OGT Review 4 - Economics
Students use economic reasoning skills and knowledge of major economic concepts, issues and systems in order to make informed
choices as producers, consumers, savers, investors, workers and citizens in an interdependent world.
Capitalism definition; an economic system in which private individuals or groups of individuals own land, factories,
and other means of production. They compete with one another, using the hired labor of other persons, to produce goods and
services for profit.
In basically capitalist systems, private decision-makers determine how resources will be used, what mix of goods and services
will be produced, and how goods and services will be distributed among the members of society. Capitalism is frequently known
as free enterprise or modified free enterprise because it permits people to engage in economic activities largely free from
government control. Other names sometimes applied to basically capitalist systems are free market systems, laissez faire systems,
and entrepreneurial systems. In systems based on central planning, the government makes most major economic decisions. Government
planners tell managers what to produce, whom to sell it to, and what price to charge. Centrally planned economies are often
called command economies.
The root of the word capitalism is capital. Capital has several meanings in economics and business. In business, it refers
to the money needed to hire workers, buy materials, and pay bills. In economics, capital includes buildings, equipment, machinery,
roads, and other assets used to produce things. In basically capitalist systems, most land, factories, and other capital is
privately owned. In systems based on central planning, the government owns most of the capital used in production.
Socialism definition: ;an economic system of social organization by which the major means of production and distribution
are owned, managed, or controlled by the government.
Socialism refers to economic and political arrangements that emphasize public or community ownership of productive property.
Productive property includes land, factories, and other property used to produce goods and services. All societies have practiced
some form of public ownership. But the term socialism, as it is used today, first appeared in Europe in the 1800's. At that
time, socialist thinkers contrasted the idea of socialism with the newly developed idea of capitalism. Many socialists were
also concerned by the disruptions in people's lives caused by the Industrial Revolution, a period of rapid industrialization
that had begun in the 1700's. Eventually, many countries adopted socialist policies. These policies included government control
of the economy and the establishment of vast social welfare programs to aid the needy.
Communism definition: an economic system in which the state, usually governed by an elite party, totally controls production,
labor, and distribution of goods. In doing so, the social and cultural life and thought of the people in regulated by the
Communism is a political and economic system that became one of the most powerful forces in the world. It shaped much
of history from the early 1900's to the 1990's. Some people have considered Communism the greatest threat to world peace.
Others have looked on it as the world's greatest hope.
The term communism has several meanings. Communism can be a form of government, an economic system, a revolutionary movement,
a way of life, or a goal or ideal. Communism is also a set of ideas about how and why history moves, and in what direction
it is headed. These ideas were developed mainly by V. I. Lenin from the writings of Karl Marx. Lenin was a Russian revolutionary
leader of the early 1900's, and Marx was a German social philosopher in the 1800's.
According to Communists, their long-range goal is a society that provides equality and economic security for all. Communists
traditionally have called for government ownership rather than private ownership of land, factories, and other economic resources,
called the means of production. They also have called for government planning of economic activity, and for strict rule by
the Communist Party.
During the 1900's, millions of people lived under Communist rule. In 1917, Russia became the first state to be controlled
by a Communist Party. Russia joined with three other territories in 1922 to form the Union of Soviet Socialist Republics (U.S.S.R.),
or Soviet Union. By 1940, 12 more republics were added, and the Soviet Union had become one of the most powerful countries
in the world.
After World War II (1939-1945), Soviet troops occupied most of Eastern Europe. The Soviet Union was thus able to help
Communist governments take power in that region. In 1949, the Chinese Communist Party won a civil war for control of China.
The rapid spread of Communism after World War II brought about a struggle for international power and influence between
Communist countries and non-Communist countries. This struggle was known as the Cold War. Most people believe that events
in the late 1980's and early 1990's marked the end of the Cold War. These events included the collapse of several Communist
governments in Eastern Europe in 1989 and the fall of Communism in the Soviet Union in 1991. By 1992, Communist parties remained
in power in only a small number of countries, including China, Cuba, Laos, North Korea, and Vietnam.
The terms Communism and socialism are frequently confused. Communists usually refer to their beliefs and goals as "socialist."
But socialists do not consider themselves Communists. Communists and socialists both seek public ownership or regulation of
the principal means of production. But most socialists favor peaceful and legal methods to achieve their goals, while Communists
have often used force without regard to law. Socialism may or may not be based on the teachings of Marx. Communism is based
on the teachings of both Marx and Lenin.
Labor movement is a term that refers to the efforts of workers as a group to improve their economic position. The movement
consists chiefly of attempts by labor unions to promote the welfare of wage earners. But political parties and other groups
have also played a part in the labor movement.
