DRAFT Unit 2 Economics: Economic Systems, Fiscal Policy and Taxes

3 Basic Economic Questions

1. What goods and services should be produced? 

2. How should these goods and services be produced? 

3. Who consumes these goods and services?

Economic System

a society’s encyclopedia entry illustrating how a hunter-gatherer group collects and shares food resources is describing

Factor Payments

when people earn income for supplying land, labor, capital, or entrepreneurship

Safety Net

government programs that protect people experiencing unfavorable economic conditions; People who receive disaster relief from the government after a flood are benefiting from an economic system that provides this

Standard of Living

 level of economic prosperity

Traditional Economy

an economic system based on customs and traditions, rather than money

Market Economy

an economic system where two forces, known as supply and demand, direct the production of goods and services

Centrally Planned Economy

an economic system where a government body makes economic decisions regarding the production and distribution of goods

Command Economy

an economic system where the government controls the production, distribution, and consumption of goods and services

Mixed Economy

an economic system combining private and public enterprise

Economic Goals

Efficiency, Freedom, Equity, Security & Predictability, Growth & Innovation (Additional Goals: Environmental protection, full employment, universal health care)

Economic efficiency

making the most of resources

Economic freedom

Freedom from government intervention in the production and distribution of goods and services

Economic Security and Predictability

assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster

Economic Equity

fair distribution of wealth

Economic Growth and Innovation

Innovation leads to economic growth, growth leads to a higher standard of living

Market

an arrangement that allows buyers and sellers to exchange things

Specialization

the concentration of the productive efforts of individuals and firms on a limited number of activities

Household

a person or group of people living in the same residence

Firm

an organization that uses resources to produce a product or service, which it then sells

Factor Market

firms purchase factors of production from households

Product Market

the goods and services that firms produce are purchased by households

Circular Flow Model

 shows the interactions between households and businesses in the free market

Profit

the financial gain made in a transaction

Self-Interest

 acting in own personal gain; also the motivating force in the free market

Incentive

the hope of reward or the fear of punishment that encourages a person to behave in a certain way

Adam Smith

father of modern economics/capitalism

“Wealth of Nations”

Book written by Adam Smith about mercantilism

Natural Law of Economics

Individual is better off left alone to pursue their own economic self-interest

Laissez-Faire

French Term (allow us to do – let us alone)

Profit Motive

desire for financial gain as an incentive in economic activity

Competition

struggle among producers for the dollars of consumers; the regulating force behind the free market. It causes more production and moderates firms' quests for higher prices

Voluntary Exchange

stimulates the fair distribution of wealth

Invisible Hand

consumers get the products they want at prices that closely reflect the cost of producing them which happens without any central plan or direction

Dollar Votes

theoretical impact of consumer choices on producer’s actions

Consumer Sovereignty

consumer's desires determine what manufacturers produce

Socialism

a range of economic and political systems based on the belief that wealth should be distributed evenly throughout a society

Communism

a political system in which the government owns and controls all resources and means of production and makes all economic decisions

Karl Marx

German economist, philosophist, and socialist; believed capitalism steals from the worker (the surplus)

“Das Kapital”

written by Karl Marx; critiques political economy and exploitive method of capitalism’s economic systems; capitalism leads to class struggles

“Communist Manifesto”

co-authored by Karl Marx and Friedrich Engels; presents problems of capitalism; favors communism; discusses proletariat and bourgeoisie + call for workers to unit against oppressive systems

Theory of Work

man’s value comes from his labor

Labor Theory of Value

value of commodity (good or service) is determined by the amount of labor that goes into its production

Theory of Surplus Value

profit (surplus value is exploited from the worker by the owner); the difference between the value produced by the worker and their wages is the surplus (workers paid less than value of goods/services they create, extra goes to owner)

Proletariat

working class

Bourgeoisie

upper class

Welfare State

government provides for needs of citizens through government programs and social services

Redistribution of Wealth

take from rich and give to the poor (balance haves and have nots)

Equality v Freedom

Balance between equitable distribution of resources vs. liberty of individuals to make their own economic choices without government intervention; cannot be pursued at the same time

Fiscal Policy

the use of government spending and revenue collection to influence the economy

Federal Budget

a written document estimating the federal government’s revenue and authorizing its spending for the coming year

Fiscal Year

a 12 month period used for budgeting purposes (not necessarily january-december)

Expansionary Policies

fiscal policy that tries to increase output

Contractionary Policies

fiscal policy intended to decrease output

Classical Economics

the idea that free markets regulate themselves

Keynesian Economics

uses demand side theory as the basis for encouraging government action to help the economy

Balanced Budget

a budget in which revenue and spending are equal

Budget Surplus

occurs in any year when revenues exceed expenditures

Budget Deficit

occurs in any year when expenditures exceed revenues

Hyperinflation

inflation that is out of control

Treasury Bill

short term bonds that have maturity dates of 26 weeks or less

Treasury Note

have terms of 2 to 10 years

Treasury Bond

bonds that mature 30 years after issue

National Debt

the total amount of money the federal government owes to bondholders

What is the difference between (1)deficit and (2)debt

__(1)__ is the amount of money the government borrows for one budget representing one fiscal year while __(2)__ is the sum of all government borrowing before that time minus the borrowings that have been repaid. Each __(1)__ adds to the __(2)__ while each surplus subtracts from it

How is national debt measured

as a percentage of gross domestic product (GDP)

Gross Domestic Product (GDP)

the total value of all final goods and services produced in a country in a given year

Crowding-out-effect

loss of funds for private investment caused by government borrowing

Servicing the Debt

amount of cash that's needed to repay the principal and interest on a debt

Tax

required payment to a local state or national government

Revenue

the income received by a government from taxes and other non-tax sources

Tax Base

income, property, good, or service that is subject to tax

Individual Income Tax

income based on a person’s earnings

Sales Tax

 tax based on goods or services that are sold

Property Tax

a tax based on real estate and other property

Corporate Income Tax

a tax based on a company’s profits

Proportional Tax

a tax for which the percentage of income paid in taxes remains the same at all income levels

Progressive tax

a tax for which the percentage of income paid in taxes increases as income increases

Regressive Tax

a tax for which the percentage of income paid in taxes decreases as income increases

Incidence of a Tax

the final burden of a tax (who actually ends up paying the tax — producers or consumers)

Withholding

taking tax payments out of an employee’s pay before he or she receives it

Tax Return

a form used to file income taxes

Taxable Income

the earning on which tax must be paid; total income minus exemptions and deductions

Personal Exemption

a set amount that taxpayers must subtract from their gross income for themselves, their spouse, and any dependents

Deductions

amount you subtract from your income when you file so you don’t pay tax on it

FICA (Federal Insurance Contributions Act)

a U.S. federal payroll tax (tax from paycheck that helps pay for social security and Medicare programs)

Social Security

a federal program that collects payroll taxes from current workers and redistributes the money to current recipients

Medicare

 federal health insurance for anyone over the age of 65

Estate Tax

a tax on the total value of the money and property of a person who has died

Gift Tax

a tax on the money or property that one living person gives to another

Tariff

a tax on imported goods

Tax Incentive

a use of taxation to encourage or discourage certain types of behavior

Mandatory Spending

spending that congress is required by existing law to do

Discretionary Spending

spending about which congress is free to make choices

Entitlement

social welfare programs that people are entitled to benefit from if they meet certain eligibility requirements

Medicaid

program providing medical and health-related services to low-income people