LSN Students: Important notes on economics

Know the following:

capitalism: An economic system with private ownership of the means of production, in which there are many choices for businesses and consumers. It was described by Adam Smith in his 1776 book Wealth of Nations. This was the economic system the USA and most western countries had during the 1800's and early 1900's.

Adam Smith advocated a laissez-faire policy, in which government stays out of economics. People and nations should be free to do what they do best to create and increase wealth.

socialism: An economic system in which the government controls and owns the means of production. A more extreme form is called communism, which dominated much of the world between 1917 and 1991. Karl Marx, a 19th century German philosopher, is associated with the rise of socialism. He believed that capitalism had solved the problem of scarcity, but left a problem of inequality, in which few wealthy people own and control the means of production, leaving a large proletariat that has no resource save its own labor.

welfare state: An economic system in which government provides many services to citizens and/or residents. It is a by-product of the socialist ideal. Usually, it is supported by high taxes and/or extensive government borrowing.

mixed economy: An economic system in which some businesses are privately owned, and some are government-owned. The USA currently has a mixed economy.

command economy: An economic system in which government exercises total control over all economic activity. It was especially associated with the Communist experiment in much of the world between 1917-1991. Many hoped that command economies would improve the lives of the world's poor people, but this hope did not materialize. For example, before the 1920's, the Ukraine was one of the world's richest farming areas. After the Communist revolution and imposition of aq command economy, its agricultural productivity decreased greatly.

scarcity: This is the fundamental economic problem. Society NEVER produces all the goods that all the people want all the time. If people have sufficient food, clothing, and shelter, they will want other things, such as cars, computers, better furniture, the latest fashions, etc.

gross national product: The sum of all goods and services produced in a country per year. If it is rising, the economy is healthy; if it is falling, the economy is in decline.

comparative advantage: This is what you or your country or state is good at doing. For instance, the area between North Dakota and Texas has good agricultural land, so its comparative advantage would be in agriculture.

inflation: A problem that happens when government debts are very large, and the government tries to pay them off by printing more and more money. The money loses its values because there are too many dollars (or marks, or pesos, or rupees, or yuan, or yen, or won, or pounds) chasing too few goods and services.