Economics/business/free enterprise- course number 45.061- resource guide: a set of model lessons for effectively implementing the objectives of the quality core curriculum, 1992

ECONOMICS/BUSINESS/FREE ENTERPRISE
COURSE NUMBER 45.061
RESOURCE GUIDE
A Set of Model Lessons for Effectively Implementing the Objectives of the Quality Core Curriculum
Office of Instructional Services Division of Curriculum and Instruction Georgia Department of Education Atlanta, Georgia 30334-5040 Werner Rogers State Superintendent of Schools 1992

FOREWORD
The resource guide ECONOMICS/BUSINESS/FREE ENTERPRISE (9-12) has been published by the Georgia Department of Education to assist local school systems in providing classroom teachers with model instructional strategies, student activities, resources and evaluation methods. The lessons are designed to demonstrate how teachers can effectively deliver instruction to implement the objectives of the Quality Core Curriculum for the PRINCIPLES OF ECONOMICS/BUSINESS/FREE ENTERPRISE course.
The Georgia Department of Education thanks the educators who assisted in the planning, writing, reviewing and refining of this document. In this rapidly changing and increasingly interdependent world, it is important for today's young people to understand basic economic ideas and to be able to analyze economic issues. We hope this resource guide will be a useful and valuable resource for teachers to implement the economics course.
Werner Rogers State Superintendent of Schools 1992

INTRODUCTION
The resource guide for the PRINCIPLES OF ECONOMICS/BUSINESS/FREE ENTERPRISE course is designed for teachers who provide economics instruction for Georgia public high school students. The lessons presented in this guide are matched to specific objectives in the social studies sections of the Quality Core Curriculum. This course is a required course for all students, and this resource guide is designed to help teachers implement this requirement. The detailed lessons presented in this resource guide provide a range of practical, sound and creative instructional ideas that should be used to supplement textbooks and other available resources. The following five major themes are developed.
Fundamental Economic Concepts Comparative Economic Systems Microeconomic Concepts Macroeconomic Concepts International Economic Concepts Understanding economic principles and how the American economic system works is essential for our students to be able to make personal economic decisions and participate in the political process for making decisions concerning societal issues. Economic literacy is essential for effective citizen participation in a democratic society.
Peyton Williams Jr. Associate State Superintendent for Instructional Programs
ii

ACKNOWLEDGEMENTS
The Office of Instructional Programs wishes to thank and give special recognition to the educators who worked diligently to produce the PRINCIPLES OF ECONOMICS/BUSINESS/FREE ENTERPRISE resource guide. Each person's contribution has a unique value due to the diversity of the project's needs. Appreciation is expressed to the staff of the Georgia Council on Economic Education, directed by David Martin. Special acknowledgement is expressed to Beverly Armento, director of the Georgia Center for Business and Economic Education, and her writing team for the invaluable work in developing and writing this resource guide.
PROJECT DIRECTOR. EDITOR AND WRITER
Dr. Beverly Armento, Director Georgia State University Center for Business and Economic Education
WRITER/EDITOR
Trina H. Krieger Georgia State University Center for Business and Economic Education
Vonda Shoemaker Georgia State University Center for Business and Economic Education
WRITERS
Debra Ault-Butenko, Gwinnett County Public School System Douglas Frutiger, Atlanta Public School System Lindsey Smith, Clayton County School System
CONSULTANT/CONTRIBUTOR
Francis Rushing Georgia State University Holder of Ramsey Chair of Private Enterprise
GRAPHICS/WORD PROCESSOR
Tracy McCutchion Georgia State University Center for Business and Economic Education
CONSULTANTS
Jackie Angel, Fulton County School System Jill Beracki, Atlanta Public School System Wayne Cook, Fulton County School System Pat Eubank, Fulton County School System Sherrill Hatcher, DeKalb County School System George Jeburk, Clayton County School System Cecelia Landress, Gwinnett County School System James Perrotta, DeKalb County School System Sadie Potter, Atlanta Public School System
iii

CONTENTS

INTRODUCTION

Philosophy............................................................................................................. vi

Purpose and Goals...................

vi

Organizing your Economics Course.......................................

vii

Proposed Instructional Time Allocation....................................................

vii

Resource Guide Contents and Use....................................................................... viii

CHARTS

Quality Core Curriculum Goals..............................................................................

xi

Proposed Instructional Time Allocation.................................................................. xiv

Organizing Your Economics Course....................................................................... xiii

FUNDAMENTAL ECONOMIC CONCEPTS

Introduction and Goals............................................

1

Resource Matrix.....................................................................................................

8

Lesson 1, Scarcity and Opportunity Cost...............................................................

9

Lesson 2, Factors of Production........................

13

Lesson 3, Specialization and Productivity.............................................................. 17

Lesson 4, Technology and Savings....................................................................... 21

Lesson 5, Entrepreneurship................................................................................... 26

COMPARATIVE ECONOMIC SYSTEMS
Introduction and Goals........................................................................................... 30
Resource Matrix..................................................................................................... 35
Lesson 6, Basic Economic Questions.................................................................... 36 Lesson 7, Markets and Prices................................................................................ 40 Lesson 8, Comparative Economic Systems........................................................... 45

iv

MICROECONOMIC CONCEPTS

Introduction and Goals.......................................................................................... 51

Resource Matrix....

60

Lesson 9, Money.................................................................................................. 61

Lesson 10, Circular Flow......................................................

64

Lesson 11, Business Organizations...................................................................... 70

Lesson 12, Supply and Demand........................................................................... 81

Lesson 13, Market Structure................................................................................. 84

Lesson 14, Labor...................................................

87

Lesson 15, Careers................................................

94

MACROECONOMIC CONCEPTS

Introduction and Goals.....................................

95

Resource Matrix

104

Lesson 16, Government Regulations

105

Lesson 17, Key Economic Indicators

111

Lesson 18, Aggregate Supply and Aggregate Demand

119

Lesson 19, Unemployment..

127

Lesson 20, Inflation (causes)

131

Lesson 21, Inflation (effects)

138

Lesson 22, Monetary Policy

143

Lesson 23, Fiscal Policy

147

Lesson 24, Fiscal Policy

(with aggregate supply and demand analysis)

154

Lesson 25, Everyone's Role in the Macroeconomy Simulation

164

INTERNATIONAL ECONOMIC INTERDEPENDENCE

Introduction and Goals

172

Resource Matrix

177

Lesson 26, International Trade..................................

178

Lesson 27, Changing Patterns in International Trade

183

Lesson 28, Economic Interdependence

189

GLOSSARY OF TERMS

196

v

Introduction
Philosophy
Why should students learn economics? As citizens mature, they face increasingly complex personal and social economic problems. As the world's people and regions become increasingly more economically interdependent, a basic understanding of economics becomes more essential. To function effectively as a citizen, one must understand the dynamics, problems and issues associated with our economic system and must be able to address current economic-political problems.
Informed decision-making is the responsibility of every citizen in a democracy. Many of today's important issues contain economic content and trade-offs (e.g., problems of the environment, energy, poverty, adequate housing, resource allocation and conservation). To understand these issues fully and to have an informed opinion about them, it is necessary to have a basic understanding of key economic concepts and to use the processes of analysis. The Principles of Economics/Business/Free Enterprise course aims to build the knowledge, skills and analytical thinking necessary to be economically literate and confident in the contemporary world.
Purpose and Goals
The Georgia Board of Education has mandated that each student shall complete a course in economics in order to be awarded a high school diploma. Based on the organizational pattern of the local school system it must be a quarter course or a semester course. The Quality Core Curriculum (QCC) identifies 25 major goals for the PRINCIPLES OF ECONOMICS/BUSINESS/FREE ENTERPRISE course.
These 25 goals identify the economic content of the course. These 25 goals plus the skills objectives identified in part two of the QCC for the mandated course provide the intellectual content of the course. The goals are designed to provide opportunities for students to gain an understanding of the economic conceptual knowledge, to acquire the ability to apply this knowledge to problem situations and to develop an economic way of thinking.
The 25 goal statements are categorized into five major conceptual clusters.
Fundamental Economic Concepts (Goals 1-5)
Comparative Economic Systems (Goals 6-8)
Microeconomic Concepts (Goals 9-15)
Macroeconomic Concepts (Goals 16-22)
International Economic Concepts (Goals 23-25)
The framework of the five themes will be used throughout this resource guide.
vi

Organizing the Economics Course
The PRINCIPLES OF ECONOMICS/BUSINESS/FREE ENTERPRISE course may be organized in many ways; however, the suggested order of the five themes presented here allows students to build from the concrete to the more abstract and difficult. Most teachers of the high school economics course use a textbook with a dozen or more chapters as the basic teaching tool. It will be helpful to think of the course as having five major themes instead of twelve or more chapters. Using the table of contents of your textbook, arrange the chapters to follow the five themes. Consult the chart, Organizing Your Economics Course, page xiv for help with categorizing the chapter titles in your textbook into the five themes.
Local school systems determine grade placement of the economics course. In some school systems the course is taught in ninth grade; in others, the course is taught in the tenth, eleventh or twelfth grades. The maturity level and prior economic knowledge held by the students will influence how easily students grasp new economic ideas. Because some school systems are organized on the quarter system and others are on the semester system, careful planning is n.ecessary in allocating time for the five units. (See Proposed Instructional Time Allocation, page xiii.) This allocation is a suggestion and should be adapted to fit local needs and constraints.
The criteria used to determine the proposed time allocations include the following.
The difficulty levels of the unit goals
The assumed prior knowledge and experience levels of high school students
The importance of the content of the unit goals
The amount of time typically spent on the unit by master teachers of economics
The reasoning for each unit's time allocation can be summarized as follows:
Fundamental Concepts
Even if students have had no prior economics instruction, they have had many economic experiences by the time they reach high school. Drawing on students' experiences will help them realize that economics has to do with them, their lives and the "real world."
Many of the concepts and skills included in the Fundamental Concepts Unit are "easy" for students to grasp, because they have already developed an intuitive notion about these ideas. For example, students make economic choices daily. Now they can give an analytical name to their experiences and talk about scarcity of resources, choices and opportunity costs. While the fundamental goals are basic, they are also concrete and relate directly and easily to experiences students have had or can recognize. (The recommended time allocation for the quarter system is one to 1 1/2 weeks; for the semester system it is two to 2 1/2 weeks.)
vii