Before the development of labor unions, individual laborers had almost no voice in determining their wages, hours, or
working conditions. There was a plentiful supply of labor, and employers could easily replace any worker who threatened to
quit. The competition for jobs forced poor people to work under almost any conditions.
Workers formed unions because their bargaining power as a group was greater than that of individuals. If all the employees
in a factory or other business stopped work, it would be difficult to replace them. But early unions faced strong opposition.
Courts regarded the first attempts at group bargaining as illegal, and employers refused to recognize unions as the representatives
In the United States, the labor movement began to be more widely accepted during the 1930's. The National Labor Relations
Act of 1935 and other laws required employers to bargain with unions. By 1945, more than a third of all nonagricultural laborers
were union members. Today, organized labor is still a powerful economic force, even though the percentage of workers who belong
to a union has declined sharply. The highest percentage of union members are in construction, manufacturing, mining, and transportation
The labor movement, along with economic progress, has given workers a higher standard of living. Compared to past laborers,
modern workers earn higher wages, work shorter hours, are better protected against accidents, and receive more fringe benefits.
However, some people believe that unions are too large and too powerful.
Amendment 16: Income taxes
(This amendment was proposed on July 12, 1909, and ratified on Feb. 3, 1913.)
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment
among the several states, and without regard to any census or enumeration.
Notes: In 1894, Congress passed an income tax law, but the Supreme Court declared it unconstitutional. This amendment
authorized Congress to levy such a tax.
Income tax is a tax on the earnings of individuals and corporations. Nearly all nations levy income taxes to pay for their
government programs. Such taxes may be levied by the federal government, state or provincial governments, and even some local
The United Kingdom was the first country to collect a general income tax. The government enacted the tax in 1799 as a
temporary measure to help pay the costs of the Napoleonic Wars. Many countries enacted income taxes from time to time during
the 1800's to help meet unusual expenses, such as wars. The income tax came into wide permanent use during the early 1900's.
In countries where most people work for wages or salaries-including Canada, the United Kingdom, and the United States-the
individual income tax raises more money for the government than any other source of revenue. In countries where most people
are self-employed in agriculture or service industries, such as India and Malaysia, individual income taxes provide a much
smaller part of the government's revenue.
Many people have questioned the fairness of the income tax, its effect on economic activities, and how complicated it
has become in many countries. Some people have even called for its elimination. But the income tax will likely remain an important
part of most countries' tax systems.
Types of income taxes
The two major kinds of income taxes are individual income taxes and corporate income taxes. Individual income taxes, also
called personal income taxes, are levied on the income of individuals. Corporate income taxes are applied to the earnings
An income tax may be either progressive or proportional. Under a progressive income tax, the more taxable income a person
earns, the higher percentage of taxes he or she owes. Taxable income is the amount left over after certain items have been
subtracted from total earnings. For example, a person with a taxable income of $10,000 may pay a tax of 20 percent of that
income, or $2,000. But a person whose taxable income is $20,000 may pay a tax of 25 percent of that income, or $5,000.
Under a proportional income tax, people pay the same percentage of tax for all levels of taxable income. For example,
under a proportional tax rate of 20 percent, a person whose taxable income is $10,000 must pay a tax of 20 percent of that
income, or $2,000. A person with a taxable income of $20,000 must also pay a tax of 20 percent of his or her income, or $4,000.
Monopoly - definition: the exclusive control of a commodity or service.
During the late 1800's and early 1900's, many business leaders in the United States tried to reduce competition. In some
industries, many small firms merged to form large corporations. In other industries, corporations formed monopolistic combinations
called trusts, in which a group of managers controlled prices and production without a formal merger. Some trusts cut prices
to force smaller firms out of business. The trusts then limited production and raised prices. Huge trusts monopolized many
fields, including the railroad, steel, and petroleum industries.
The abuse of monopolies and trusts led to a number of federal laws. The Sherman Antitrust Act of 1890 banned any trust
or other combination that interfered with interstate or foreign trade. In 1911, the government used this act to break up the
Standard Oil Company into more than 30 separate, competing firms. The Clayton Antitrust Act of 1914 made it illegal for corporations
to group together under interlocking boards of directors. This law also prohibited several unfair business practices that
large firms had used to eliminate smaller rivals. The Celler-Kefauver Act of 1950 tightened control over mergers that might
In 1998, the U.S. Department of Justice charged Microsoft Corporation with using anticompetitive practices to destroy
its competition in the computer industry. Following a 1999 trial, a federal district court judge found that Microsoft had
violated antitrust laws by abusing its monopoly in personal computer operating systems. In 2001, Microsoft reached a proposed
settlement with the Justice Department. The settlement included measures to protect competition and consumer choice. A federal
judge accepted the settlement, with minor modifications, in 2002.
