Define: Operates by traditional ways, customs, religion, and beliefs

 Example: Developing Nations (Third World Nations) - African Nations & Native Americans Advantages:- Keeps tradition and culture alive. - Family Run Disadvantages:  - Not able to mass produce in a short period of

time.- Not “wealthy” by Western standards

Define: Operates by voluntary exchange in a free market and there is no governmental control.

 Example: Capitalism. USA is closest thing to a

Market Economy Advantages- Encourages private ownership- People can become VERY wealthy Disadvantages: Wealth is NOT distributed equally.

 Define: Operates under strict government control,

the economy is ENTIRELY controlled by the government

 Examples: Former Soviet Union, China & Cuba Advantages:  ( IN THEORY) Wealth is distributed

equally. Everyone is taken care of, no poverty No competition Disadvantages: Everyone is treated equally

regardless of work, work ethics, or education.

Define: Most modern economies: Market based with little government intervention

Operates by mixing private ownership and public ownership

 Example: Most Economies*, Socialism Germany, France, United States & Canada Advantages: Government rules and regulations

ensures businesses will not get out of control and are held accountable

 Disadvantages: Governmental rules limits the

individuals free reign over their business

Adam Smith: Wealth of Nations

Laissez Faire: “hands off”Invisible Hand: The economy will regulate itself

Karl Marx: Communist Manifesto & Das

Kapital

Constant struggle between workers & owners

Workers add value to goods but do not receive the profits

against market economies

John Maynard Keynes

(Keynesian Theory)

The General Theory of Employment, Interest and Money

Aggressive Fiscal Policy Written after the Depression Cut Taxes while increasing

government spending This will increase deficit

spending Gov’t spending more than it

is taking in

In the United States mixed economy Three sectors, or elements, that interact: ◦Households◦Businesses◦Government

Economists use the CFM to explain the interaction among these three sectors.

Each sector of the economy contributes to another.

Household & Firms– Factor Market

1.Where firms purchase or rent land

2.Firms hire workers & pay salaries for labor

3.Borrow money from households to purchase capital households interest or profits in return.

Product Market1.Households purchase products

made by firms

Government in the Factor Market1. Government purchases land, labor, & capital from households2. Government collect taxes from firms.

Government in the Product Market1. Government purchases goods & services = building, telephones, computers, fax machines2. Government provides goods & services = roads3. Government collect taxes from households

Govt

TaxesTaxes

Govt SpendingGovt Spending

Gross Domestic Product (GDP): The total market value($ value) of all the goods & services produced within the borders of a nation during a specified period.

Usually reported on an annual basis◦ Per Capita GDP: A nations GDP divided by its

population

Consumer Price Index (CPI): Calculated each month by the Bureau of Labor Statistics◦ It measures the change in prices (inflation) of a

“market basket” Ex. Food, housing, medical care, entertainment

NOT a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock.

Its timing is random & unpredictable.

A business cycle has four phases.

Expansion: speedup in the pace of economic activity or Rise in GDP

Recovery: right after a trough, economy is getting better

Prosperity: right before a peak, economy is at its best

economic growth

Contraction: slowdown in the pace of economic activity

Economic decline marked by falling GDP

Recession: 6 straight months of contraction

Depression: Especially long contraction

Trough: lower turning point of a business cycle, where a contraction turns into an expansion

GDP stops falling

Peak: upper turning of a business cycle

When GDP stops rising

**A trough & peak both represent a turning point in the business cycle**

The National Debt is the total amount of money the Federal Government owes to treasury bondholders.

If you invest in a treasury bond, the money that one uses to buy the bond is used to finance the National Government.

◦ A bond is essential an IOU issued by the government as a way for them to borrow money.

Reduces the funds available for businesses to invest.

The government must pay interest to bondholders, the more the government borrows, the more interest it has to pay.

Roughly, to pay off the National Debt today, each citizen would have to pay just over $40,083.53

http://brillig.com/debt_clock/http://www.usdebtclock.org/