1. Chapter 19: The American Economy

2. Goods and Services
Goods are tangible products we use to satisfy our wants and needs, they include items such as books and automobiles; services include work performed for someone else such as haircuts, home repairs, and entertainment

3. Factors of Production
1. Natural Resources= “gifts of nature” that make production possible; include land, water, fish, animals, forests and minerals

4. Factors of Production
2. Labor= human resources, workers

5. Factors of Production
3. Capital= manufactured goods used to make other goods and services; machines, buildings, tools
-Consumer goods= directly satisfy wants (clothes, shoes, etc.)
-Capital goods= aid in production of consumer goods

6. Henry Ford- Founder of the Ford Motor Company
Factors of Production
4. Entrepreneur= an individual who starts a new business, introduces new products, and improves processes
Henry Ford- Founder of the Ford Motor Company

7. Gross Domestic Product
Gross Domestic Product is the total value, in dollars, of all the final goods and services produced in a country during a single year
A final good is a good sold to its user, the intermediate goods that go into making it are not counted in GDP, and the sale of used goods is not counted in GDP

8. Gross Domestic Product
To calculate GDP of an economy multiply the price of each good by the quantity produced and then add the amounts
Country A makes 10 bicycles at $200 each
$2,000
Country A makes 10 computers at $1,500 each
$15,000
Country A makes 10 watches at $100 each
$1,000
What is the GDP of Country A?
$18,000

9. Gross Domestic Product
GDP is an important indicator of standard of living, the quality of life based on the possession of necessities and luxuries that make life easier

10. Gross Domestic Product
GDP measures quantity, it does not reflect improvements in the quality of products; economists must account for quality improvement
The loss of value because of wear and tear to durable goods, such as automobiles is called depreciation; GDP does not take this into account

11. Gross Domestic Product
Net Domestic Product (NDP) accounts for depreciation; it takes GDP and subtracts the total loss in value of capital goods caused by depreciation
GDP- Gross Domestic Product –
Depreciation
______________________
NDP- Net Domestic Product

12. Economic Sectors and Circular Flow
A market is the free exchange of goods and services between buyers and sellers; they may be local, regional, national, or global
In a market system, the flow of resources, goods and services, and money is circular; this represents economic decision making in the market

13. Economic Sectors and Circular Flow
1. The Consumer Sector= consumers earn income in factor markets, the markets where productive resources are bought and sold; workers earn wages, salaries, and tips in exchange for their labor

14. Economic Sectors and Circular Flow
2. The Business Sector= individuals spend income in product markets where producers offer goods and services for sale

15. Economic Sectors and Circular Flow
3. The Government Sector= made up of all three levels of government-federal, state, and local; government receives revenue from services it sells and uses it to purchase goods and services in the product markets

16. Economic Sectors and Circular Flow
4. The Foreign Sector= represents all countries in the world; we buy and sell products there

17. Promoting Economic Growth
Economic growth occurs when a nation’s total output of goods and services increases over time; growth is a way to tell if our economy is healthy

18. Promoting Economic Growth
Productivity is a measure of the amount of output produced by a given level of inputs in a specific period of time

19. Promoting Economic Growth
Specialization takes place when people, businesses, regions, or countries concentrate on goods or services they produce better than anyone else

20. Promoting Economic Growth
Division of Labor is breaking down a job into small tasks performed by different workers (ex. Assembly Line)

21. Promoting Economic Growth
Productivity increases when businesses invest in human capital, the sum of people’s skills, abilities, and motivation

22. Promoting Economic Growth
Our economy displays a strong degree of economic interdependence, we rely on others, and others rely on us, to provide goods and services

23. Capitalism
The economy of the US is known as capitalism, an economic system in which private citizens own and use the factors of production to seek a profit
In a free enterprise economy, competition is allowed to flourish with a minimum of government interference

24. What Makes Capitalism Work?
Markets
Economic Freedom
Private Property Rights= the freedom to own and use our property as we choose as long as we do not interfere with the rights of others
Competition= the struggle between buyers and sellers to get the best products at the lowest prices; keeps prices low and quality high
Profit Motive= the possibility of financial gain leads many to take risks in hopes of earning a profit, the amount of money left over after costs have been paid
Voluntary Exchange= the act of buyers and sellers freely engaging in market transactions

25. History of Capitalism
In 1776, Adam Smith, a Scottish philosopher and economist wrote The Wealth of Nations which described economic principles for the first time

26. History of Capitalism
From the writings of Smith came the idea of laissez-faire economics, government should not interfere in the marketplace; government ensures free competition