1. The American Economy
Chapter 19

2. 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

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

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

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

6. 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.

7. 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

8. 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

9. 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 - $ 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. – Trillion (2007 est.) growth rate 2.2%
Per capita - $45,800
Explain difference between GNP & GDP

10. 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, 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

11. 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

12. 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

13. 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.

14. Circular Flow

15. 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?

16. 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

17. 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

18. 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

19. Capitalism thrives on competition Rewards the most efficient producers
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

20. The Drawbacks of capitalism

21. 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

22. 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