Comparative Economic Systems
A relatively short unit is suggested. The aim is to introduce a global perspective early in the course and to engage students actively in inquiry about the economic systems of other countries. Since this is an exciting and rapidly changing area, it is important for students to learn how to "keep up" with the changes happening around the world. With this background unit, student inquiry can continue throughout the course and form the basis for a weekly global economic current affairs discussion.
Microeconomics Concepts
Unless students have had some prior economics instruction, they will probably find such ideas as supply and demand new. However, most of the microeconomic concepts can be illustrated with very concrete examples that are fun and interesting and meaningful to students. If presented concretely, the microeconomics unit should be both intellectually engaging and interesting for teachers and students alike.
Teachers new to the economics course sometimes find themselves spending a long time on the microeconomics unit, so that very little instructional time is left for the remaining units. Because the remaining goals are very important for high school students to accomplish, careful planning and time allocation are necessary to cover them.
Macroeconomics Concepts
As you can see on the time allocation chart, this unit is given the heaviest instructional time allocation of all the units. This is because the goals are both difficult and important. Macroeconomics deals with the economy of the country. Since so many of the nation's problems are "understood" at this level, it is important for students to accomplish as many of the macroeconomic goals as possible.
International Concepts
The study of global economics begins with the comparative economics systems unit. Thus, this last unit should help students synthesize some of the ideas they've been developing throughout the course. Given the complex interdependencies of the world's nations and peoples, it is important that students build an informed perspective on such topics as international trade and foreign investments.
Resource Guide Content and Use
The materials have been organized using the following sequence.
I. Introduction to the unit
Brief discussion of the overall purpose of the unit
viii

One full page for explanation of each goal is included in the unit. Along with the stated goal are a brief explanation of the goal and a graphic organizer for the goal. The information provided on each goal page is intended as background teacher information. However, these pages are also useful for instructional purposes. The graphic organizer can be used in a variety of ways: to help students develop a visual image of the major conceptual ideas and the ways these ideas relate to each other, to help students realize that the economic ideas are multidimensional and dynamic and give students a model for representing knowledge. A graphic organizer is also a useful way to evaluate student knowledge. Have students develop their own graphic representations illustrating the ways they think ideas are related.
II. Resource Matrix
A resource matrix has been developed for the lessons in each of the five units. These materials are from the following sources.
The Joint Council on Economic Education (JCEE) is based in New York. The Georgia affiliate is the Georgia Council on Economic Education, based at Georgia State University in Atlanta. All materials listed on the resource matrix are available through the Georgia Council on Economic Education or through your local Center for Economic Education. For further information, call or write the Georgia Council on Economic Education, P.O. Box 1619, Atlanta, Georgia 30301-1619 (404) 651-3280.
Following are the full titles of the materials listed on the matrix.
Capstone: The Nation's High School Economic Course, two parts
Economics and Entrepreneurship: Teaching Strategies
Econ U$A Video series
Give and Take Video Series
Income-Outcome -- computer-assisted instruction
Strategies for Teaching Economics: Basic Business and Consumer Education
Strategies for Teaching Economics: Junior High
Strategies for Teaching Economics: World Studies
Strategies for Teaching Economics: U.S. History
Teaching Strategies: High School Economics Course
Teaching Strategies: International Trade
Understanding Taxes
ix

III. Lesson Plans

Lesson plans for each goal include the following.

acc Statement of the

goal

Topic of the lesson

Background information for the teacher

Objectives stated specifically for the lesson developed in the Resource Guide

Learning Activities or instructional procedures necessary to accomplish the lesson objectives

Evaluation of the lesson. A full range of evaluation strategies has been included in the Resource Guide. These strategies are included with particular lesson plans so that the relationship between instructional objectives and evaluation can easily be seen.

Handouts needed for lesson. Handouts may be duplicated for classroom use.

This resource guide is designed to help the classroom teacher plan and organize for instruction and evaluation purposes. The material not only provides a framework for the high school economics class, but also provides many of the details necessary for "thinking through" particular lessons.

This resource guide is designed to supplement the basic resource, the textbook. The guide and textbook, along with supplementary instructional materials (e.g., Joint Council on Economic Education material) should be interactive and mutually supportive.

x

Quality Core Curriculum (QCC) Goals for the Principles of Economics, Business and Free Enterprise Course

Students will be able to:

1. Define, give examples and apply the concepts of scarcity, decision-making, choices and opportunity costs to problem situations.

2.

Identify the factors of production and explain how they are utilized in the production

process.

3.

Describe how specialization permits scarce resources to be more efficiently used and

assess why specialization is important for domestic economic activity and growth.

4.

Explain how specialization, savings, investment in capital goods (technology) and invest-

ment in human capital (labor) influence productivity and economic development.

5.

Discuss how ownership and the productivity of labor, capital, land, and entrepreneurship

help to determine the income from each of the factors of production.

6.

Identify the three questions facing every economic system and analyze how our society

has organized to answer these questions.

7.

Identify characteristics of the American economic system and analyze the role of eco-

nomic incentives for producers and consumers.

8.

Differentiate among traditional, command, market, and mixed economic systems with

regard to such characteristics as the ownership of property, distribution of income, role

of government, and role of economic and other incentives.

9.

Using an historical perspective, explain how economic transactions have been and are

facilitated (e.g., by using barter and money).

10. Illustrate the economic relationships among households, businesses, and governments by using a diagram of the circular flow of resources, goods, services, and money payments through markets.

11. Compare and contrast the various forms of business organizations, the advantages and disadvantages of each, and the sources of funding for these various enterprises.

12. Apply the concepts of supply, demand, money, and prices to the assessment of economic problems.

13. Differentiate among the various types of market structures with regard to the number of firms, degree of competition, types of products, and determination of prices by competitive or noncompetitive processes.

xi

14. Describe the development of organized labor in the American economy and identify and analyze current issues facing organized labor.
15. Analyze the skill requirements for various job choices and assess the personal qualifications, education, and training necessary to acquire and retain these jobs, as well as rewards associated with various positions.
16. Identify and evaluate the effects of government regulation on consumers and producers in the American economy.
17. Explain how the key indicators of economic performance (such as GNP, consumer price index, and the unemployment rate) measure the general condition and direction of the economy.
18. Explain how aggregate supply and aggregate demand reflect the overall activity of the economy.
19. Explain causes and effects of unemployment and distinguish among the basic types of unemployment.
20. Identify the nature and causes of inflation and analyze the impact of inflation and deflation on economic decisions made by businesses and households.
21. Describe the structure and organization of the banking system and the effects on the economy of the Federal Reserve System's implementation of monetary policy.
22. Explain how the federal government's taxation, expenditure, and borrowing policies (fiscal policy) affect inflation, employment, productivity, the national debt, and the economic behavior of producer and consumers.
23. Explain why countries trade and how economic specialization promotes foreign trade and interdependence among nations.
24. Identify and analyze some of the problems associated with international trade (e.g., exchange rates, balance of payments, and barriers to trade).
25. In the world economy, analyze how events in one country (e.g., drought, debt, migration) have an impact upon the other members of the world economy.
xii

Proposed Instructional Time Allocation

Economic Unit Fundamental Concepts

12-Week Quarter 18-Week Semester

1.5 Weeks

2.5 Weeks

Comparative Economic Systems

1.5 Weeks

2.5 Weeks

Microeconomic Concepts

2 Weeks

3.5 Weeks

Macroeconomic Concepts

4 Weeks

5.5 Weeks

International Economic Inte rdepe nde nce

3 Weeks

4 Weeks

xiii

Organizing Your Economics Course Names of Chapters in Typical Economics Textbooks

Fundamental Concepts
What is Economics?
The Nature of Economics

Com parative I Microeconomic I Macroeconomic

Concepts II

Concepts , Concepts

International Concepts

I
Modern Economic The American

i
Money, Banking

The United States

Systems

Economic System and the Economic and the World

I System I

1 Economy

Characteristics of the American Economy

Business and the American Economy

I
Government and the Economy

The World Economy

The Basic Economic Problem

Other Economic Systems: A Comparison

The Individual and the Economy

Challenges on the Domestic Scene

Challenges on the International Scene

Specialization and Interdependence

Command, Market and Traditional Economic Systems

The Role of Production

Unemployment and Inflation

International Trade

Scarcity and Decision Making

The Nature and Types of Economic Systems

The Role of the Market

The Federal Reserve System

International Economics and Trade

Maki ng Social Decisions
I
Productivity and the Producer

Profits and Competition

Monetary and Fiscal Policies

Developing Countries

The Role of the Consumer

Measuring National Economic Activity

Balancing Supply and Demand

Economic Growth

When the Market System Fails
1
i 1
xiv

Fundamental Concepts Introduction

Fundamental Concepts

This unit focuses on the concepts and thinking processes most basic to the study of economics. Economics is the study of the choices and decisions people make as they use scarce resources to meet their wants. In this first unit of study, students begin to examine the questions: What is scarcity? What are resources? How do I make decisions when resources are scarce? What costs and benefits are involved in making econom ic decisions?

