Chapter 4 Flashcards
Economic System
The way a country organizes its resources and distributes goods and services to its citizens
Defining questions of a country’s economic system
- What should the country product and in what quantities?
- How should scarce resources such as labour and capital be allocated?
- How should goods and services be distributed throughout the country?
- What should be the price of the goods and services?
Market Economy
An economic system determined by free competition, in which businesses, consumers, and government act independently, of on another, and market forces and self-interest determine what foods are created and sold.
In a market economy:
- Corporations and people are encouraged to own private property.
- Profit belongs to business owners and they can choose how to spend it.
- Companies compete in terms of quality, services, price, reputation, and warranties. Consumers have greater selection and companies have an incentive to innovate.
Centrally planned economy
An economic system in which the government controls all elements of the economy, including prices, wages, and production.
- Ownership of property is restricted
- All product belongs to the government; all workers are employed by the government
- Competition is limited; government determines price, quality, style, and amount of goods and services.
Mixed Economy
An economic system that sits between a market economy and a centrally planned economy, combining government intervention and private enterprise.
- Property is owned by individuals, corporations or government.
- Profit is encouraged, but taxed to support government projects and programs
- Strong competition amongst corporations; government may also be a competitor
Political System
The type of government by which a country is run
Democracy
A state governed by all eligible members of the population through elected representatives.
- Characterized by free and fair elections, the rule of law, free speech and press, the right to assembly, and freedom of religion
- Politicians may be more concerned with reelection than the good of the country
Autocracy
A state of government by a single individual or a small group of people with unlimited power.
- Usually has a strong military presence
- Strives to control all aspects of citizens’ lives
- Citizens have no influence on government
Underdeveloped countries
Also referred to as the least developed or 3rd world countries, nations that are the lowest level of the world’s economy.
Effects of underdeveloped countries
- Severe poverty
- Lack of social services
- Poor infrastructure
- Low levels of literacy
- Limited access to technology
- Agriculture or resource based economies
- Long term political issues
Developed Countries
nations characterized by a high per capita income or strong gross domestic product
Effects of developed countries
- A reliance on secondary and predominantly tertiary industries
- High standards of living
- High literacy rates
- Major advancements in health care and technology
GDP
total goods and services produced in one country in one year
GNP
total value of goods produced and services provided by a country during one year, equal to the gross domestic product plus the net income foreign investments
Business Cycle
Recurring periods of increased and decreased economic activity, or expansions and contractions.
Four stages of business cycle
Recession, Trough, Expansion, Peak
Recession (two consecutive quarters of GDP)
The economy slows down. There is a decline in consumer purchasing, an increase in unemployment and, business contract or close.
Trough
Production and employment reach their lowest levels. The economy completes the recession and turns towards prosperity
Expansion
The economy begins to grow again. Employment, wages, production, and profits expand
Peak
Top of the cycle. Economy stops expanding and begins contracting
Three types of economic indicators
Leading, Lagging, Coincident
Leading
Adjust before the economy experiences a change and predict where the economy is going, housing starts are an example
Lagging
Do not adjust until after the economy has experienced a change. Unemployment rate is an example
Coincident
Move in conjunction with the business cycle, international trade is an example
Opportunity cost
The value of what is foregone, or the cost of giving something up to get something else, for example, the opportunity cost of being in class is the money a student could earn working at a job.
Absolute advantage
The ability of one country to use its resources to make a product or service more efficiently than other countries
Comparative advantage
The ability of a country to produce a good at a lower opportunity cost than another country, Comparative advantage is the foundation for specialization and trade.
Ways government affects international trade and business
- Establishing import and export laws
- Setting tariffs
- Maintaining membership in trade organization and negotiating trade agreements
- Determining monetary policy, including currency exchange rates
- Determining fiscal policy, including taxation laws
- Building infrastructure, such as roads and sewer systems
Government establishes
- Regulations that business must comply with
- Trade offices
- Government embassies, high commissions, and consulates
- Trade missions
Corporate influence on governments
- Contribute large amounts to political campaigns
- Participate in trade missions with politicians
- Pressure government to change or adopt policies that will benefit business.
Lobbying
The process through which companies, special, interest groups, or individual attempt to influence government officials and persuade them to endorse public policy favourable to these groups,
