Chapter Four There are three basic economic questions which must be answered in order to determine the type of economy a nation has.

Chapter Four

There are three basic economic

questions which must be answered in

order to determine the type of

economy a nation has.

What are the three basic economic questions? What goods and services should be

produced? How should the goods and services be

produced? For whom should the goods and services be

produced?

The way a nation answers The way a nation answers these questions determines these questions determines the type of economy that the type of economy that nation has.nation has.

1. What goods and services 1. What goods and services should be produced?should be produced?

In our nation, who decides what should be In our nation, who decides what should be produced?produced?

How is this decided?How is this decided? That’s right, the customer or market That’s right, the customer or market

decides by whether we choose to decides by whether we choose to purchase the product or not.purchase the product or not.

In other countries, the government decides In other countries, the government decides or at least controls the major companies.or at least controls the major companies.

ScarcityScarcity Nations have unlimited wants and needs Nations have unlimited wants and needs

for growth and development but limited for growth and development but limited resources to meet them.resources to meet them.

The difference between wants and needs The difference between wants and needs and available resources is SCARCITY.and available resources is SCARCITY.

What role does this play in the three basic What role does this play in the three basic economic questions?economic questions?

2. How should the goods and 2. How should the goods and services be produced?services be produced?

This is determined by our resources This is determined by our resources or factors of production.or factors of production.

What are resources or factors of What are resources or factors of production?production?

ResourcesResources

Another name for resources is factors Another name for resources is factors of production.of production.

Factors of production……(the factors Factors of production……(the factors that determine how something is that determine how something is produced)produced)

There are four factors of production.There are four factors of production.

The 4 (four) factors of The 4 (four) factors of productionproduction

What is another name for factors of What is another name for factors of production?production?

The factors are:The factors are: LandLand LaborLabor CapitCapitaall EntreprenuershipEntreprenuership

LandLand

• Does the country have a large amount of land on which factories can be built or is the population too dense?

• What is the condition of the land?– Swamp land…not so great for buildings– Mountainous, rocky terrain….lots of capital

needed to make land “useable”– Dry/Arid…can you get water piped in at an

affordable cost? What about sanitation?

Labor

• Is there a large population?• What is the education of the

people?• Are they able to grasp concepts

and follow them to fruition?• How driven are they to work?

CapitalCapital

What is capital?What is capital?MONEY!!!!MONEY!!!! It is the money needed to start up It is the money needed to start up

the business (loans)the business (loans)As well as the money required to As well as the money required to

operate the business until it is able operate the business until it is able to “carry” itselfto “carry” itself

Entreprenuership

What is entreprenuership? Does the country encourage citizens to open

and operate their own businesses? Will the country support the business in any

way? How would this help to shape a nation’s

economy?

3. For whom should the goods 3. For whom should the goods and services be produced?and services be produced?

Are the products being produced for Are the products being produced for government?government?

Private individuals?Private individuals? Private businesses?Private businesses? Public businesses?Public businesses? Are businesses allowed to choose Are businesses allowed to choose

whom they make the products for or whom they make the products for or are they mandated by government?are they mandated by government?

CapitalismCapitalism

Democratic SocietyDemocratic Society Usually more than one political party from Usually more than one political party from

which to choosewhich to choose Cares about “the people” and for those who Cares about “the people” and for those who

can’t care for themselvescan’t care for themselves Believes the political power should be in the Believes the political power should be in the

hands of the peoplehands of the people Encourages individuals to start and operate Encourages individuals to start and operate

their own businessestheir own businesses United States and Japan are this type of United States and Japan are this type of

economyeconomy

Socialist/SocialismSocialist/Socialism

Increased government involvement in Increased government involvement in people’s lives and the economy people’s lives and the economy

Main goal is to keep prices low for all people Main goal is to keep prices low for all people and to provide employment to manyand to provide employment to many

Pay much higher taxes that capitalistsPay much higher taxes that capitalists Government runs the key industriesGovernment runs the key industries

(telecommunications, mining, banking, transportation)(telecommunications, mining, banking, transportation)

• Have more social services to ensure a certain Have more social services to ensure a certain standard of living for everyonestandard of living for everyone