Today, antitrust laws are enforced by the Federal Trade Commission (FTC) and the Antitrust Division of the Department
of Justice. The FTC can order a company to stop unfair methods of competition. The Antitrust Division investigates and prosecutes
businesses that violate antitrust regulations.
The federal government and most state governments have special laws to control public utilities. Government regulation
replaces competition in setting prices and establishing standards of service for many of these utility companies.
Federal Reserve System is an independent agency of the United States government that helps oversee the nation's banking
system. The Federal Reserve System, sometimes called the Fed or the FRS, is known as the central bank of the United States.
Its most important job is to assist the U.S. government in managing the economy by encouraging economic growth and controlling
inflation. It pursues these goals by influencing interest rates and, thus, the availability of money and loans. The program
the Fed follows in influencing interest rates is called its monetary policy. The Fed also performs many financial services
for the federal government and provides numerous services to commercial banks.
History. Congress established the Fed in 1913 to provide a flexible currency for the nation and to strengthen the supervision
of the banking system. In the mid-1930's, Congress gave the Fed authority to set reserve and margin requirements. Later laws
made it easier for the Fed to lower interest rates when a financial disaster seemed likely. But the Fed focus on interest
rates was criticized for making the economy unstable. As a result, in 1979, the Fed adopted a policy aimed at controlling
the money supply instead of interest rates. The money supply is the total amount of money in the country, including cash and
bank deposits. This policy helped control inflation, but it also contributed to recessions. By 1993, the Fed had returned
to a focus on controlling interest rates as its main mechanism for stabilizing the economy. It did so because it felt changes
in investment patterns had weakened the relationship between the money supply and the growth rate of the economy.
Managing the economy. The Fed promotes economic stability chiefly by (1) working to keep interest rates low in recessions
and (2) letting interest rates rise in periods of rapid economic expansion to control inflation. The Fed can influence interest
rates in three main ways. It can conduct open-market operations, change reserve requirements, or change the discount rate.
Open-market operations are the sale or purchase of government securities by the Fed. The Fed sells securities if it wants
to increase interest rates. Payments for the securities are drawn on banks, leaving the banks less money to loan. As a result,
banks raise their interest rates on loans, and fewer people can afford loans. To attract more funds, the banks also raise
the interest rates on deposits in savings and similar accounts. In addition, when the Fed sells securities, the supply of
bonds increases, and so issuers of bonds must compete harder for investors' money. As a result, the interest rates on bonds
rise. The Fed buys back government securities if it wants to reduce interest rates.
Reserve requirements are percentages of deposits that almost all deposit-taking institutions must set aside either as
currency in their vaults or as deposits in their district FRB. An institution can use the rest of its deposits to make loans.
Raising the reserve requirement reduces the money banks have available for loans. Thus, the banks raise their interest rates
on loans to ration their loan funds. They also raise their interest rates on deposits to attract new funds. Lowering the reserve
requirement enables banks to lower their interest rates for both loans and deposits.
The discount rate is the interest rate banks pay when they borrow money from an FRB. By raising the discount rate, the
Fed can increase what it costs banks to make loans and thus cause banks to raise interest rates on loans. Lowering the rate
has the opposite effect. However, banks rarely borrow from an FRB, and the Fed uses changes in the discount rate chiefly to
communicate changes in monetary policy.
Organization. The Fed has 12 Federal Reserve Banks and 25 Federal Reserve Bank branches. Each Federal Reserve Bank (FRB)
operates in one of the country's 12 Federal Reserve districts. Most districts have from one to five FRB branches, each of
which offers many of the services that FRB's provide. Banks in the FRS use their FRB much as people use a bank in their community.
All national commercial banks are required by law to be members of the Fed. Membership is optional for state-chartered
banks. But all deposit-taking institutions are subject to Fed requirements regarding a certain amount of deposits that cannot
be used for loans.
Two main committees direct Fed policies. They are the Board of Governors and the Federal Open Market Committee. The Board
of Governors administers the system. It has seven members. Each member is appointed by the President of the United States
to a 14-year term, subject to the consent of the U.S. Senate. The President names one member to serve as chairman for four
Great Depression was a worldwide economic slump of the 1930's. It ranked as the worst and longest period of high unemployment
and low business activity in the 1900's. Banks, factories, and shops closed, and farms halted production. Millions of people
were left jobless and penniless. Many people had to depend on the government or charity to provide them with food.
