The American Economy Chapter 19

Vocabulary Chapter 19 Factors of production Specialization Labor Division of labor Natural Resources Economic interdependence Capital Capitalism Entrepreneurs Free Enterprise Gross Domestic Product (GDP) Consumer sovereignty Market Competition Product market Profit motive Factor Market Voluntary exchange Productivity Laissez-faire economics

Goods and Services Good: Anything manufactured. Service: Something people do for others. To provide any good or service, 4 factors of production are necessary

Factors of Production Capital Land and Natural Resources Labor Entrepreneurship or management

Capital Capital goods/resources: All tools, buildings, and machinery businesses use to make goods and provide services.

Land and Natural Resources All land used for the business. Natural resources are things that come form the earth such as water and minerals – they haven’t been altered/changed All energy is considered a natural resource.

Labor Entrepreneurs Hired workers who help produce goods and services. Entrepreneurs are people willing to take risks and start a new business. - Plan, supervise production, make decisions – The managers, CEO

With a neighbor, list the land, labor, capital, and entrepreneur that went into making each of the following (you can list more than one item for each…) Your shoes iPod Dominos pepperoni pizza

Measuring the Economy Gross Domestic Product (GDP) - Total value of all the final goods & services produced in a country during a single year Ex. – New car, ice cream Parts of a final good don’t count – Cream and flavors within the ice cream. second hand sales are not counted either – used cars and other goods Measure of an economy’s size & success (monetary measure - $17.95 trillion 2015 est. #1) Used to measure standard of living (quality of life based on the possession of necessities and luxuries that make life easier) in a country What is standard of living? – quality of life based on the possession of necessities and luxuries Show CIA factbook – rates for countries of their curiosity U.S. – 13.84 Trillion (2007 est.) growth rate 2.2% Per capita - $45,800 Explain difference between GNP & GDP

Per Capita GDP – total GDP divided by the country’s population U. S Per Capita GDP – total GDP divided by the country’s population U.S. was $56,421 2014 est. #11 Compared yearly to check growth of country Higher GDP from previous year = expanding/growing economy Lower GDP from previous year = declining/shrinking economy Measures quantity not quality

Economic Activity, Production and Sectors Market – Location/situation that allows buyers and sellers to exchange economic products. Markets can be – Local, regional, national, global 4 Economic sectors/decision makers - Consumer sector, Business sector, Government sector, Foreign sector Circular Flow of Economic Activity – How resources, goods, service and money are used in these groups/sectors

Consumer Sector Business 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 machinery loan it in return for rent 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 Foreign 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, the gov’t receives the majority of it revenue from taxes The gov’t uses its revenue/income to buy final goods and services in the product markets Foreign Sector Foreign sector includes all the countries in the world. 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.

Circular Flow

Promoting Economic Growth Productivity - Measure of the amount of output produced by a given amount of inputs in a specific period of time. In other words – How resources are being used efficiently to produce goods and services. Specialization - Takes place when people, businesses, regions & countries concentrate on goods or services that they can produce better than anyone else – more efficient Division of Labor - Separating a big job into smaller jobs. Each person is responsible for doing one job. (Assembly line). Human Capital - Sum of the skills, abilities & motivations of people – employee training, health insurance How would businesses and employee’s benefit from this?

Productivity in a Nutshell Goes up when more output can be produced when scarce resources are used efficiently Requires labor and human capital Increases when businesses invest in human capital Increases with specialization

Capitalism and Free Enterprise Our economy is based on these 2 principals Capitalism: Private citizens own most means of production – land, labor, capital & entrepreneurship – to make a profit. Free Enterprise: Freedom of businesses to compete for profit with minimal govt. interference. People buy, sell, and produce what ever they want. People can work where they want. Individual freedoms

What Makes Capitalism Work? Markets - exchanges here determine prices of goods & services. Consumer Sovereignty - the consumer is ‘king’ of the market Consumer demand determines what will be produced Economic freedom – freedom to choose our occupation, with consequences Example – You can start almost any business but if it fails the gov’t will not bail you out. Private Property Rights – the freedom to own, use, or dispose of our own property as long as it doesn’t interfere with the rights of others. Creates incentive

Capitalism thrives on competition Rewards the most efficient producers 4. Competition – struggle between buyers and sellers to get the best products and the lowest prices. Capitalism thrives on competition Rewards the most efficient producers 5. Profit Motive – the driving force behind free enterprise and capitalism that encourages individuals and organizations to improve their material well-being. 6. Voluntary Exchange – act of buyers and sellers freely and willingly engaging in market transactions Both buyers & sellers must feel a benefit

The Drawbacks of capitalism

The Rise of Capitalism 2 concepts developed People work for economic gain Government should have a limited role 1200s C.E. trade routes opened between Europe & the East - Silk Roads, Marco Polo Throughout hundreds of years trade increased and developed the idea of wealth

Adam Smith and The Wealth of Nations Adam Smith - Scottish Economist Wealth of Nations (1776) - Described the basic principles of economics Individuals who seek a profit will benefit all of society Laissez-Faire – to leave alone The government should not interfere in the market Government’s only role should be to ensure free competition