The American EconomyChapter 18

Gross Domestic Product

Lesson 1

Essential Questions:• Why and how do people make economic choices?

It Matters Because:• The success of the United States economy affects the quality

of life for everyone who lives here

Guiding QuestionWhy is Gross Domestic Product important to a nation?

Why GDP is ImportantThe U.S. economy is busy

and all around youFarmers raise crops Factories produce many

kinds of goodsEmployees stock shelves Shoppers crowd the stores

to buy products Products- anything that is

producedGoods and services

GDP Measures Total OutputGross Domestic Product

(GDP)- total market value of all final goods and services produced in a country during a single year. 2010 annual output (amount

produced) in the U.S. 15 trillion dollars The worlds largest national

economy US output is 1/5 of all goods and

services produced in the world2010 China had the second-

largest economy- 9 trillion dollars

GDP Represents IncomeMaking goods and

producing services create income for people in the economyGDP is a way to measure

the nations incomeIncludes purchases

made by consumers, businesses and government

Factors of Production 4 Factors of Production

Natural Resources LaborCapital Entrepreneurs- a risk-

taking person who starts a new business, introduces a new product, or improves a management technique They invest in companies that

might not succeed They take risk in hope for

reward All factors of production earn

income when a product is produced (i.e. Bicycle, car)

Measuring GDPGuiding Question- Why is GDP difficult to produce?

GDP is difficult to measure because so many different goods and services are produced during a year

To measure GDP, thousands of highly skilled economists and government workers are needed (Page 484 example)

(Price of goods sold) x (Quantity Produced)

GDP Only Includes Final Products Not all economic activities are included in GDP

GDP reflects only the market value, or price of final goods and services produced and sold.

Intermediate goodsGoods that go into making a final good

(i.e. parts that go into making a car)Consumer goods and services- bicycles, clothing,

and haircutsProducer goods- goods businesses use such as

machines, office supplies (investment and capital goods)

What GDP Does Not Include

GDP- does not include every kind of activity in the economyIntermediate goods and

servicesUsed goods

(transferring)Work performed around

the home Cooking, cleaning, yard

work

GDP Per CapitaGDP Per Capita- Gross

Domestic Product on a per-person basis Per-capita- means “for

each person”GDP divided by

population China has the 2nd largest

economy in the worldChina also has the largest

population100 other countries have

a larger GDP per-capita than China

Standard of LivingStandard of Living- the

material well-being of and individual, a group, or nation Measured by how well its

needs and wants are satisfied How production takes

place is also importantChina’s economy is very

productive, but it is also a big polluter

Pollution does contribute to country having a lower standard of living

Economic Flow and Economic GrowthLesson 2

Essential Questions:• Why and how do people make economic choices?

It Matters Because:• People of all ages and from every part of the country

contribute to the U.S. economy

Guiding QuestionWhy do resources, goods, and services flow in a circular pattern in a market system?

The Circular Flow ModelCircular flow model- a model showing how goods,

service, and money flow among sectors and markets in the American economyTwo parts are markets- where buying and selling

takes place Two parts are sectors- the two main groups of

participants in the markets- consumers and businesses active in the economy

Money flows in one direction while the products and productive resources flow in the opposite direction The circular model also shows that markets link the

consumer and business sectors

The Factor and Product Markets Factor Market- a

market where factors of production are bought and soldNatural resources,

labor, capital

Product Market- a market where goods and services are for sale

The Consumer and Business SectorsConsumer Sector- consumers take part in both

the factor and product markets Consumers go to work, they sell their labor in the

factor marketWhen they get paid the money is spent in the product

marketBusiness Sector- represents all the companies

that produce goods and servicesBusinesses sell goods and services in the product

marketThey use the money they receive from sales to buy

land, labor and capital

The Government SectorGovernment Sector-

made up of units of the federal, state, and local governments

These units go to the product market to buy goods and services

Government also sells goods and services to earn income State universities charge

tuition Government also use taxes

and borrowing to raise money

Foreign SectorForeign Sector- made up of

all the people and businesses in other countries They act in both U.S.

markets Businesses in other countries

buy raw materials in the U.S. factor markets

They also sell their goods and services to consumers in the U.S. product markets

15% of goods and services in the U.S. comes from other countries

13% of what we produce are sold outside the U.S.

Promoting Economic GrowthEconomic growth- the increase

in a country’s total output of goods and services over time

If GDP goes up, it means the economy has grown

Government and businesses work hard to promote economic growth

When the economy grows, the nation’s wealth and standard of living increases

Additional resources and increased productivity are needed for economic growth

Increasing ProductivityProductivity- a measure of how efficiently

resources are used to create products

Specialization-occurs when people, businesses, regions and/or nations concentrate on goods and services they can produce better then anyone else

Division of Labor- The breaking down of job into separate, smaller tasks to be performed individually

Human Capital- the sum of people’s knowledge and skills that can be used to create products Three key factors

Education, training, experience

Capitalism and Free EnterpriseLesson 3

Essential Questions:• Why and how do people make economic choices?

It Matters Because:• Each of us enjoys the freedom to choose a job and decide

how to use our money under the economic system called capitalism

Guiding Question

What makes capitalism a successful economic system?

Capitalism and Free EnterpriseHow did the United States

become such an economic power house?

Capitalism- a system in which private citizens own most, if not all, of the means of production and decide how to use them within legislative limits

Free Enterprise- economic system in which individuals and businesses are allowed to compete for profit with minimum government interference

Six Features of Free EnterpriseEconomic Freedom- people are free to buy

and sell the factors of productionThese freedoms allow the market place to

adapt quickly to changing economic conditions. The economy is more efficient and production

Markets- buyers and sellers exchange goods and services for money in markets Buyers and sellers decide what is supplied and

demanded

Six Features of Free EnterpriseVoluntary Exchange- the act of buyers and

sellers freely and willingly engaging in market transactionsBuying and selling of goods and services

The Profit Motive- the driving force that encourages individuals and organizations to improve their material well-beingProfit- the money a business receives for its

products or services over and above its costs

Six Features of Free EnterpriseCompetition- the struggle that goes on

between buyers and sellers to get the best products at the lowest prices

Competition leads to greater efficiency, higher quality products, and more satisfied customers

If producers cannot compete, they might be forced out of business

Private Property Rights- the freedom to own and use our property as we chose as long as we don’t interfere with the rights of others

Gives people incentive to work hard, save, and invest People tend to take better care of things they own

The Origins of U.S. CapitalismAdam Smith- Scottish philosopher and

economist1776 he published “The Wealth of Nations”Father of modern economics The best way for society to advance is for

people to work for their own self-interestLaissez-faire economics (to let alone)

The belief that government should not interfere in the market place

“the invisible hand”- market exchanges work best with little government interference