx: Communist Manifesto & Das Kapital Constant struggle between workers & owners Workers add value to goods but do not receive the profits against market economies
John Maynard Keynes (Keynesian Theory) The General Theory of Employment, Interest and Money Aggressive Fiscal Policy Written after the Depression Cut Taxes while increasing government spending This will increase deficit spending Gov’t spending more than it is taking in
In the United States mixed economymixed economy Three sectors, or elements, that interact: ◦ Households ◦ Businesses ◦ Government Economists use the CFM to explain the interaction among these three sectors. Each sector of the economy contributes to another.
Household & Firms – Factor Market 1.Where firms purchase or rent land 2.Firms hire workers & pay salaries for labor 3.Borrow money from households to purchase capital households interest or profits in return. Product Market 1.Households purchase products made by firms
Government in the Factor Market 1. Government purchases land, labor, & capital from households 2. Government collect taxes from firms. Government in the Product Market 1. Government purchases goods & services = building, telephones, computers, fax machines 2. Government provides goods & services = roads 3. Government collect taxes from households
Gross Domestic Product (GDP): The total market value($ value) of all the goods & services produced within the borders of a nation during a specified period. Usually reported on an annual basis ◦ Per Capita GDP: A nations GDP divided by its population Consumer Price Index (CPI): Calculated each month by the Bureau of Labor Statistics ◦ It measures the change in prices (inflation) of a “market basket” Ex. Food, housing, medical care, entertainment
NOT a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random & unpredictable. A business cycle has four phases.
Expansion: speedup in the pace of economic activity or Rise in GDP Recovery: right after a trough, economy is getting better Prosperity: right before a peak, economy is at its best economic growth
Contraction: slowdown in the pace of economic activity Economic decline marked by falling GDP Recession: 6 straight months of contraction Depression: Especially long contraction
Trough: lower turning point of a business cycle, where a contraction turns into an expansion GDP stops falling
Peak: upper turning of a business cycle When GDP stops rising **A trough & peak both represent a turning point in the business cycle**
The National Debt is the total amount of money the Federal Government owes to treasury bondholders. If you invest in a treasury bond, the money that one uses to buy the bond is used to finance the National Government. ◦ A bond is essential an IOU issued by the government as a way for them to borrow money.
Reduces the funds available for businesses to invest. The government must pay interest to bondholders, the more the government borrows, the more interest it has to pay. Roughly, to pay off the National Debt today, each citizen would have to pay just over $40,083.53