The concepts in this unit are relatively easy for most high school students to understand. This is partly because their lives are filled with many clear examples of these fundamental concepts. One purpose of your economics class is to help students formalize their knowledge of the economic world by giving names, definitions, and new meaning to the examples they already know. The concepts studied in this unit, while fairly simple and straightforward, are fundamental to understanding higher level and more difficult concepts.

The Fundamental Concepts unit will deal with the following major ideas:

Scarcity Choices Decision-m aking Opportunity Cost Specialization Resources Interdependence

Savings Investment Production Consumption Capital Goods Services Public and Private Goods and Services

This unit of instruction revolves around five broad learning goals for the PRINCIPLES OF ECONOMICS, BUSINESS AND FREE ENTERPRISE course drawn from the Quality Core Curriculum (QCC) of Georgia. An overview of the unit follows on the next several pages. First, you will find a QCC goal; for each goal, there is a brief written explanation of the goal and a diagram or graphic organizer showing how the concepts in the goal may be related to one another. The graphic organizers highlight the major ideas in this unit.

Several fully developed instructional lessons follow the introductory material. These lessons are intended to supplement your regular instruction and to illustrate sound educational principles. The handouts may be duplicated or prepared as overhead transparencies. Adapt lessons as your instructional needs dictate.

1

Fundamental Concepts Introduction
Goal 1
Define, give examples and apply the concepts of scarcity, decision making, choices and opportunity costs to problem situations.

Explanation
Scarcity is a basic concern for everyone because resources are limited and economic wants are unlimited. Daily, individuals, families and political leaders make choices and decisions because resources are scarce. As we make choices, we must give up something. The next best choice given up is our opportunity cost, or the opportunity that is lost. For example, if a local community decides to use a certain parcel of land and resources to build a stadium, the community loses the opportunity to use that land and those resources for a community center. The community center is the opportunity cost for building the stadium.
Reflective decision making enables individuals and groups to be more fully aware of all possible choices and the consequences of those choices.

Graphic Organizer
Sl Limited Resources
-----------t~ city Unlimited Wants

Decisions

Alternative I -----------
Consequences: (Positive or Negative)

Alternative II - - Consequences: - -
(Positive or Negative)

--- Choice _ _

Opportunity

Cost

2

Fundamental Concepts Introduction
Goal 2
Identify the factors of production and explain how they are utilized in the production process.
Explanation
Factors (or the inputs) of production are used to produce goods and services to meet the needs of individuals and communities. The factors of production include
-land or natural resources like land, water and air, -labor or human resources and -capital or machinery, tools and other equipment used to produce goods and
services.
Entrepreneurship is often viewed as a fourth factor of production. Entrepreneurship is the creative blending of resources into a new product, new concept or new business.
Businesspersons try to find the most efficient combination of resources to produce goods and services that can then be priced competitively with similar products.
The factors of production are unequally distributed around the world. This unequal distribution causes regions to specialize or produce those goods and services that they can produce most efficiently. Specialization facilitates trade and leads to greater interdependence among individuals, regions and nations.
Graphic Organizer

Land

Labor

Entrepreneurship

Examples:
Trees, Sun, Water and Other Natural Resources

Examples:
Individuals, Human Resources, Skills

Examples:
Trucks, Heavy Machinery, Steel Mills

3

Examples:
Creative Organization and Management

Fundamental Concepts Introduction
Goal 3
Describe how specialization permits scarce resources to be more efficiently used and assess why specialization is important for economic activity and growth.
Explanation
Because land, labor, capital and entrepreneurship are scarce and unequally distributed worldwide, individuals and regions tend to specialize. This specialization usually allows for the greatest output at the lowest cost. When regions or people specialize, they invent new ways to use resources efficiently. Specialization necessitates trade because individuals or regions are unable to meet all their needs with only their own specialized production. Thus, specialization necessitates interdependence among people, regions and nations.
Graphic Organizer
4

Fundamental Concepts

Goal 4

Introduction

Explain how specialization, savings, investment in capital goods (technology and machinery) and investment in human capital (labor) influence productivity and economic development.

Explanation
People can either spend (or use up) their current resources or they can save some or all of their resources. Savings form the foundation for investment in human and capital resources, because savings form the pool from which loans are made. Investments in human capital (through training and education) lead to greater human skill, knowledge and productivity. Investment in capital goods (factories, machines, tools) leads to greater productive capacity.
The higher the savings rate in any country, the greater the country's capacity is to make loans for investment purposes. The productive capacity of a country or region is related to its investment rate for upgrading, retooling and streamlining its productive processes.

Graphic Organizer

Choices

Spend

Save/Invest

Costs Benefits

Costs Benefits

Investment in Human Capital
(Education, Training)

Investment in Capital Goods
(Factories, Machines)

Costs Benefits

Costs Benefits

5

Fundamental Concepts Introduction
GoalS
Students will discuss how ownership and the productivity of labor, capital, land and entrepreneurship help determine the income from each of the factors of production.
Explanation
Because resources are scarce, societies must answer three basic questions regarding production: what to produce? how to produce it, and for whom? As these questions are answered, various resources are used as inputs for production. Owners of these resources (or factors of production) receive a form of payment (rent, wages, interest or profit) forthe use ofthe resource. In a market economy such as ours in the United States, most of the productive resources are owned by individuals, residing in households. Ownership of resources can then relate to income; that is, the more resources one owns and uses for production, the greater one's income. In addition, in a market economy, people generally receive wages in proportion to the productivity of their labor. One's productivity can be enhanced through education and training. Thus, in theory, the greater one's education and training, the greater one's productive capacity and income.

Graphic Organizer

Households own factors of production

~

Rent, Wages,

" " Interest, Profit

""""~ Land, Labor, Capital,

Entrepreneurship

""

Businesses use factors of production

/ Payments for Factors o~ /

Production /

~
/ /~ / /

Factors of Production

Resource Markets

Key
Real Flow Dollar ($) Flow

6

Fundamental Concepts Introduction

Instructional Time for Unit
Because the concepts in this unit are fairly simple to com prehend and rather straighforward we would suggest that you allow one and a half to two and a half weeks for this unit. If you are on a quarter system, one and a half weeks of good instruction should be sufficient; two and a half weeks, if you are on a semester system. While a firm understanding of the fundamental concepts of this unit are very important, we feel that you will need greater instructional time later in the course for more difficult material.

12 Week Quarter Fundamental Concepts, goals 1-5 1.5 Weeks

18 Week Semester Fundamental Concepts, goals 1-5 2.5 Weeks

Related Textbook Topics
You may wish to organize your Economics course around the five units proposed in this Study Guide: Fundamental, Comparative, Microeconomics, Macroeconomics, and International Concepts. If so, examine your textbook and decide which chapters "fit" with each of these five units.
Typically, textbook chapter titles which relate to the Fundamental Economic Concepts units include:
-What is Economics?
-The Nature of Economics
-The Basic Economic Problem
-Specialization and Interdependence
-Scarcity and Decision-making
-Making Social Decisions
-Productivity and the Producer

7

Fundamental Concepts Goals
1. Scarcity, Decision Making, Opportunity Cost

Resource Matrix JCEE Instructional Lessons and Georgia Economics Goals

High School

Junior High

Teachin~ Strategit: s Books Basic Inter- U.S. World Entre- Capstone Business national History Studies preneurship

Videos
Give & Econ U$A Tax Take

Software
Income Outcomes

1,3,4,13 1,6

1,3,16 1, 18,

2

20,22,

1,2

2,3,4,7, 1,2,3,5,7 1,2,4, 1

8,16

11,12

1 2,8

2. Factors of 3,4,21 2,6

9

1,2

1,2

1

1,8

1

6

1

6

Produc-

tion

ex> 3. Specializa- 3,9,17 3,4 tion and Interdepen-
dence

8,10 2,3,4,8,9, 3,6 15

1,8,12,13 7

1

2

3,4,5,8

4. Savings, 4

S-4

2,3

Investment

and Pro-

ductivity

5. Resource Ownership and Income

2,3,18,19

9

1,2,18,20

1,14

3

2,3,5,7,9

2,3,5,6,8

1,13

5,6

3,5

1

GOAL 1

FUNDAMENTAL CONCEPTS
Lesson 1

Define, give examples and apply the concepts of scarcity, decision making, choices and opportunity costs to problem situations.

TOPIC Scarcity and Opportunity Cost

BACKGROUND
Scarcity is a fact of life that cannot be avoided. Resources are limited, given human wants. Individuals must constantly make decisions about the best use of available resources. It is important for students to be aware of the problem of scarcity and the importance of making wise decisions as they deal with alternative uses for scarce resources. Students will be able to find examples of scarcity as they study history, geography, civics, sociology and many other subjects. An examination of current issues should help students realize that nations and regions of the world continually grapple with issues of scarce resources.

