1.2 Economic Theories, Models, and Systems

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources

exports

products (goods and services) made domestically and sold abroad

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

goods and services market

a market in which firms are sellers of what they produce and households are buyers

gross domestic product (GDP)

measure of the size of total production in an economy

imports

products (goods and services) made abroad and then sold domestically

labor market

the market in which households sell their labor as workers to business firms or other employers

market

interaction between potential buyers and sellers; a combination of demand and supply

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

model

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation; also known as theory

private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

traditional economy

typically an agricultural economy where things are done the same as they have always been done

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations