AE - 21ST CENTURY

• Economic Systems - A system that dictates how resources are allocated to different sectors of society. Who answers the three economic questions (what to produce, how to produce it, and for whom to produce it).
• Traditional Economic System - Answers economic questions through the honoring of tradition and established trends (inheritance, hierarchy of position ruling in a company, etc.).
• Command Economic System - The central authority provides the answers to the three economic questions. The role of this central authority is usually filled by the government.
• Command Economic System - Negative: Because all resources are allocated by the govern government, there is no profit incentive. Individuals would are not motivated to work harder.
• Command Economic System - Positive: Can easily adapt to changing circumstances A central authority is more likely to take into consideration the needs of the less fortunate.
• Market Economic System - Has little to no government intervention. The free market and the opportunity for profit answer the three economic questions. This system applies mostly to microenterprises or small businesses.
• Market Economic System - Positive: Workers are more likely to be motivated to work harder as harder as they can make more money. Usually leads to economies with stronger growth rates.
• Market Economic System - Negative: The distribution of resources is less fair and the poorest of poorest of society are usually worse off. There is no economic incentive to help the marginalized and vulnerable sectors.
• Mixed Economic System A system that takes the best characteristics from each of the other three systems. A balance between the free market and government intervention.
• Macroeconomic Goals 1. Low Unemployment 2. Stable Inflation Rate 3. Economic Growth 4. Equity in Income Distribution
• Gross Domestic Product GDP can be measured in three ways
• Expenditure Approach - The formula: GDP = C + I + G + NX
• Consumption (C) - purchase of goods by individuals and households
• Investments (I) - spending by firms and households on capital and long-term goods.
• Government spending (G) - all spending made by the government (ie., salaries, public projects, etc.)
• Net exports (NX) - the value of all exports (local goods sold abroad) minus imports (goods from abroad bought by local consumers)
• Income Approach - The formula: GDP = W + R + I + P
• Income Approach In the income approach, the GDP is equal to the value of total national income (TNI). TNI is the sum of all wages, rents, interests, and profits earned by members of the economy in each period.
• Wage (W) - income generated by the labor force. It can come from jobs or self-employment.
• Rent (R) - income that comes from the ownership of land.
• Interest (I) - increase in the value of capital goods.
• Profit (P) - income generated by firms operating in the country.
• Economic Growth This leads to higher income and more incentive to innovate
• Income distribution talks about how the national output is distributed to the population
• Income inequality occurs when some people earn more than others
• Equity - fairness, giving more to those who need more.
• Equality - giving everyone the same resources