OBJECTIVES
Students will be able to
Define scarcity as a basic imbalance between relatively unlimited wants and relatively limited resources available to satisfy these wants
Give examples of scarcity in their own lives, in their community and in the world
Apply a decision making process to the analysis of issues surrounding alternative uses of scarce resources
Define opportunity cost as the foregone benefit of the next best alternative

acc RELATED

SKILL OBJECTIVES

A-9, A-10; 8-11,8-16; C-17, C-20, C-21

MATERIALS
Handout 1-1 and 1-2 Chalkboard

9

LEARNING ACTIVITIES

FUNDAMENTAL CONCEPTS
Lesson 1

1. Begin a discussion with students in which you ask questions like the ones below.
a) What things would you like to buy that (unless forbidden by law, parents or school) you are unable to purchase? List some items on the board.
b) Why aren't you able to buy everything you want?
Tell students that they are describing the problem known as scarcity. Define scarcity with them and explain that scarcity is a problem faced by individuals around the world. The scarce item in this example is the student's income. This is a very concrete way to help students realize that resources are limited in comparison to our wants.

2. Pass out a copy of Handout 1-1 to each student (or each team of students). Have students complete the reading to find out more about scarcity. Students should answer the questions in writing.

3. Organize students into groups of three or four. Give each group a copy of Handout 1-2. Explain that the handout contains three scarcity situations. For each situation, groups should apply the questions at the bottom of the handout. This activity should help students develop a clearer understanding of scarcity and opportunity cost.

EVALUATION
Students may be evaluated according to their successful completion of the activities in Lesson 1.

10

FUNDAMENTAL CONCEPTS
Lesson 1
HANDOUT 1-1 SCARCITY
How many decisions do you make in any given day? How many decisions do the leaders of your community make in any given week? Why do so many decisions have to be made? Many times the scarcity of time, space, income and natural resources is a driving force behind all of these decisions. Quite simply, scarcity means that resources are limited when compared with our wants.
Imagine that you are serving on the town council in Sweetwater, Georgia. A decision must be made about the use of a certain parcel of land. For the past 50 years the land has been primarily a park and recreational area for the community. In addition to large open areas for ball games and picnics, there are also wooded areas for nature hikes. The people who use the park land want to make sure it stays just as it is now! However, this land is located next to a favorite community shopping center. The shopping center draws large crowds throughout the year, but there is no easy way to get there. Many members of the community want to build a road that would cut across the park to make a more efficient access to the shopping center. Such a road would take most of the land that is now a park.
As a council member, you are faced with a clear example of scarcity. The land cannot be used for both a road and a park. The scarcity of land forces you to designate this piece of property either as a road site or as a park. When you make your decision, you will be forced to give up one possible use of the land. What you give up when you make your decision is called your opportunity cost. An opportunity cost is the opportunity or the choice you lose when you make a decision to use resources for one purpose rather than for another purpose. If you decide to keep the park, then the new road is your opportunity cost. What is your opportunity cost if you decide to build the new road?
Scarcity forces you to make decisions every day. Every decision about the use of a scarce resource brings with it an opportunity cost. That is, when you choose one alternative, you give up the opportunity to have the next best alternative.
QUESTIONS
a) What does the word scarcity mean? Give an example of scarce resources in your home, school and community.
b) What does the phrase "opportunity cost" mean? Give an example from a choice you made today.
c) Give an example of a decision you made recently; explain your economic problem, your alternatives and your decision. Explain the reasons you selected one alternative over the others. Whatwas your opportunity cost?
11

FUNDAMENTAL CONCEPTS
Lesson 1
HANDOUT 1-2 CHOICES AND OPPORTUNITY COSTS
SITUATION 1 The weekend is approaching, and you are excited about going to a concert with a group of your best friends. Your favorite group is coming to town! On Thursday evening you get a call from your favorite cousin from California who wants to pay for your flight to visit for the weekend.
SITUATION 2 You are a freshman at Small Town High School. Your classes are very large--60 in a class and both students and teachers are very frustrated. A new school is desperately needed! Only one parcel of land is available for a new building. However, the town council is also considering selling this land to an auto manufacturer. This would provide jobs for many adults who are out of work, such as your uncle.
SITUATION 3 The governor of Georgia has to make some tough budget decisions. Many important areas need attention. The state needs new schools, new social programs and new highways. A drought last year had serious consequences for the state's farmers. What criteria would you use if you were the governor to help you plan the state's budget?
QUESTIONS Answer these questions for each situation. a) What resource is scarce? b) What choices do you have? What are the pros and cons of each choice? c) What is the opportunity cost for each choice? d) What decision would you make? Explain your reasoning. e) With your group, make up a new scarcity situation. Apply the four questions above to analyze this situation.
12

FUNDAMENTAL CONCEPTS
Lesson 2
GOAL 2
Identify the factors of production and explain how they are utilized in the production process.
TOPIC Factors of production
BACKGROUND
Factors of production are the fundamental elements or inputs needed to produce goods and services. The factors of production are land, labor, capital and entrepreneurship.
Land: All nonhuman or natural resources such as the land itself, mineral deposits, timber and water.
Labor: All human resources that are directed at the production of goods and services. This includes one's knowledge, skill and technical know-how. Entrepreneurship is also a form of labor.
Capital: Things made by people and used to produce goods such as tools, machinery, equipment, factory buildings and freight cars. (Note: questions often arise about money being referred to as capital. It is important to point out that finance capital is the money used to finance the operation of a business. Money is primarily used to facilitate exchange and is not a productive resource in and of itself. Nations cannot become rich simply by printing money. Money should therefore be viewed as a means to facilitate exchange rather than as a factor of production.)
Entrepreneurship: The entrepreneur is an innovative person who combines the factors of production in new ways to create a new process or product. Land, labor, and capital must be organized and combined in order to produce goods and services. Entrepreneurs recognize needs and opportunities; generate new ideas; assemble land, labor and capital; organize management; and experience the success or failure of a business.
OBJECTIVES
Students will be able to
identify and give examples of the factors of production
explain how the factors of production are utilized in the production process of a particular product
apply the concept of factors of production to a current scarce resource issue
13

acc RELATED

SKILL OBJECTIVES

FUNDAMENTAL CONCEPTS
Lesson 2

A-5, A-7, A-9, A-10; 8-11, 8-12, 8-13, 8-14, 8-15, 8-16, C-17, C-22

MATERIALS Chalkboard; Handout 2-1

LEARNING ACTIVITIES
Lesson Opener
1. Ask students what they think the term "factors of production" means. Students should suggest ideas such as the parts needed to make goods, the essential elements of production.
Introduction of Concept
2. Direct students' attention to Handout 2-1. Ask them to examine carefully the diagram at the top of the page (part I) and to derive a definition for each of the factors of production illustrated. You may have students work in pairs to do this. Then, discuss briefly and clarify the definitions students have written.
Development of Concept
3. Ask students to think of the school cafeteria as a mini-business, where food is prepared and meals are served. What factors of production are utilized when meals are made in the school cafeteria?
Using the chalkboard, list student responses and categorize these into land, labor, capital and entrepreneurship categories. (for examples, land includes all the food derived from natural resources; labor includes all the people who work to clean food and prepare the meals, using their knowledge and skills; capital includes all the machinery and tools needed to produce the meals, including stove, microwave, pots and refrigerator; and entrepreneur includes the creative leadership it takes to combine all the factors in the production of daily meals).

14

FUNDAMENTAL CONCEPTS
Lesson 2
4. Now, have students identify examples of businesses in their community. These might include a grocery store, a dry cleaner, a shoe store and a quick service restau rant.
Divide students into teams of three to four. Have each group select one of the community businesses and, using the chart on Handout 2-1, part II, identify the factors of production that are used in the business they selected.
Allow only four to six minutes for this activity, as this information should be fairly obvious to students.
Have one or two groups report their answers to the rest of the class.
Extension of Concept
5. Using part III of Handout 2-1, have each group select one of the goods listed under Final Product. The task is to trace back the product to its landbased origins. Use the time line to identify the stages and factors of production. Students will need to work on another piece of paper or on the back of Handout 2-1 .
Have several groups share their trace-backs with the rest of the class. Be sure to stress the idea that at each stage of production, value is added to the product as changes occur and as new factors of production are used to transform the product in some way.
Analysis and Decision Making
6. Have students think about trees as a natural resource and as a factor of production. Ask students to read part IV of Handout 2-1 and discuss these questions with group members. (Students should identify issues such as deforestation and its environmental and climatic effects, preservation of natural habitats for plants and animals, and preservation of forests for human recreation and enjoyment.)
These issues are occurring almost everywhere worldwide as people try to strike a balance between the use of trees as a productive resource and environmental habitats.
Have students collect news items describing the issues they have identified here. You could have students select one particular issue, follow it in the news and keep the rest of the class informed on this issue by making periodic reports and writing brief news updates.
EVALUATION
The completed Handout 2-1 should serve as a short-term evaluation of the objectives for this lesson.
15

FUNDAMENTAL CONCEPTS
Lesson 2

T
I. Land Trees, Water, Air
Definitions:

Handout 21

Factors of Production

!
Labor

!
Capital

Work, Know-How Tools, Machines,

Tractors

!
Entrepreneurship Creative Skills

II.

