Macro economic systems PDF

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Professor Sweeney Spring 2018
each chapter contains lecture notes as well as summaries of the most important info gathered from the book . In essence these are lecture notes and book summaries...

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Chapter 2 !

Economic Systems!

In capitalist or market economies, private individuals and firms own most of the resources.! -The who, what, how decisions are determined by individuals desires for products and profitmaking decisions by firms.!

Product Prices are the principal mechanism for communicating information in the system!

- People(Consumers) decide hat to buy! - the efficiency of sellers determined whether or not they survive or perish ! - Gov. role is to protect property rights, enforcing contracts, providing publics goods and ensuring competitive markets.!

Planned Economies(Socialist and Communist)! -most of the productive resources are own by the state! -Most economic decisions are made by the central government. ! Ex:USSR and China until recently !

Resources and Production ! Production:turning land, labor and capital and entrepreneurial ability into goods and services !

Land:refers to land in the usual sense as well as other natural resources that are used in production ! -Natural resources such as mineral deposits oil and natural gas and water.Economists refer to the payment to land as rent.!

Labor: both mental and physical talents of people ! -Improvements to labor capabilities add to labor’s productivity and less to a higher standard of living. (Ex:training,education-human capital)! -labor is paid in wages.!

Capital: Any manufactured product (trucks,printers) that is used to produce other products is included in the category of capital.! -capital earns interest! “capital” used by economics to refer to “real”(physical) capital. Money financial capital are important in that they are used to purchase red capital that is used to produce products. !

Entrepreneurial Ability: entrepreneurs combine land, labor and capital to produce goods and services. ! -Assume risks and combine and manage inputs of production, day to day, marketing finance of production decisions ! -For taking these activities and assuming risk entrepreneurs earn profits.!

Production Efficiency !

Production turns land, labor, capital and entrepreneurial ability-into products and services! Production method ! -Ability to use factors of production efficiently within a production method increases the amount of output given an amount of inputs used.! -Productivity:a measure of efficiency of outputs produced given a # of inputs(used)! Production Efficiency:mix of goods is produced at the lowest possible resource of opportunity cost !

——— As much output as possible is produced with a given amount of resources(technology aids in this)! ! ! Allocative Efficiency:mix of goods and services produced is the most desired. ! -Allocative Efficiency requires that the right mix of goods be produced at the lowest cost.! -In a capitalist country, consumers and businesses and the market on what is desirable. !

Production Possibilities and Economic Growth !

PPF-Production Possibilities Frontier! shows combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable but are inefficient use of resources(Economy can do better) and those outside of the frontier are unattainable.!

Opportunity Cost! The cost paid for one product in terms of the output of another product that must be forgone.! -opportunity cost thus represents the tradeoff required when an economy wants to increase its production of a single product.!

Increasing Opportunity Costs! -OC rise as more factors are used to produce increasing quantities of one product !

Economic Growth ! !

Economic Growth has two basic determinants: expanding resources and improving technologies ! -Expansion of resources allows producers to increase production of all goods and services in an economy. ! -Improved technological improvements can increase output without using added labor or other resources. !

Expanding resources !

Capital and labor are the principal resources that can be changed through gov action. !

Increasing Human capital and labor !

- A clear increase in population, the number of households or the size of labor shifts the PPF outward.!

- Labor increase can be caused by higher birthrates, increased immigration or an increased willingness of people to enter the labor force.!

- Americas high level of immigration fuels a strong rate of economic growth.!

Increase in population, the number of households, or the size of the labor force shifts the PPF outward ! -improving worker’s skills:investment in human capital !

Capital Accumulation ! -more capital makes each of unit of labor more productive and thus results in higher possible production throughout the economy.!

PPF represents the maximum output attainable when all resources are fully employed, reallocating production from one product to another involves opportunity costs.!

Specialization, comparative advantage ,and trade! Absolute and comparative advantage ! -Absolute advantage:exists when one country can produce more of a good than another country.! -Comparative Advantage: one country has a lower opportunity costs of producing good than another country. ! Practical Constraints on Trade ! Voluntary Trade: is a positive-sum game, because both countries benefit from it....