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 ► population growth, education, and war can affect quantity and quality of labor

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.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: localregionalnationalglobal

4 Economic Sectors of the Economy ► Economic decision makers are the 1. Consumer sector 2. Business sector 3. Government sector 4. 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 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.

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.