Land

A Business In Your Community

Labor

Capital Entrepreneursh ip

III. Trace Back

I ~------------_. Land

Final Product
Hamburger, Milk Shake, French Fries

IV. Extension and Analysis
While the idea of factors of production is a fairly simple one to understand, a lot of controversy surrounds this idea. For example, think about trees. Trees are an important factor of production. Answer these questions about trees:
Name some products made from trees.
Trees are a renewable resource since they can be planted and grown. What are some of the issues that relate to the cutting and renewing of the world's trees and forests?
Where in the world do these issues occur?
What alternative choices do people have as they attempt to use and conserve trees?
Find newspaper or magazine articles that discuss some of the issues surrounding the use of trees as a factor of production.
16

FUNDAMENTAL CONCEPTS Lesson 3 GOAL 3 Describe how specialization permits scarce resources to be more efficiently used and assess why specialization is important for domestic economic activity and growth.
TOPIC Specialization and productivity
BACKGROUND
Specialization refers to differentiating the function of a productive resource by concentrating its activity on a single task or production process. Nations, as well as individuals and regions, specialize in producing those goods and services that their resources are best suited to produce. As people and production processes become more specialized, they become more efficient. They also become more dependent on others, thus increasing the need for exchange and for an economic system that efficiently coordinates many diverse economic activities.
Economics has to do with making choices. These choices are about the scarce use of resources. Individuals make decisions about what to produce and how they will use their productive resources. People also make choices about the exchanges they will make to get the goods and services they need. This lesson is about those choices.
OBJECTIVES Students will be able to
give examples of how specialization is practiced in the U.S. economy by individuals, businesses and regions
explain how specialization results in greater efficiency, interdependence and trade
use simple economic models to illustrate how trade results from specialization and how that trade is mutually beneficial to both parties
RELATED acc SKILL OBJECTIVES
A-5, A-B, A-9, A-10; 8-11, 8-12, 8-13, 8-14, 8-15; E-35, E-37
17

MATERIALS Handout 3-1

FUNDAMENTAL CONCEPTS Lesson 3

LEARNING ACTIVITIES
Lesson Opener
1. Draw on the chalkboard the following graphic organizer:
Unequal Distribution of Limited Resources
I I
Specialization by Individuals. Regions. Nations
I I
Trade Among People, Regions. Nations
I I
Interdependence
Ask students to "read" the diagram and then create sentences that show the relationships between each statement. Have students name examples in their school, community and region that illustrate the relationships shown on the diagram. For example, because of soil type and climate, Georgia farmers grow peanuts and peaches and raise poultry. For the same reasons, farmers in the Midwest grow wheat and corn. These products are then sold and exchanged to distributors in the various regions. Thus, people in the South can enjoy not only chicken, peaches and peanuts, but also corn and bread. Because of trade such as this, people in the various regions are interdependent with one another.
Introduction of Economic Model
2. Direct students' attention to Handout 3-1. Have students read the two graphs and explain these in their own words. (You may want to lead students through the discussion of the graph on the River People, using the explanation given below. Then use the questions provided to help students interpret the graph for the Plains People.) The graphs are production possibilities curves; they indicate the

18

FUNDAMENTAL CONCEPTS Lesson 3
maximum production possible for the River and Plains groups, given the current level of technology. For example, you can see on the Production Possibilities curve for the River People that they are very good at catching fish, but not very good at growing corn. If they spent all of their time catching fish, they could catch 100 baskets of fish in one month and, of course, grow no corn. Or, if they spent all of their time growing corn, they could grow 20 baskets of corn in one month, and catch no fish. The River People could also catch some fish and grow some corn. For example, if they caught 50 baskets of fish, they would have enough time to grow 10 baskets of corn. How much corn could the River People grow if they caught 75 baskets of fish? 25 baskets of fish? (15 baskets and five baskets)
Now, have students look at the Production Possibilities curve for the Plains People; ask these questions:
What are the Plains People good at producing? (corn)
If the Plains People spent all of their time in one month catching fish, how much would they catch? (20 baskets)
If they spent all of their time growing corn, how much could they grow? (100 baskets)
How much fish could they catch if they grew 50 baskets of corn? (10 baskets)
How much fish could they catch if they grew 25 baskets of corn? (15) If they grew 75 baskets of corn? (5)
Analysis
3. Now, have students read the information on Handout 3-1 under "To Trade or Not to Trade". Discuss this explanation, stressing the idea that people will trade with one another if the price is equal to or less than the opportunity cost of producing the good by themselves. Have students write a paragraph explaining why the Plains and River people each think they "got a good deal" when they agreed to trade one basket of fish for one basket of corn.
Extension and Evaluation
4. Over the next several days, have students locate examples of regional and international specialization, trade, and interdependence. Prepare a bulletin board display of these examples, along with students' explanations of how this specialization and exchange promotes efficiency, productivity, and interdependence.
19

FUNDAMENTAL CONCEPTS Lesson 3 Handout 3-1
Handout 31 Production Possibilities for Two Economic Units
for One Month

River People

Plains People

River People can

catch 100 fish Baskets

80

of

Fish

60

H - or catch 50 fish and 40 I 1\ grow 10 corn

20 or grow 20 corn
20 40 60 80 100
Baskets of Corn
To Trade or Not to Trade

100
80 I

Baskets
of Fish

60

lY 40 lains People can catch 20 fish

or catch 10 fish and grow 50 corn

20 ....

I or grow 100 corn
-L

20 40 60 80 100

Baskets of Corn

To the River People, a basket of corn is very valuable; it is worth five baskets of fish. To the Plains Peoples, fish is very valuable; it is worth five baskets of corn.

The River People have to trade five baskets of fish for every basket of corn they grow. If the River People can trade with the Plains People and get a basket of corn for less than five baskets of fish, then they ought to trade, because they will come out with more fish and more corn if they trade than they would by trying to meet their needs independently.

The opposite is so for the Plains People. That is, the tradeoff between fish and corn is one to five. If they could trade less than five baskets of corn for one basket of fish, they should trade.

When the River People and the Plains People meet, they talk about how much fish and corn each is able to produce. They decide to trade one basket of fish for one basket of corn. Everyone is very happy. Can you explain why?

20

FUNDAMENTAL CONCEPTS Lesson 4
GOAL 4 Explain how specialization, savings, investment in capital goods (technology) and investment in human capital (labor) influence productivity and economic development.
TOPIC Technology and savings
BACKGROUND Economic growth and productivity are influenced by many factors including investment in capital goods or improved technology. "Technology" refers to the application of new ideas that result in the development of new, or different, and more productive methods. Daily we hear phrases that include the word technology such as "high-tech" and biotechnology. What is technology? What impact does technology have on productivity and growth over time? How will technology affect our lives in the future? Is there ever too much technology? These are all questions that make for interesting discussions. The world is a constantly changing place, largely due to technology. The life that we lead today is different from the lives that our parents and grandparents led. Computers, automobiles and medical miracles have become standard features of the modern world. Investment in technology and in capital goods is made possible by the savings generated by individuals. Banks are able to make loans from reserve deposits to entrepreneurs and businesspersons who use this money to invest in new machines, in expansion of productive resources and in the development of new technologies. In this way, through the banking system, savings relate to investment in capital goods and to technological advancements.
21

FUNDAMENTAL CONCEPTS Lesson 4
OBJECTIVES Students will be able to explain the relationships between savings and investment in human and capital
resources cite examples of how savings and investment in capital goods can be used to
promote productivity, employment and economic development explain how economic incentives influence people to save and invest
RELATED acc SKILL OBJECTIVES
A-5, A-7, A-9, A-10; B-11, B-12, B-14; E-37
MATERIALS chalkboard or overhead projector graphic organizer for Goal 4 from Fundamental Concepts in the
introductory section of this manual LEARNING ACTIVITIES Lesson Opener 1. Place the graphic organizer for Goal 4 (labeled "Choices") on the chalk
board or on an overhead transparency. Lead a discussion asking the following questions about the graphic organizer: According to the graphic organizer, see that we can either spend or save our resources. If we spend, we can buy goods and services for our short-term use. But we can also save and invest some or all of our resources. Why do people save? (Ask for examples of longer-term needs and wants, such as a college education, new home, automobile, new game or clothes.) In addition, people can earn money by investing; savers' earn interest. Earning interest is an incentive for saving. The higher the interest rate, the more people are willing to save.
22

FUNDAMENTAL CONCEPTS
Lesson 4
On the graphic organizer we see that our savings can be used to invest in human capital or in capital goods. In many cases, one person's savings enables another person or company to invest. How can this be? (The banking system transforms one person's savings into loans used by another person for investment purposes.)
What does investment in human capital mean? (Development of human resources so that people are more productive; this is done by obtaining training and education.)
What does investment in capital goods mean? (Increasing or enhancing machinery, tools, infrastructure or any other capital good so that this capital good leads to greater productivity)
Can you think of examples that illustrate some of the costs and benefits of investing in human and capital goods?
Human: Some benefits are that investments lead to greater skill and knowledge and thus to greater productivity; some of the costs are that often skills are not transferable to other jobs or that the people or company who paid for the training may not receive the full benefits if the workers move to a new job.
Capital: Some benefits are greater productivity and economic growth; some costs may be that the technology introduces new legal or ethical dilemmas or that the technology may make workers' jobs obsolete.
Extension of Concept
2. Ask students to estimate how much they think Americans save. What percentage of total income do you think Americans save? What about Canadians? Japanese?
Data Analysis and Comparison
3. Place these data on the chalkboard:
Savings as Percentage of Personal Income 1976-1981 U.S.-6.1% Canada - 10.8% United Kingdom - 13.0% France - 16.0% Japan - 20.3%
23

FUNDAMENTAL CONCEPTS
Lesson 4 4. Ask students why people in these various countries might save? Why might the
French or Japanese save more than we do? (Perhaps for the care of self or parents in retirement; perhaps to finance the high cost of a new home or business, etc.) 5. Have students use these data to develop a bar or line graph. 6. Remind students how the rate of savings relates to the amount of investment and economic growth in a country. That is, the lower the savings rate, the less money there is available in banks for lending and the less capital there is available for economic expansion needed to create new jobs. Ask students to rephrase this relationship in their own words. Have students reexamine the data on savings rates in the various countries. What are the implications of these differences? Have students, working with partners, write a paragraph in which they explain how their savings account creates new jobs.
24

FUNDAMENTAL CONCEPTS Lesson 4

EVALUATION

Evaluate students' paragraphs by assigning points to each of the following relationships stated in the writing sample.

