Economics Review

Economic Systems Economic System- the method used by a society to make and distribute goods and services. 3 Types of Systems Free Market Centrally Planned Mixed

Free Market (Capitalism/Free Enterprise) Private ownership of resources and goods. Producers are driven by the desire to make a profit. Country examples: USA, Canada, Germany, Japan

Centrally Planned (Communism/Socialism) Government ownership of ‘means of production’ and decision making. In theory – workers own means of production. In practice – the government does. Country Examples: China, Cuba, North Korea

Mixed A mix of Free Market & Centrally Planned. The government plays a significant role in making economic decisions. Country Examples: United Kingdom, Italy, France, Russia

Stop and Think What are the 3 types of economic systems? Which one has the most amount of government involvement? The least government involvement?

Adam Smith Considered the ‘Father of Economics’ His book The Wealth of Nations (1776) was groundbreaking in explaining the idea of a capitalist system Major Points Less government regulation Lassiez Faire- “Hands Off” approach to business in terms of government

American Free Market/Capitalist Economy Producers and Consumers are motivated by self-interest Producers Strive to… Make goods and services that consumers want in order to make money Engage in competition- (lowers prices, advertise, improve quality) in order to sell to consumers and make money Consumers… Purchase the best goods and services for the lowest prices Government plays important but limited role!

Gross Domestic Product GDP- The value of goods and services produced by a nation in a given time period. Measures how a nation’s economy is doing If the GDP is not increasing, then the economy is probably in a recession.

Stop and Think Who is Adam Smith? What is he known for? Explain what the GDP is.

GDP Continued… Interest Rates – the cost of borrowing money. https://www.youtube.com/watch?v=UMAELCrJxt0 GDP Continued… Interest Rates – the cost of borrowing money. Inflation – a rise in the average level of prices. A decrease in the purchasing value of money. Stagflation – Inflation + no growth in the economy Recession – a period of declining economic activity. The GDP falls 6 months in a row.

GDP Continued… Budget Deficit – when the government spending exceeds revenue. National Debt – when there is a budget deficit, the government must borrow money to pay the shortfall. The borrowed money over time is added together to form the national debt. Federal Reserve System – national banking system that controls the money supply and the availability of credit.

Federal Budget Federal Budget – The amount of money the Government has to spend in a given year. (ex. defense, education, scientific research)

Stop and Think What are interest rates? Explain the idea of inflation. Where does national debt come from?

https://www.youtube.com/watch?v=Hf9vN_VKpXw Supply and Demand Supply - the amount of a good or service that producers are willing and able to make at a given price. Demand – the amount of a good or service consumers are willing and able to buy at a given price. Equilibrium Price – point at which supply and demand intersect. Market operates efficiently. Surplus – quantity supplied is greater than the quantity demanded. Shortage – quantity supplied is less than the quantity demanded.

The Stock Market Large companies sell stocks (or shares) of ownership in their companies in order to raise money. Individuals invest in stocks to make money. New York Stock Exchange -- Wall Street. Activity on The Exchanges signals how well the economy is doing. Dow Jones- average of 30 large companies – indicator of economy

Foreign Trade Many goods are produced globally by multinational corporations, with parts produced in one country and assembled in another. Free-trade zone – region where a group of countries agrees to reduce or eliminate trade barriers, such as tariffs on imports. NAFTA – (North American Free Trade Agreement) Canada, United States, and Mexico

Stop and Think Explain the connection between supply and demand. 3 lines. What is equilibrium price? What are stocks?