Chapter 2 Our Global Economy

Basic Economic Problem

You are limited by the amount of time and money you have

Economics

Study of how people choose to use limited resources to satisfy their unlimited needs and wants

Scarcity

Limited resources available to satisfy the unlimited needs and wants of people

Decision Making Process

Define the problem - what do I need or want?

Identify the alternatives

Evaluate the alternatives

Make a choice

Take Action on the choice

Review the decision

Supply

Relationship between the amount of a good or service that businesses are willing and able to make available and the price

Demand

Relationship between the amount of a good or service that consumers are willing and able to purchase and the price

Market Price Equilibrium

The point at which demand and supply intersect

Inflation

Increase in the average prices of goods and services in a country

Demand-Pull Inflation

Demand exceeds supply, prices go up

Cost-Push Inflation

Expenses of a business increase (Cost of raw materials rise)

Land (FoP)

Natural Resources | raw materials that come from the earth, water, or air

Examples: Iron ore, gold, silver, oxygen, rivers

Labor (FoP)

Human Resources | the people who work to create goods and services

Capital (FoP)

Capital resources | buildings, money, equipment and factories used in the production process | Large Expense used over years so long-term investment

Command Economies

Government or a central-planning committee regulates the amount, distribution and price of everything produced. Government owns all. All income goes to the government

Example: Communism - Government owns all productive resources of the economy and a single party controls the government

Market Economies

Individual companies and consumers make decisions about what, how, and for whom items will be produced

Example: Capitalism | Market economy exists

3 Main Characteristics

Private Property

Profit Motive

Free & Competitive Marketplace

Mixed Economies

A blend of government involvement in business and private ownership

Socialism

Political and economic system with most basic industries owned and operated by government with the government controlled by the people

Privatization

Process of changing an industry from publicly to privately owned

Literacy Level (Dev. Factor)

Countries with better education systems can usually provide higher quality goods/services to their citizens

Technology (Dev. Factor)

Automated production, distribution, and communication. Allows company to create and deliver goods, services, and ideas quickly

Agricultural Dependency (Dev. Factor)

A country focusing on agriculture doesn’t have manufacturing base to produce high quality products

Industrialized Countries

Strong business activity, usually from advanced technology and highly educated population

Developing Countries

Evolving from less developed to industrialized

Less-Developed Countries

Country with little economic wealth and emphasis on agriculture or mining

Absolute Advantage

When a country can produce a good or service at a lower cost than other countries. Usually due to natural resources or raw materials of a country

Example: Saudi Arabia - Oil production

Comparative Advantage

A country specializes in the production of a good or service at which it is relatively more efficient

Example: Swiss Watchmakers

GDP | Gross Domestic Product

Measures output of goods that a country produces within its borders. Includes items produced with foreign resources

GDP per capita = GDP/# of people in the country

GNP | Gross National Product

Measures the total value of all goods and services produced by the resources of a country. Includes production in other countries using resources of the country whose GNP is being measured

Balance of Trade

Difference between a country’s exports and imports

Foreign Exchange Rate

Value of one country’s money in relation to the value of the money of another country

Foreign Debt

Amount a country owes to other countries

CPI | Consumer Price Index

Federal government report

Published by Bureau of Labor Statistics

Used to compare price levels for various products and services in different regions of the country

Aids managers in buying decisions

Things to Remember

Continually rising prices is not a sign of a healthy economy

As supply decreases, price increases

As supply increases, price decreases

Unemployment Rate

Indicates country’s economic situation

People are not earning an income

Can’t purchase needed goods/services

More people lose their jobs

Weaker economy

Balance of Trade

Difference between country’s exports and imports

Favorable Balance of Trade

When a country exports more than it imports

Unfavorable Balance of Trade

When a country imports more than it exports

Consumer Price Index Shows

Price levels for various products and services