Points

Relationship

2

My savings, kept in a bank, become part of the bank's reserves.

2

The bank makes loans to businesspersons who use the money

to build factories, roads and machines (capital goods).

2

This economic expansion or investment in capital goods creates

new jobs.

2

Thus, the more the individuals in a country save, the greater is

the potential for capital expansion.

2

The less a country saves, the lower the potential for economic

expansion.

10 points total

Give extra credit if students discuss in their paragraphs how the savings rate in one country can affect the investment rate (or foreign investment) in another country. (For example, if there is a high savings rate in one country, such as there is in Japan, people will look for good places both inside and outside of their country to make investments. Some of those investment dollars will flow to other countries, such as the U.S., where, because of low savings rates, the foreign dollars will easily find opportunities for investment.)

25

FUNDAMENTAL CONCEPTS
Lesson S
GOALS Discuss how ownership and the productivity of land, labor, capital and entrepreneurship help to determine the income from each of the factors of production.
TOPIC Entrepreneurship
BACKGROUND An entrepreneur is an individual who recognizes opportunities (needs, wants, problems) and uses resources to implement innovative ideas for new, thoughtfully planned ventures. Entrepreneurs are frequently individuals who see what others have not seen and act on that insight. Entrepreneurs thrive on and like to respond to change. But even more important, entrepreneurs are the agents of change. They typically challenge the status quo by developing new and better ways to improve society. Entrepreneurs, through their insight, find niches where there are opportunities to employ their creativity for personal accomplishment and reward. Money is important to most entrepreneurs but usually more as a "scoreboard" or barometer of success. Personal satisfaction is often the most powerful motivator. To find the right niche and the best opportunity, the entrepreneur must have insight, creativity, initiative, hard work, courage and perseverance. What Do Entrepreneurs Do? Introduce a new good or service into the marketplace Discover new resources or new uses for old resources Develop new technologies Open new markets Reorganize existing enterprises
26

FUNDAMENTAL CONCEPTS
Lesson 5

Entrepreneurship is often associated with establishing a new business enterprise. While this is a major form of entrepreneurship, entrepreneurship is a much broader idea. Entrepreneurs are the individuals who mobilize resources into more productive uses, creating new products or new services. Entrepreneurs often open new mar-
kets, develop new technologies or innovations or reorganize and change existing organizations.

Often, entrepreneurs can be found within existing businesses, where they innovate by discovering new products, modifying existing products or finding ways to reduce the cost of production or to increase efficiency. Entrepreneurs identify opportunities that arise from change. They formulate and test ideas and select the best ideas for implementation, whether by establishing a new business, by working within an existing business or by becoming involved with a government agency or a nonprofit organization such as a community action group, a neighborhood committee or a service club.

OBJECTIVES

Students will be able to

define and give examples of entrepreneurship

identify the role of entrepreneurs in a market economy

acc RELATED

SKILL OBJECTIVES

A-7, A-9, A-10; C-22, C-23, C-24; D-31

MATERIALS

Handout 5-1

27

FUNDAMENTAL CONCEPTS
Lesson 5
LEARNING ACTIVITIES Lesson Opener 1. Write the word "entrepreneur" on the chalkboard. Ask for examples of persons
in the community who are entrepreneurs. Have students list words or phrases that characterize entrepreneurs. (These might include creative, high initiative and risk-taking.) Development of Concept 2. Using the five things entrepreneurs do (from the teacher's background section for this lesson), ask students to name persons or examples that illustrate each of these activities. Extension of Concept 3. Have students read Handout 5-1 about Truett Cathy, a famous entrepreneur from Georgia. After students have read and answered the questions, have a discussion using the questions from 5-1 as a guide. 4. In teams, have students refine the interview questions they developed in Handout 5-1. These questions should help the interviewer distinguish an entrepreneur from a "regular businessperson." Using the background information from this lesson, help students refine their interview questions. Application and Evaluation 5. Have students identify people in the community who could be interviewed, using the newly developed interview questions. (Students should review interview procedures and general courtesy at this point.) Have students carry out their interviews and prepare a short summary for the class. Students should focus on describing the characteristics of the person that would or would not qualify the person as an entrepreneur.
28

FUNDAMENTAL CONCEPTS
Lesson 5
HANDOUT 5-1 ENTREPRENEURS
Have you ever eaten a Chick-fil-A sandwich? Many Georgia residents have. Chickfil-A is a popular restaurant not only in Georgia, but in many other states as well.
Today, there are over 400 Chick-fil-A restaurants in the United States. But back in 1946, there was just an idea and a person. The person was Mr. S. Truett Cathy, and his idea was to start his own restaurant. Mr. Cathy opened his first restaurant in Hapeville, Georgia, in 1946 and called it the Dwarf House.
Early in his childhood, Mr. Cathy showed signs of being an entrepreneur. For example, he sold Coca-Cola and other soft drinks in his neighborhood. He would buy a six-bottle carton of Coca-Cola for a quarter from the neighborhood grocery store. Then he would sell each bottle for a nickel. Also, Truett made extra money by working as a newspaper carrier for the Atlanta Journal. He saved the profits from both of these jobs; this money helped him start his first real business: The Dwarf House.
Truett sold hamburgers, french fries, Cokes, apple and peach pies, and breakfast food. In the 1960s he added a special item to the menu, a boneless, skinned chicken breast coated with secret seasonings and cooked for four minutes in peanut oil. Truett invented this tasty chicken sandwich. It would later be called the Chick-fil-A sandwich.
Over the years, Mr. Cathy had many ideas for expanding and nurturing his business. He followed his hunch to build restaurants in malls and later to build freestanding units. He had to be sensitive to trends in the food business as he made many decisions. He has been very successful as an entrepreneur and as a businessperson. What are some of his keys to success?
Mr. Cathy has been innovative, positive and has engaged in meaningful planning. He has also been totally committed to his dream. He is a hard worker. Mr. Cathy says: "The difference between success and failure is often about five percent more effort." To Mr. Cathy, business is people who have a purpose and who want to make a difference.
QUESTIONS
a) What characteristics of an entrepreneur does Mr. Cathy demonstrate?
b) What do you think is the difference between an entrepreneur and a businessperson?
c) Create a set of interview questions you think could be used to distinguish a businessperson from an entrepreneur.
29

Comparative Economic Systems Introduction

Comparative Economic Systems
Each society in the world, past or present, must find a way to organize itself so that it can decide what to produce, how to produce it, and how to distribute the goods and services it produces. These issues are often referred to as the society's output, input and distribution questions. The econom ic system of a country or society is a framework for making econom ic decisons. Essentially, three types of decision-making frameworks exist: a) one primarily utilizes the social system or tradition; b) one primarily utilizes the political or command systems; and c) one utilizes the market system.
In the contemporary world, every economic system is really a mixture of the three types of economic systems. That is, every society has a mixed economic system that includes components of command, market and traditional systems. A traditional system is characterized as one in which people generally repeat the decisions made by earlier generations; thus, there is very little change from generation to generation. A command system is one where economic decisions are made by a central authority; this tends to be a politicallyoriented economic process. Whereas, in a market system, decentralized decision-making is the basic characteristic. The buyers and sellers make decisions in the marketplace about what to produce and what to buy.
It is important for students to realize that a society's econom ic framework may change, often slowly, but sometimes, in dramatic ways. Currently, political and economic decision-making processes are changing in many Eastern European countries and around the world. The basic framework for understanding these global changes should be developed in this unit of instruction and reinforced and extended throughout the course.

The Comparative Economic System unit will deal with the following major ideas.

Economic System Economic goals and values Traditional Command Market Mixed Market

Resources Government Producers Consumers Econom ic Incentives

30

Comparative Economic Systems Introduction
Goal 6
Identify the three questions facing every economic system and analyze how our society has organized to answer these questions.
Explanation
Every society must decide what goods and services it will produce, how it will use its resources for this production and how it will distribute the nation's production among the citizens.The American society is basically organized as a market economy; however, elements of traditional and command economies also exist. In a market economy, producers and consumers make most of the economic decisions in a decentralized manner.
Graphic Organizer
Basic Economic Questions

What shall

I

we produce?

I The Output Question

How shall we use our resources in this production?

The Input Question

How shall we distribute the oods and services?

The Distribution Question

31

Comparative Economic Systems Introduction
Goal 7
Identify characteristics of the American economic system and analyze the role of economic incentives for producers and consumers.

Explanation
The American economic system is primarily a market economy. Most of the productive resources are privately held by individuals. Many economic decisions are made by individuals acting as producers and consumers in resources and products markets. However, some economic decisions are made by the government, and the influence of tradition is also evident. Thus, the American economic system is a mixed market economy. It can be characterized using a simple circular flow model.