• Medical and Dental care is freeMedical and Dental care is free

Socialism continuedSocialism continued

Free education from elementary to Free education from elementary to “college”“college”

Have democratic political institutionsHave democratic political institutions Ruled by king or queen (Monarchy)Ruled by king or queen (Monarchy) Canada, Germany, Great Britain, Canada, Germany, Great Britain,

Sweden and Australia are socialist Sweden and Australia are socialist countriescountries

Communism/CommunistCommunism/Communist

Totalitarian form of governmentTotalitarian form of government -----Government runs everything-----Government runs everything One political party from which to One political party from which to

choosechoose Only one party to ensure that everyone Only one party to ensure that everyone

shares the same common political and shares the same common political and economic goalseconomic goals

All people who are able to work are All people who are able to work are assigned jobsassigned jobs

CommunismCommunism

Theoretically, no unemploymentTheoretically, no unemployment Employees who do not go to work still Employees who do not go to work still

continue to get paidcontinue to get paid Government decides type of schooling Government decides type of schooling

and tells the people where to liveand tells the people where to live Housing is assigned according to needHousing is assigned according to need Food and housing subsidies so that Food and housing subsidies so that

everyone has a place to live and food everyone has a place to live and food to eatto eat

InfrastructureInfrastructure

The physical development of a The physical development of a country including the condition of its country including the condition of its roads, ports, sanitation facilities, and roads, ports, sanitation facilities, and utilities, especially utilities, especially telecommunications.telecommunications.

PrivatizationPrivatization

Process of selling government-owned Process of selling government-owned businesses to private individuals.businesses to private individuals.

Gives much needed revenue to the Gives much needed revenue to the governmentgovernment

Demonstrates the high level Demonstrates the high level commitment to becoming a market commitment to becoming a market societysociety

Economic MeasurementsEconomic Measurements

Gross Domestic Product – a measure of the Gross Domestic Product – a measure of the goods and services produced using labor goods and services produced using labor and property located in this country.and property located in this country.

Gross National Product – a measure of the Gross National Product – a measure of the goods and services produced by American goods and services produced by American owned companies whether they are owned companies whether they are produced domestically or abroad.produced domestically or abroad.

InflationInflation

Inflation refers to rising prices.Inflation refers to rising prices. Do we want a low or a high inflation Do we want a low or a high inflation

rate?rate? Why?Why?

Measures of InflationMeasures of Inflation

Consumer Price Index – (Also called Consumer Price Index – (Also called the price of living index)the price of living index) Measures the change in price over a Measures the change in price over a

specified period of time; measures 400 specified period of time; measures 400 specific retail goods and services used specific retail goods and services used by the average urban household.by the average urban household.

Unemployment Rate – Also called Unemployment Rate – Also called jobless rates. The higher the jobless rates. The higher the unemployment rate, the greater the unemployment rate, the greater the chances of economic slowdown.chances of economic slowdown.

Business CyclesBusiness Cycles

Government keeps statistics in order Government keeps statistics in order to determine the stage their to determine the stage their economies are in at any given time. economies are in at any given time. History shows that at some times an History shows that at some times an economy grows and at others it economy grows and at others it slows down.slows down.

These recurring changes are called These recurring changes are called business cycles.business cycles.

Four Business CyclesFour Business Cycles

Prosperity – (expansion) – the time Prosperity – (expansion) – the time when the economy is flourishing. when the economy is flourishing. Good time for new businesses to Good time for new businesses to start up.start up.

Recession – a period of economic Recession – a period of economic slowdown that lasts for various slowdown that lasts for various periods of time. Companies reduce periods of time. Companies reduce their workforces and consumers have their workforces and consumers have less money to spend.less money to spend.

Business CyclesBusiness Cycles

Depression – a period of prolonged Depression – a period of prolonged recession. During a depression, it recession. During a depression, it becomes nearly impossible to find a becomes nearly impossible to find a job and many businesses are forced job and many businesses are forced to slow down.to slow down.

Recovery – the increase in the overall Recovery – the increase in the overall economic activity. During this stage economic activity. During this stage business picks up, people find jobs, business picks up, people find jobs, and the demand for goods increases.and the demand for goods increases.