Economics

Economics is a difficult subject, one some people spend years studying. To get you ready for the GED social studies test, we need to start with the basics.

Basic Economic Concepts

At the core of all economies is the buying and selling of goods. Beyond that, things get a bit more complicated.

Macroeconomics refers to the economy as a whole with a focus on how governments influence economic events and trends. How the government regulates (or doesn’t) economic activity determines what kind of economic system people experience in their daily lives.

Different Economic Systems
Traditional Economy	How It Works: People’s customs and traditions regulate/motivate the economy. Bartering is common. Examples: Primitive and tribal societies
Command Economy	How It Works: The government owns all factories, sets prices and production quotas, and employs everyone. Examples: The Soviet Union
Market Economy	How It Works: The government lets the economy operate independently with some oversight. Examples: The United States
Mixed Economy	How It Works: Businesses can operate independently and make profits but must abide by strong government regulations and high corporate taxes. Examples: Germany

People trade goods and services in markets, and economies want to reach equilibrium. Equilibrium is when a demand for a product or service matches the available supply. Supply and demand have an inverse relationship. If demand rises, supply will shrink. If supply rises, demand will shrink, etc., etc.

The U.S. Economy Throughout History and the Business Cycle

The writings of English economist Adam Smith had a significant impact on the young United States’ economic development. In his book, The Wealth of Nations, he argued that if individuals and businesses could operate without government oversight, the economy would flourish.

For most of U.S. history, the government’s policy toward the economy was laissez-faire, meaning hands off. This policy reflected Smith’s ideas. It wasn’t until the early 20th century that the government took an active role in regulating the economy. The government broke up monopolies – businesses that had total control over oil, railroads, and communications. As a result of the Great Depression, the government created new rules financial institutions had to follow. Modern American businesses work within this free yet regulated system.

The business cycle affects all businesses, but those with savings and competent leadership are more likely to survive.

The Business Cycle
#1: Growth	People are enthusiastic about the new business, leading to rapid initial growth.
#2: Slowdown	The businesses’ decisions or outside factors slow growth.
#3: Recession	When a recession hits (and one always does), the business must downsize and lay off workers to survive.
#4: Recovery	Changing government policies or economic improvement increases demand for the business’ goods and services.

How the U.S. Government Influences the Economy

The government’s basic functions affect the economy significantly. The government:

• Prints money and mints coins
• Employs millions of people
• Awards contracts to private businesses (i.e., which employ even more people)
• Insures bank deposits through the FDIC
• Regulates the production and sale of many products, including food and medication

All of these functions begin with Congress, the branch of the federal government tasked with raising and spending the nation’s money.

Outside of Congress, the independent Federal Reserve (the Fed) sets the prime rate, the interest rate at which the government lends money to financial institutions, such as banks. A high prime rate will cause financial institutions to charge higher interest for home and auto loans.

The Fed also determines the money supply, the amount of U.S. currency in circulation. The Treasury prints new bills and destroys old ones according to the Fed’s instructions.

Government economists want to prevent periods of high inflation or high deflation, as both can damage the economy.

Inflation and Deflation Explained
Inflation	Deflation
What It Is: Refers to the rate at which the price of goods and services increases over time. What Causes It: Lower supply and high economic growth can cause inflation. Why It’s Bad: Decreases the value of people’s money, as they must spend more for the same goods and services. How the Fed Fights Inflation: The Fed can reduce the money supply and raise the prime rate.	What It Is: Refers to the rate at which the price of goods and services decreases over time. What Causes It: Oversupply of goods/services, decreased demand, and a tight money supply can cause deflation. Why It’s Bad: Lower spending can cause businesses to fail, increasing unemployment and further suppressing demand. How the Fed Fights Deflation: The Fed can increase the money supply and lower the prime rate.

The Economy and Consumer Issues

Microeconomics involves the study of economics at the individual and business levels. All the economic decisions you make happen at the microeconomic level.

Everyone you know participates in the economy by selling their labor to one or more businesses. In return, they receive wages, such as a salary, medical benefits, and a retirement plan.

Starting in the 19th century, American workers began joining labor unions to increase their negotiating power. Unions participated in collective bargaining – the practice of unions negotiating for workers’ salary, benefits, and time off. By the 1930s, these unions had won significant victories for industrial workers, such as a minimum wage, the elimination of child labor, and unemployment insurance. Labor unions also provide workers with financial assistance in the event of a strike – a work stoppage meant to better workers’ salaries or benefits.

Consumers learn about new goods and services through advertisements. Government regulations do not allow advertisements to make false statements that could cause consumers harm.