Transcript The Free Enterprise System

Global Economies
What is an Economy?
• An economy, or economic system, is the way
a nation makes economic choices.
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Choices that must be made involve how the
nation will use its resources to produce and
distribute goods and services.
Resources = Factors of Production
• Resources, or factors of production, are all the things used
in producing goods and services.
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Land
Labor
Capital
Entrepreneurship
Land
• Land includes everything on the earth that is
in its natural state, or the
earth’s natural resources.
Labor
• Labor is all the people
who work in the
economy.
Capital
• Capital includes money needed
to start and operate a business,
as well as the goods used in the
production process.
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Factories
Buildings
Computers
Tools
• Capital also includes
infrastructure, or the physical
development of a country
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Roads
Ports
Sanitation facilities
Utilities, especially
telecommunications
Entrepreneurship
• Entrepreneurship
refers to the skills of
people who are willing
to risk their time and
money to run a
business.
How Does an Economy Work?
• Nations must answer
three basic questions
when deciding how to
use their limited
resources.
1. What goods and services
will be produced?
2. How should goods and
services be produced?
3. For whom should the
goods and services be
produced?
Need for Economic Systems
SCARCITY
• No one country has enough resources to
supply everything that is needed or wanted
which creates scarcity.
• Scarcity forces
nations to make
economic choices.
Types of Economic Systems
• Market Economy
– No government involvement in economic decisions
• Command Economy
– Government controls the factors of production and makes all
decisions about their use
• Mixed Economies
– All economies in the world today (including the Free Enterprise
System in the U.S.) are mixed with varying degrees of
government regulation
Command Economy
Communism
Market Economy
Socialism
Capitalism
Capitalism
• Capitalism is an economic system characterized by private
ownership of businesses and marketplace competition.
– Political system = democracy
– Usually more than one political party
– People free to elect those candidates who agree with their personal
philosophy of government and economy
– Examples: United States, Japan
Socialism
• In a socialist political system, there is increased government
involvement in people’s lives and the economy.
– Main goal is to keep prices low and provide employment
– Government runs key industries, such as those in
telecommunications, mining, transportation,
and banking, and makes economic decisions
– Tend to have more social services to ensure a
certain standard of living for everyone
• Medical care is free or low cost
• Free education – some through college
• Systems for pensions and elderly care
– Businesses and individuals pay much higher taxes
– Examples: Canada, Germany, Sweden, Great Britain, Australia
Communism
• Communist countries have a totalitarian form of
government, which means that the government runs
everything.
– One political party, where all people share
common economic and political goals
– All who are able to work are assigned jobs
– Government decides type of schooling people
receive and tells them where to live
– Food and housing subsidies keep prices low,
so everyone has a place to live and food to eat
– Medical care is free
– No incentive for people to increase productivity has caused
communist economies to collapse
– Examples: Cuba, North Korea
Economies in Transition
• The breakup of the former Soviet Union
probably provides the best examples of
societies making the difficult change from
command to market economies.
– State-owned industries have been privatized,
which refers to the process of selling
government-owned businesses to individuals
• Privatization generates much-needed revenue for the
governments involved and demonstrates a high level
of commitment to making the transition to a market
system.
When Is An Economy Successful?
• Economic measurements
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Employee productivity
Gross Domestic Product (GDP)
Inflation rate
Unemployment rate
• Other indicators
– Consumer Confidence index
– Consumers Expectations index
– “Jobs Plentiful” index
• The Business Cycle
Employee Productivity
• Productivity is output per worker hour that is
measured over a defined period of time, such as a
week, month, or year.
– Crucial factor in a country’s standard of living
• Businesses can increase productivity in many ways:
– Invest in new equipment or facilities that allow
employees to work more efficiently
– Provide additional training or financial incentives
– Reduce workforces an increase responsibilities of
workers who remain to make an organization more
financially efficient and more effective
Gross Domestic Product
• Most governments study productivity by keeping
track of an entire nation’s production output.
– Principle way of measuring output in the U.S. is gross
domestic product
• Gross Domestic Product (GDP) is a measure of the
goods and services produced using labor and
property located in this country.
Inflation Rate
• Inflation refers to rising prices.
– A low inflation rate (1-5%) is
good because it shows that an
economy is stable.
• Controlling inflation is one of a
government’s main goals.
– When inflation gets high, money
is devalued.
– When inflation starts to go up,
many governments raise interest
rates to reduce everyone’s ability
to borrow money, which slows
down economic growth.
• Measures of inflation in U.S.
– Consumer Price Index (CPI), or
cost-of-living index, measures the
change in price over a time of 400
specific retail goods and services,
excluding food and energy, used
by the average urban household
– Producer Price Index (PPI)
measures wholesale price levels in
the economy
• When there is a drop in the PPI, it
is generally followed by a drop in
the CPI.
Unemployment Rate
• All nations chart unemployment, or jobless, rates.
– The higher the unemployment rate, the greater the
chances of an economic slowdown.
– The lower the unemployment rate, the greater the
chances of an economic expansion.
• When more people
work, there are more
people spending money
and paying taxes.
Other Indicators
• The Conference Board, a private business research
organization made up of businesses and individuals,
provides additional information to help economists evaluate
the performance of the U.S. economy.
– Consumers are polled to see how they feel about personal finance,
economic conditions, and buying conditions.
– Surveys review how customers feel about current economic
environment as well as the future.
– Retail sales are studied to see if Consumer Confidence polls match
consumer actions in the marketplace.
– Rate of housing starts and sales of vehicles are also reviewed.
– Wages and new payroll jobs provide additional information about
the strength of the economy.
The Business Cycle
• Governments keep statistics about how the economy grows
and slows in recurring patterns, known as the business
cycle.
– Prosperity, or expansion, is the time when the economy is
flourishing and is a good time for new businesses to start up.
– Recession is a period of economic slowdown that lasts for six
months, which results in workforce reductions and less consumer
spending.
– Depression is a period of prolonged recession, where it becomes
nearly impossible to find a job and businesses are forced to shut
down.
– Recovery is the increase in the overall economic activity, which
allows business to pick up, people find jobs, and the demand for
goods increases.
The Business Cycle
Factors That Affect Business Cycles
• Businesses tend to react to business cycles by expanding
their operations during periods of recovery or prosperity
and curtailing their operations during periods of recessions.
– Expansion = investments in new properties, equipment, and
inventories, as well as hiring more employees
– Recession = worker layoffs, cut back on inventories to match
lowered demand
• Government influences business cycles through its policies
and programs.
– When the economy needs a boost, the government may reduce
interest rates, cut taxes, or institute federally funded programs.