ECONOMICS STANDARD TWO: Students will examine the interaction of individuals, families, communities, businesses, and governments in a market economy [Macroeconomics].
Students will understand that:
- A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government, and trading partners.
- Because of interdependence, decisions made by consumers, producers, and government impact a nation’s standard of living.
- Market economies are dependent on the creation and use of money, and a monetary system to facilitate exchange.
Unlike the study of individual markets, the total economy is the sum of all markets in a society. Understanding involves the ability on the part of the students to analyze how changes in one market will impact others. In a market economy, there are three major players in the economy: households, businesses, and government. What the society produces generates income for households. Households sell their productive resources (land, labor, capital, and entrepreneurship) to businesses in exchange for income (rent, wages, interest, and profit). Household income is spent, taxed, or saved. The money spent for private goods and services returns to businesses, while the taxes paid to the government fund public goods and services. Savings is money households do not spend on goods and services. Most households place this income with financial intermediaries, banks and brokers. These financial institutions transfer the savings through businesses borrowing from banks, the buying and selling of corporate stocks and bonds, the funding of mortgages, and the buying of insurance. Businesses from small to large borrow to expand. This requires buying more productive resources from households, which in turn creates more household income. Additionally, goods and services are exported and imported by American households and businesses causing increases in consumption and production within the United States. Economists measure these activities by calculating the gross domestic product and then measure a nation’s standard of living by computing gross domestic product per capita.