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? 4 What goods and services should be produced? 4 How should the goods and services be produced? 4 For whom should the goods and services be produced?

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

1. What goods and services should be produced?  In our nation, who decides what should be produced?  How is this decided?  That’s right, the customer or market decides by whether we choose to purchase the product or not.  In other countries, the government decides or at least controls the major companies.

Scarcity  Nations have unlimited wants and needs for growth and development but limited resources to meet them.  The difference between wants and needs and available resources is SCARCITY.  What role does this play in the three basic economic questions?

2. How should the goods and services be produced?  This is determined by our resources or factors of production.  What are resources or factors of production?

Resources Another name for resources is factors of production. Another name for resources is factors of production. Factors of production……(the factors that determine how something is produced) Factors of production……(the factors that determine how something is produced) There are four factors of production. There are four factors of production.

The 4 (four) factors of production What is another name for factors of production? What is another name for factors of production? The factors are: The factors are: Land Land Labor Labor Capit a l Capit a l Entreprenuership Entreprenuership

Land 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?

Capital What is capital? What is capital? MONEY!!!! MONEY!!!! It is the money needed to start up the business (loans) It is the money needed to start up the business (loans) As well as the money required to operate the business until it is able to “carry” itself As well as the money required to operate the business until it is able to “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 and services be produced? Are the products being produced for government? Are the products being produced for government? Private individuals? Private individuals? Private businesses? Private businesses? Public businesses? Public businesses? Are businesses allowed to choose whom they make the products for or are they mandated by government? Are businesses allowed to choose whom they make the products for or are they mandated by government?

Capitalism Democratic Society Democratic Society Usually more than one political party from which to choose Usually more than one political party from which to choose Cares about “the people” and for those who can’t care for themselves Cares about “the people” and for those who can’t care for themselves Believes the political power should be in the hands of the people Believes the political power should be in the hands of the people Encourages individuals to start and operate their own businesses Encourages individuals to start and operate their own businesses United States and Japan are this type of economy United States and Japan are this type of economy

Socialist/Socialism Increased government involvement in people’s lives and the economy Increased government involvement in people’s lives and the economy Main goal is to keep prices low for all people and to provide employment to many Main goal is to keep prices low for all people and to provide employment to many Pay much higher taxes that capitalists Pay much higher taxes that capitalists Government runs the key industries Government runs the key industries (telecommunications, mining, banking, transportation) Have more social services to ensure a certain standard of living for everyone Have more social services to ensure a certain standard of living for everyone Medical and Dental care is free Medical and Dental care is free

Socialism continued Free education from elementary to “college” Free education from elementary to “college” Have democratic political institutions Have democratic political institutions Ruled by king or queen (Monarchy) Ruled by king or queen (Monarchy) Canada, Germany, Great Britain, Sweden and Australia are socialist countries Canada, Germany, Great Britain, Sweden and Australia are socialist countries

Communism/Communist Totalitarian form of government Totalitarian form of government -----Government runs everything -----Government runs everything One political party from which to choose One political party from which to choose Only one party to ensure that everyone shares the same common political and economic goals Only one party to ensure that everyone shares the same common political and economic goals All people who are able to work are assigned jobs All people who are able to work are assigned jobs

Communism Theoretically, no unemployment Theoretically, no unemployment Employees who do not go to work still continue to get paid Employees who do not go to work still continue to get paid Government decides type of schooling and tells the people where to live Government decides type of schooling and tells the people where to live Housing is assigned according to need Housing is assigned according to need Food and housing subsidies so that everyone has a place to live and food to eat Food and housing subsidies so that everyone has a place to live and food to eat

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

Privatization Process of selling government-owned businesses to private individuals. Process of selling government-owned businesses to private individuals. Gives much needed revenue to the government Gives much needed revenue to the government Demonstrates the high level commitment to becoming a market society Demonstrates the high level commitment to becoming a market society

Economic Measurements Gross Domestic Product – a measure of the goods and services produced using labor and property located in this country. Gross Domestic Product – a measure of the goods and services produced using labor and property located in this country. Gross National Product – a measure of the goods and services produced by American owned companies whether they are produced domestically or abroad. Gross National Product – a measure of the goods and services produced by American owned companies whether they are produced domestically or abroad.

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

Measures of Inflation Consumer Price Index – (Also called the price of living index) Consumer Price Index – (Also called the price of living index) Measures the change in price over a specified period of time; measures 400 specific retail goods and services used by the average urban household. Measures the change in price over a specified period of time; measures 400 specific retail goods and services used by the average urban household. Unemployment Rate – Also called jobless rates. The higher the unemployment rate, the greater the chances of economic slowdown. Unemployment Rate – Also called jobless rates. The higher the unemployment rate, the greater the chances of economic slowdown.

Business Cycles Government keeps statistics in order to determine the stage their economies are in at any given time. History shows that at some times an economy grows and at others it slows down. Government keeps statistics in order to determine the stage their economies are in at any given time. History shows that at some times an economy grows and at others it slows down. These recurring changes are called business cycles. These recurring changes are called business cycles.

Four Business Cycles Prosperity – (expansion) – the time when the economy is flourishing. Good time for new businesses to start up. Prosperity – (expansion) – the time when the economy is flourishing. Good time for new businesses to start up. Recession – a period of economic slowdown that lasts for various periods of time. Companies reduce their workforces and consumers have less money to spend. Recession – a period of economic slowdown that lasts for various periods of time. Companies reduce their workforces and consumers have less money to spend.

Business Cycles Depression – a period of prolonged recession. During a depression, it becomes nearly impossible to find a job and many businesses are forced to slow down. Depression – a period of prolonged recession. During a depression, it becomes nearly impossible to find a job and many businesses are forced to slow down. Recovery – the increase in the overall economic activity. During this stage business picks up, people find jobs, and the demand for goods increases. Recovery – the increase in the overall economic activity. During this stage business picks up, people find jobs, and the demand for goods increases.