INTRODUCTION A nation is not made wealthy by the childish accumulation accumulation of shiny metals but is enriched by the economic prosperity of its people This quote is from Adam Smith a Scottish philosopher and the author of The Wealth of Nations 1776 which for the first time in history described the idea of a political economic system Smith’s book is considered the foundation of classical economics which focuses on economic growth and freedom and one of the most important important books ever written At the time a country’s wealth was based on how much gold and silver it had Smith believed that wealth should be based on how productive a country is and how much it can buy sell or trade An economy is the part of a society that creates wealth A country uses an economic system to manage its money and resources and meet the needs and wants of its people It dictates what goods and services are to be produced and sold In a healthy economy jobs are plentiful and people and businesses flourish The demand for goods and services is high In a failing economy demand is low businesses close and people lose their jobs A healthy economy depends on strong business institutions institutions and good management Management is necessary because no matter how productive a society gets there will never be an infinite number of resources Even those who live in the most abundant of societies could suffer a shortage of goods and services For example natural disasters like earthquakes 4
Introduction quakes could damage manufacturing manufacturing plants or rising costs of oil in other countries could slow down production and delivery Making effective business decisions is what determines the success or failure of not only an organization organization but the national and global economy as well Economics is the social science science that studies the economy and how society’s resources are shared It describes and analyzes analyzes decisions about the way goods and services are produced produced distributed and consumed consumed It then assesses the consequences of those choices Economic systems vary from the traditional system of monarchies monarchies common in ancient history to the contemporary version of capitalism operating in the United States today Adam Smith 1723 1790 was the most influential figure in the development of modern economic theory Every business in modern society participates in the economy by making and selling goods or services by paying paying taxes or by taking donations Business institutions like corporations nonprofit organizations and labor unions represent represent major forces in our national and global economies 55 5
CHAPTER ONE THE PATH TO CONTEMPORARY ECONOMIC SYSTEMS An economy is the wealth-producing segment of society Wealth is the sum of one’s assets minus one’s total liabilities liabilities such as debt People have needs and desires which are satisfied by the production of goods and services Societies that can barely afford to fulfill the basic needs of food shelter shelter and clothing are considered poor Economies like that of the United States sustain their people’s needs and far beyond beyond allowing them to afford luxuries that people of other countries cannot A society creates wealth by producing goods and services services Goods include such objects as apples clothes toys houses airplanes and roads Services are things that people do for others for example gymnastics lessons teaching banking military service music concerts and dental care Money defines the value of a product or service It is the means by which two unlike products or services are exchanged 6
The Path to Contemporary Economic Systems keeps Money the economy productive People People who make and sell things earn money to buy more materials to make more things People who provide services make money that allows them to buy goods and services from others THREE MAIN ECONOMIC SYSTEMS People who provide services for others such as gymnastics instructors are part of the service industry A traditional economy the earliest economic system is overseen by a sovereign ruler In traditional economies economies social roles are rigid and there is almost no hope for personal advancement In a command economy the government owns the means of production of goods and services and its central planners control all economic activity Central planners decide what is to be produced how much will be produced and 7 7