Graphic Organizer

,;;,

Product Markets

/ (xpenditures
I
I

,
, , Receipts ,

Produced Goods and Services

~

Households

Businesses

~
~ncome
" -.....

Resource Markets

I
Wages/
/
~/

= Real Flow - - - = Money Flow

32

GoalS

Comparative Economic Systems Introduction

Differentiate among traditional, command, market and mixed economic systems with regard to such characteristics as the ownership of property, distribution of income, role of government and economic incentives.

Explanation
In a traditional society, economic decisions are strongly influenced by customs and traditions, or by the sociocultural values ofthe society. Property tends to be commonly held and often shared among the community's members. In a command society, the political system makes the primary economic decisions including production and distribution choices. Decision making in a market economy is decentralized, with buyers and sellers making production and distribution decisions through their market transactions.

Graphic Organizer

Economic Systems Traditional Command Market

Who owns the productive resources?

What economic choices must be made?

Who makes the economic decisions?
How are the decisions made and communicated?

33

Comparative Economic Systems Introduction
Instructional Time for Unit
The following amount of instructional time is appropriate to introduce and develop comparative economic systems.

12 Week Quarter
Comparative Systems, goals 6-8 1.5 Weeks

18 Week Semester
Comparative Systems, goals 6-8 2.5 Weeks

Related Textbook Topics
Textbook chapters related to this unit will have titles such as: Modern Economic Systems Characteristics of the American Economy Other Economic Systems: A Comparison Command, Market, and Traditional Economic Systems Nature and Types of Economic Systems

34

Comparative Systems Goals

Resource Matrix JCEE Instructional Lessons and Georgia Economics Goals

High School

Junior High

Teaching Strategies Books Basic Inter- U.S. World Entre- Capstone Business national History Studies preneurship

Videos Give & Econ U$A Tax
Take

Software
Income Outcomes

6. Three Basic 2,8 Questions

1,2

1,3,4

4

7,8

2,3,14 8,9 4

7. American Economic System

5,8,9,10 7

W 01
8. Traditional 2 Market, Command Systems

2,8,21 10,11,12 5

1,5

2,3,6

9,7,8 2,3,6,8, 1-9 1,2,3,6

10,12

9,10

1,3,4,6, 5,1

1,7

1,7

8,9

COMPARATIVE SYSTEMS Lesson 6

GOAL 6
Identify the basic questions facing every economic system and analyze how our society has organized itself to answer these questions.

TOPIC Basic economic questions

BACKGROUND
An economic system is the institutional framework a society uses to answer basic economic questions: What to produce? How to allocate resources for production? How to distribute the goods and services? (These questions may be rephrased as What to produce? How to produce it? and For whom shall it be produced? These questions are also known as the output, input and distribution questions.)

OBJECTIVES Students will be able to identify the basic economic questions facing each society collect, interpret and present economic data on a particular country

acc RELATED

SKILL OBJECTIVES

A-1, A-3, A-7, A-9; B-13, B-15; C-17

MATERIALS
Students should have easy access to reference materials that contain information on selected countries and their economic systems. Copies of current news magazines and newspapers will be necessary to trace ongoing structural economic changes in many countries.

36

COMPARATIVE SYSTEMS
Lesson 6

LEARNING ACTIVITIES
1. Organize the class in teams or small groups to begin a research project that will extend throughout the course.
The purpose of the research project is to better understand economic decision making in the contemporary world by examining and comparing data from two countries. Since students will share their research findings, class members should learn quite a bit about a number of countries. Have each team select two countries, one that is organized primarily as a market economy, (column B) and one that was organized primarily as a command economy but is currently undergoing economic and socio-political change (column A). Each team should select one country from column A and one from column B (be sure all countries have been selected; some countries may be selected by more than one group).

Qolumn A

Column B

Bulgaria

Canada

China

Denmark

Czechoslovakia

France

Hungary

Germany

Poland

Great Britain

Romania

Italy

Russia

Japan

Yugoslavia

Spain

2. Each team should begin to collect information on their two countries from the library, newspapers, news magazines and the consulate or embassy from the particular country.

37

COMPARATIVE SYSTEMS
Lesson 6
Students should begin their investigation using the following questions. a) What is produced in the country? b) What resources are used in production? c) Where do these resources come from (from the country or from imports)? d) How are the goods and services distributed to people
within the country? 3. Have each group start two vertical files for their research. Use one file for each
country. Additional research questions will be added for each lesson in this unit; students should also expand their research by adding questions of interest to them. 4. For each data source (newspaper article, library reference, etc.), have students prepare a summary/critique form on a 5" x 8" file card that can be attached to each article or be kept separately. Information on the summary/critique form should include the following. Name of Country Name of Article Author Source Date Short Summary What produced? How? For Whom? Issues Raised Your Reactions Name of Critic
38

COMPARATIVE SYSTEMS
Lesson 6
EVALUATION 5. This research project can extend throughout this unit or the entire course. Addi-
tional questions for research will be added in the lessons in this particular unit, and you and the students should, of course, add your own questions. 6. Student teams should then decide how to present their findings to the rest of the class. The format can vary, from written reports to panel discussions. All presentations should include a basic description of the economic systems of each country, a comparison of the two countries on the essential economic/political/social similarities and differences data that illustrate points made.
39

COMPARATIVE SYSTEMS Lesson 7
GOAL 7
Identify characteristics of the American economic system and analyze the role of economic incentives for producers and consumers.
TOPIC Markets and prices
BACKGROUND
In a market economy, buyers and sellers interact in two types of markets: 1) markets for resources and 2) markets for goods and services. In the resource markets, individuals who own productive resources such as land, labor, natural resources and entrepreneurship act as the sellers or producers. Businesses are the consumers in the resource markets, for they need these productive resources in order to make products. On a supply-demand diagram, the resource market looks like the following.
Resource Markets

Price (Wages, Rent, Profits)

S (Individuals who own resources, land, labor) D (Businesses that want to buy resources)

Quantity

In the resource markets, businesses pay rent for land, wages for labor resources

and profit for entrepreneurship skills.

.

In the product markets, businesses offer for sale the goods and services they have produced, and individuals and households now become the consumers who are willing and able to buy these goods and services. The product markets look like this on a supply-demand diagram:

40

Product Markets

COMPARATIVE SYSTEMS Lesson 7

Price

S (Producers offer goods/services for sale)

I
Quantity

D (Individuals and households that are willing to buy goods/services)

The focus of this lesson is on how the market answers production and distribution questions in a society and how a market system generally operates. One must be able to understand the essential characteristics of a market in order to comprehend the American economic system and to understand the dramatic economic changes occurring in many countries today as they change their mix of command and market decision-maki ng mechanisms.

OBJECTIVES
Students will be able to
explain how the market process makes basic economic choices
distinguish between the resources and products markets, explaining who the producers and consumers are in each market
explain how the pricing mechanism in a market economy serves to allocate scarce resources

acc RELATED

SKILL OBJECTIVES

A-S, A-7, A-9, A-10; 8-12

MATERIALS
Handouts 7-1 and 7-2

41

COMPARATIVE SYSTEMS
Lesson 7
LEARNING ACTIVITIES Lesson Opener 1. Remind students that societies organize themselves to make economic deci-
sions in three general ways: using traditional, command or market processes. The American economic system is basically a market system, even though it includes many traditional and command elements. Many of the world's leading industrial nations are also market economies, and recently many countries that were primarily command economies are adapting to include more market elements. 2. Ask students to cite examples from their research on two countries to illustrate these statements. Extension of Concept 3. To better understand how a market system operates by answering the basic economic questions, have students work in pairs to complete Handout 7-1. 4. Follow this activity with a brief class discussion, using the questions on Handout 7-1 as a guide. 5. In the same student teams, have students use Handout 7-2 and their economics textbook (as well as other reference books, if possible) to complete the tasks presented on 7-2. The students will learn about two specific types of markets, the products and resource markets. Their final product should look like a circular flow diagram. This task should take up to 15 minutes to complete. 6. Follow with a class discussion in which you use the questions and tasks from Handout 7-2 as your discussion guide.
EVALUATION Students should be able to complete the tasks on Handouts 7-1 and 7-2 and be able to explain their answers in their own words.
42

COMPARATIVE SYSTEMS Lesson 7
HANDOUT 7-1 How Do Markets Help Make Economic Decisions?
What tQ produce?
In a market sQciety, prQducers will make the gQQds and services that peQple want and are willing tQ buy. If CQnsumers change their minds and stQP demanding certain gQQds Qr services (such as hula hQQps Qr hQrse-drawn carts), producers must change Qr they will gQ Qut Qf business. In Qther wQrds, a prQducer WQuid be unwise tQ cQntinue tQ make hula hQQps if nQ Qne bQught them. The hula hQQps WQuid pile up, and the business Qwner WQuid have mQunting CQsts and nQ incQming revenue frQm sales. The smart businesspersQn is sensitive tQ CQnsumer preferences and is willing tQ adapt as CQnsumers change. In this way, the market prQcess helps a sQciety decide what tQ produce.
HQW tQ produce it?
In a market eCQnQmy, prQducers try tQ use the "cheapest" reSQurces available tQ prQduce gQQds and services, while they alsQ try tQ Qptimize their use Qf these reSQurces. A "cheap" reSQurce is a reSQurce the sQciety has a IQt Qf. It is better tQ use these mQre plentiful reSQurces than tQ use the mQre expensive and scarce reSQurces. In this way, a market prQcess helps a sQciety CQnserve scarce reSQurces.
WhQ shall get the gQQds and services?
In a market sQciety, peQple try tQ produce thQse things wanted by Qthers. The mQre YQU prQduce Qf the things Qthers are willing tQ buy, the mQre mQney incQme YQU receive. The value Qf what each persQn prQduces determines that persQn's incQme and hQW much Qf the sQciety's gQQds and services he Qr she can Qbtain.
TQ dQ:
1. In yQur Qwn wQrds, explain hQW a market process helps a sQciety answer the basic eCQnQmic questiQns:
-What tQ produce? -HQW tQ produce it? -HQW tQ distribute the gQQds and services?
2. HQW dQ CQnsumers send messages tQ prQducers abQut what gQQds and services they want, and hQW much they are willing tQ pay?
3. HQW dQ producers decide which reSQurces they will use in productiQn? HQware the prices fQr productive reSQurces determined?
43

