Unit II: Economic systems, GDP..

Unit II

Types of economic systems:

1. Command
2. Traditional
3. Mixed
4. Free Market

1. Command
1. the government decides production (owns land, capital, controls labor); example: Cuba.

1. Traditional
   1. based on rituals, habits and customs. Most decisions are made by the elders, example: tribes.

1. Free Market
1. people and firms act in their own best interest. It allows buyers and sellers to exchange goods and services. Only free market: Hong Kong.

1. Mixed Economy
1. government regulating business to protect the public's interest. examples: US, Canada, Mexico.

Product market - buyer is usually consumer, and seller is a firm.

Factor market - factors of production. Most important: labor. The buyer is usually the firm, and the seller is the factor owner.

Gross Domestic Product - total value of all the final goods and services produced within the country's borders within a given year. It includes all production or income earned within the US by US and foreign producers. It excludes production outside of the US, even by Americans.

Gross National Product - it is the total value of all the final goods and services produced by Americans in a year. It includes production or income earned by Americans anywhere in the world. It excludes productions by non-Americans, even in the US.

Formula for GDP:

GDP = C + Ig + G + Xn, where:

             C = Personal consumption,

             Ig = Gross Private Domestic Investment (factory equipment, maintenance...)

             G = Government purchases of goods and services

             Xn = Net Exports (Exports - Imports)

Real GDP vs. Nominal GDP explainded:

Net national product (NNP) = GNP - Depreciation.

Net domestic product (NDP) = GDP - Depreciation.

National income - income earned by American owned resources, whether here or abroad.

Formula for national income: 

NNP - Indirect Business Taxes (IBT) or,

CE + RI + II + CP + PI, where:

CE = Compensation of employees,

RI = Rental income, 

II = Interest income, 

CP = Corporation profits, 

PI = Proprietors income, or

GDP - IBT - Depreciation - Net Foreign factor payments

Disposable personal income - after tax income available for household consumption (DPI).

Formula for disposable personal income:

NI - HT + GT, where

NI = National income,

HT = Household taxes,

GT = Government taxes