CHAPTER 8 Copyright © 2006 by the McGraw-Hill Companies, Inc.

CHAPTER 8

Copyright © 2006 by the McGraw-Hill Companies, Inc.

CHAPTER 8: Production, Distribution, and Consumption


The study of economicseconomics focuses on the following:

• The production and distribution of goods and services and how they relate to buying, selling, and making a profit

• The role of government in regulating business activities

• How a society accumulates and distributes wealth



In a primitive economyprimitive economy the acquisition and distribution of goods is absorbed within the traditional mode of existence.• Shared materials

for clothing and shelter

• Seasonal migration

• Strong communal life

The San people of Africa have lived in a primitive economic society for over 20,000 years.



CapitalismCapitalism is based on the private ownership of property and the resources of production.

• Wide selection of goods to purchase

• Regulation through competition

• Focus on the individual

(Continued)

The United States economy is based on the theory of capitalism.



SocialismSocialism is a system in which major industries may be owned privately or publicly but are subject to governmental control.• Limited choice of

goods to purchase• Central regulation

of supply and price

• Focus on society’s needs as a whole

In Norway, the government controls key industries, such as petroleum and oil production.



CommunismCommunism is a system in which property is owned by the state and all citizens share in the common wealth according to their need.• Limited choice and

ability to purchase goods

• Regulation according to abilities and needs

• Focus on the group

(Continued)

North Korea is one of the few remaining countries that practice communism.



The modern economy first developed in Europe during the late Middle Ages.

• Political fragmentation under the feudal system created a situation that allowed for the growth of freedom and the economy.

• The modern economy did not emerge due to deliberate planning, but as a response to local conditions.



Supply and demand are the basic factors that determine price.

• Supply:Supply: the amount of goods and services available for sale

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• Demand:Demand: the desire and ability of consumers to buy a good or service

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• Law of Supply and Law of Supply and Demand:Demand: the market prices of goods and services are determined by the relationship of supply to demand

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Measures of economic activity give an indication of how the economy is doing and where it might be heading.

• The Dow Jones Industrial Average

• Gross Domestic Product (GDP)

• Rate of inflation• Unemployment rate



Both GDP and GNP tend to fluctuate in a pattern called the business cycle.business cycle.

• A period of growth, or a boom, is followed by a period of slowdown called a recession.recession.

• A severe recession is called a depression.depression.

The last, as well as the worst, depression in American history, called the Great Depression, occurred in the 1930s.



Government can help an economy by:

• Providing security• Requiring dependable

standards• Providing trustworthy

courts• Enforcing laws• Maintaining

international agreements

In 2002, the U.S. Department of Justice formed a special task force to investigate possible fraud and insider trading in the wake of Enron Corporation’s bankruptcy.



Government can hurt an economy by:

• Being corrupt• Conducting unfair

trials• Oppressing and

exploiting residents• Spending unwisely

For nearly ten years, William Marcy “Boss” Tweed ran a corrupt political machine that profited at the taxpayers’ expense and put New York City’s economy in serious jeopardy.

(Continued)



Government can influence economic activity through its taxation policy and enforcement.

(Continued)

Income tax A percentage of wages, profits, and other income paid to federal, state, and local governments

Social Security tax

A percentage of wages paid into a public insurance fund that can be drawn on upon retirement

Capital gains tax

Money paid to the federal government out of profits from the sale of land, buildings, stocks, and other capital assets

Property tax Money paid (usually to a local government) by the owners of real estate

Sales tax Money paid to federal, state, or local governments on the purchase of goods or services

Types of Government Taxes



Financial institutions accept deposits, lend money, safeguard and transfer funds, guarantee creditworthiness, and exchange money.• For individuals: savings banks, savings

and loan associations, and credit unions

• For businesses: commercial banks• For the government and other banks:

central banks• For governments and nations:

international financial institutions



When deciding how to manage finances, a person needs to think about the following:

• Setting priorities• Making a budget• Banking and saving• Investing• Controlling debt• Planning for

retirement



The distribution of wealth is the way that money is divided among the people in a group, country, or the world.

• The disparity between the rich and the poor is growing larger.

• This will inevitably have a continuing impact on current events.

U.S. Distribution of Wealth, 1997 Portion of Population (% of Wealth)

Bottom 40%,

0.50%Next 40%, 15.20%

Next 10%, 11.50%

Next 5%, 11.40%

Next 4%, 22.30%

Top 1%, 39.10%



Economic development is encouraged by the following practices:

• Inventiveness and ingenuity

• Organization and efficiency

• Utilization of natural and human resources

The invention of the Internet is a major force behind the developing global economy.


THE ENDTHE ENDPractice the skills you learned in this chapter by taking the Chapter Review QuizChapter Review Quiz or the GED GED Practice QuizPractice Quiz.


CHAPTER 8 Copyright © 2006 by the McGraw-Hill Companies, Inc.

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Transcript of CHAPTER 8 Copyright © 2006 by the McGraw-Hill Companies, Inc.