Economic Systems

8/26/2025 - Macroeconomics Unit 1

capitalist economy

An economic system where resources and production are privately owned, and decisions are guided by profit and market forces.

command economy

An economic system where the government makes all decisions about production, allocation, and pricing of goods and services.

economic growth

An increase in a nation’s total output of goods and services over time, usually measured by rising real GDP.

efficiency

The use of resources in a way that maximizes output of goods and services without waste.

free enterprise

An economic system where private businesses operate in competition with little government regulation, guided by voluntary exchange.

full employment

When nearly all available labor resources are being used in the most efficient way; typically unemployment is at the natural rate (NRU).

inflation

A sustained rise in the general price level of goods and services in an economy.

invisible-hand

Adam Smith’s idea that individuals pursuing their own self-interest unintentionally promote the overall good of society.

laissez-faire

An economic philosophy advocating minimal government intervention in the market economy.

mixed economy

An economic system combining elements of market and command economies, with both private decision-making and government regulation.

productivity

The amount of output produced per unit of input, such as per worker or per hour of labor.

pure market economy

An idealized system where all economic decisions are made by private individuals and firms without government intervention.

recession

A decline in total economic activity, typically defined as two consecutive quarters of negative real GDP growth.

Adam Smith

18th-century economist, known as the “father of economics,” who wrote The Wealth of Nations and introduced concepts like the invisible hand and specialization.

standard of living

The level of wealth, comfort, goods, and services available to a population.

total output

The total quantity of goods and services produced by an economy, often measured as GDP.

traditional economy

An economic system based on customs, traditions, and cultural practices, where roles and production are passed down through generations.

transitional economy

An economy shifting from central planning to a more market-oriented system.

unregulated market

A market where prices and allocation of goods/services are determined solely by supply and demand, without government intervention.

Wealth of Nations

Book written by Adam Smith (1776) that laid the foundations of modern economics, advocating for free markets, specialization, and limited government.