The Great Depression had significant effects on people's beliefs and on government policies. It caused some nations to
change their leaders and their types of government. In the United States, President Herbert Hoover held office when the Great
Depression began. But soaring unemployment and declining output led to the election of Franklin D. Roosevelt in 1932. The
Roosevelt administration introduced a number of policies that transformed the role of the government in the economy.
President Hoover believed that business, if left alone to operate without government supervision, would correct the economic
conditions. He vetoed several bills aimed at relieving the Depression because he felt they gave the federal government too
much power. Hoover declared that state and local governments should provide relief to the needy. But those governments did
not have enough money to do so.
Roosevelt believed the federal government had the chief responsibility of fighting the Depression. He called Congress
into a special session, now called the Hundred Days, to pass laws to relieve the Depression. Roosevelt called his program
the New Deal. The laws established by the New Deal had three main purposes. First, they attempted to provide relief for the
needy. Second, they sought to aid recovery by providing jobs and by forming partnerships between government, consumers, and
businesses. Third, the laws tried to reform business and government so that such a severe depression would never happen again.
The recovery from the Depression. The New Deal programs helped relieve some of the worst human suffering of the Depression.
The government also increased trade by lowering tariffs on certain imported goods. In return, other nations lowered tariffs
on some products that they imported from the United States. However, the economy substantially improved only after the United
States abandoned the gold standard, devalued the dollar, increased the money supply, and helped the banking system to recover.
Despite the various government programs, about 15 percent of the nation's working force still did not have a job in 1940.
Unemployment did not substantially decline until 1942, after the country had entered World War II. The great increase in production
of war materials provided so many jobs that the U.S. unemployment rate fell to about 1 percent in 1944.
Long-term effects of the Depression
New government policies. Following the Great Depression, many countries began to provide better welfare benefits for the
poor. In the United States, laws of the New Deal gave the government more power to provide money for the needy and the elderly.
Since the Depression, both Democratic and Republican administrations in the United States have broadened the powers of the
In addition, many governments changed their basic philosophy of spending as a result of the Great Depression. Before the
Depression, they had tried to spend the same amount of money as they collected, even during economic downturns. But since
the 1930's, governments have been more willing to reduce taxes or increase government purchases to stimulate production and
spending. In addition, they have gained greater understanding of how central banks can help fight recessions by changing the
money supply and interest rates.
New public attitudes. The Great Depression changed the attitudes of many people toward business and government. Before
the Depression, many people regarded bankers and business executives as national leaders. After the stock markets crashed
and these leaders could not relieve the Depression, people lost faith in them. As a result, many people decided that the government-not
business-had the responsibility to manage the national economy.
The Depression also changed people's attitudes toward unemployment. People came to view unemployment not as a personal
shortcoming but as a condition that can result from circumstances beyond the individual's control.
BENCHMARKS AND OBJECTIVES:
Compare how different economic systems answer the fundamental economic questions of what goods and services to produce,
how to produce them, and who will consume them.
1. Evaluate the effects of specialization, trade and interdependence on the economic system of the United States.
Q1 - What is capitalism?
Q2 - What is socialism?
Q3 - What is communism?
2. Analyze the development and impacts of labor unions, farm organizations and business organizations on the U.S. economy.
Q4 - What is the role have unions played during US history?
Q5 - During what period of US history did unions become widely accepted? Why?
Explain how the U.S. government provides public services, redistributes income, regulates economic activity, and promotes
economic growth and stability.
Government and the Economy
3. Demonstrate how U.S. governmental policies, including taxes, antitrust legislation and environmental regulations affect
individuals and businesses.
Q6 - What part of our government establishes the income tax?
Q7 - What is the purpose of an income tax?
Q8 - What are the main types of income taxes?
Q9 - What is an monopoly?
Q10 - What problems are caused by monopolies?
Q11 - During US history, how has our government sought to deal with the threat of monopolies and trusts?
4. Explain the reasons for the creation of the Federal Reserve System and its importance to the economy.
Q12 - What is the Federal Reserve?
Q13 - When and why was the Fed formed?
Q14 - How does the Fed promote economic stability?
5. Analyze the impact of the Great Depression and World War II on the economy of the United States and the resulting expansion
of the role of the federal government.
Q16 - What was the Great Depression?
Q17 - How did Presidents Hoover and Roosevelt differ in their approach to solving the Depression?
Q18 - What events lead to the end of the Great Depression?
Q19 - What have been the long-term effects of the Depression?
Q20 - Do you think the US will have another Great Depression during your life time? Explain your answer.