COMPARATIVE SYSTEMS Lesson 7

Handout 72 Markets, Markets, Markets
I I Product Markets

I I Households

x:

I I Businesses

I I Resource Markets
x:

1. In a market economy, what resources do households/individuals own and what do they bring to the resource markets? Symbolize these resources on the diagram.
2. How do businesses interact with individuals in the market for resources? What is bought and sold, and by whom? What are the money payments called? Show these transactions on the diagram.
3. What occurs in the product markets in a market economy? Who are the producers? The consumers? How do they interact? How are prices determined? Show these transactions on the diagram.
44

COMPARATIVE SYSTEMS
Lesson 8
GOAL 8 Differentiate among traditional, command, market and mixed economic systems with regard to such characteristics as the ownership of property, distribution of income, role of government and economic incentives.
TOPIC Comparative economic systems
BACKGROUND Every society has developed an institutional framework for making basic economic decisions such as what to produce, how to produce it and how to distribute the produced goods and services. These economic frameworks can be categorized as using primarily command, traditional or market decision-making mechanisms. In a tradition-based economy, production and distribution decisions are determined largely by custom; in a command system, a central political authority makes major production and distribution decisions; and in a market economy, these decisions are made by producers and consumers in a decentralized manner in markets. Every society today is mixed, having some features of the three economic systems. In addition, many societies today are experiencing dramatic socioeconomic and political change. Much of this change is economic. People in many countries are changing the way they make economic decisions, the way they respond to economic incentives and the way they relate to property, resources and economic information. In this lesson, students examine the essential differences in command, traditional and market economies.
45

COMPARATIVE SYSTEMS
Lesson 8

OBJECTIVES
Students will be able to
compare and contrast traditional, command and market economies using these questions:
a) Who decides what to produce, how and for whom?
b) Who owns the resources?
c) How is income distributed?
d) What are the economic incentives operating in the particular economy?
explain, using examples of contemporary countries, the dominant economic model used and the elements of other economic models present in particular countries
evaluate the strengths and weaknesses of each of the basic economic frameworks and discuss ways a society could address the weaknesses of the system they adopt

acc RELATED

SKILL OBJECTIVES

A-1, A-5, A-10; 8-11, 8-13

MATERIALS: Handout 8-1

LEARNING ACTIVITIES
Lesson Opener
1. Have students reflect on the countries they selected for research in Lesson 6. Ask: How are economic decisions basically made in the two countries your team selected? Who makes these decisions? What motivates people in these countries to participate in the economy?
Synthesis and Comparison of Data
2. Draw on the chalkboard a data retrieval chart similar to the one shown here. Have students use the data drawn from Handout 8-1 to fill in the chart and make comparisons.

46

COMPARATIVE SYSTESM Lesson 8

COMPARATIVE ECONOMIC SYSTEMS

Who decides what to produce, how and for whom?
Who owns property?
What are the economic incentives?

Traditional

Market

Command

Use the questions on the chart to stimulate discussion and comparison. Ask students to give examples for each category on the data retrieval chart.

EVALUATION
Have students select one of the three basic economic frameworks (traditional, command or market). Assuming the society was strictly organized according to this framework, what would be the strengths and weaknesses? Students should respond in a short written essay. Be sure to remind students to begin their essay by stating the characteristics of the economic system selected.
Essays might be scored according to the following scale.
4 pts = description of market, command, or traditional system
3 pts = discussion of economic incentives
3 pts = discussion of property rights
5 pts = strengths of system
5 pts = weaknesses of system
5 pts = overall clarity, accuracy, completeness
25 pts = total

47

COMPARATIVE SYSTEMS
Lesson 8
EXTENSION: Using the two countries students selected for further research in Lesson 6, have students add information to their files on questions raised by Lesson 8. Students should be able to describe the basic system for making economic decisions in the countries selected for research and should be able to describe how property rights are determined, how economic information is transmitted and how economic incentives are used to influence decisions.
48

COMPARATIVE SYSTEMS
Lesson 8
HANDOUT 8-1 SOCIETIES MAKE CHOICES
Every society and every individual has to make choices about the use of scarce resources. A society can use 1) social processes, 2) political processes, or 3) market processes to determine all of the alternative choices it must make as it decides what to produce, how to produce it, and who should get the goods and services that are produced.
Many of the production and distribution questions in every society are answered by the customs and traditions of the society or by the social process. Think about the many economic choices made by men and women concerning the work they do. For example, there are many traditional jobs for men such as construction, engineering and medicine; similarly, there are many traditional jobs for women such as teaching, nursing, and writing. Tradition strongly influences people's choices. The more "traditional" a society, the stronger the role social customs will play in the economic choices people make. In more "modern" societies, people will choose less traditional economic roles for themselves and they will be less influenced by customs. Usually, in the more traditional societies, the family, group, or clan decides what will be produced, how it will be produced, and how it will be distributed. Often, the fruits of production are thought to be owned by the entire group, and thus shared according to custom. In economic systems strongly influenced by tradition, the social system plays a major role in economic decisions.
The political system is also used to make economic decisions. All countries use the political process for economic decision-making to some degree. In the U.S., federal, state, and local governments use tax revenues to make certain production decisions such as those related to defense, highways, schools, recreation areas, and prisons. In addition, some of the tax revenue is used for distribution purposes. For example, money may be distributed to the unemployed, disabled, aged, or to families with dependent children.
In some countries, the political process plays a major role in production and distribution decisions. This has been the case in countries such as the former U.S.S.R. and countries in Eastern Europe until recent times. In a planned or command economy, central planners make the basic decisions about what to produce and how to produce it. Resources are allocated based on what the planners think is best for the society. In many command economies, the state owns most of the productive resources or capital goods of the society, including the land, factories and machines. The state may also set wages and prices for goods and services.
In a market economy, most of the economic decisions are made by producers and consumers in the product and resource markets. Interactions by producers and consumers send messages to each other to indicate what should be produced and how much people would be willing to spend for such goods and services.
49

COMPARATIVE SYSTEMS Lesson 8 (Handout 81 Continued) Prices are determined by this interaction between producers and consumers in markets. In a market economy, a price is an agreement between producers and consumers. Prices act as a signal to producers telling them what buyers want. Prices also reflect the relative scarcity of goods, services and resources within the economy. Every society has rules governing property rights, or the ownership of resources. In some societies, the resources are owned collectively or by the state. In other societies, the resources are held privately by individuals. The concept of property rights refers not only to the ownership of the productive resources, but also the right to use these resources as the owner desires. Every society has some sort of incentive system that encourages efficient, productive behavior. Incentives could include money, shares of the production or patriotic feelings of contributing to the welfare of the country. In a market economy, wages are usually a primary incentive for productive behavior, although lots of other factors motivate people (such as a desire to perform well or to provide needed products or seNices).
50

Microeconomic Concepts Introduction
Microeconomic Concepts

In a market economy, many of the economic decisions are made as individuals express their wants in the marketplace. Decisions made by individuals, businesses, and government all playa role in creating the economy. This unit will focus on the various markets in the American economy, and on how market conditions, and supply and demand affect prices. Actually, the ideas learned in this unit generalize beyond our own economy to other market economies.

In a "micro" look at the economy, one examines the roles of individuals and businesses as they interact in the products and resource markets.

The Microeconomic Concepts Unit will deal with the following major ideas:

Economic Transactions Barter Exchange Markets Supply Demand Price Market Structure

Households Businesses Circular Flow of Economic Activity Government Labor Types of Businesses Careers Competition

51

Microeconomic Concepts Introduction
Goal 9
Using a historical perspective, explain how economic transactions have been and are facilitated (e.g., by using barter and money).

Explanation
Throughout history, individuals have used many sources of exchange to help them satisfy their wants and needs. Barter is one of the earliest forms of trade used. However, bartering was a very time-consuming process, and other means of exchange were sought. Over time, such items as shells, skins, teeth, tea leaves and iron were used to facilitate exchange. Today forms of money include coins, currency, demand deposits and savings deposits. A commonly accepted form of money allows for easy exchange. Money also serves as a measure and store of value.

Graphic Organizer
Methods of Exchange I

Barter
7 " Positive Aspects Negative Aspects

r
Electronic Fund Transfer

I
Coins & Currency

Money
I I Forr~s
Demand &
Other Checkable Deposits

1
Savings &
Time Deposits

Functions of Money

-------==------~~

Medium of

Store of

Unit of

Measure ("

Exchange

52 Value

Account

Valu'

Microeconomic Concepts Introduction
Goal 10
Illustrate the economic relationships among households, businesses and governments by using a diagram of the circular flow of resources, goods, services and money payments through markets.

Explanation
The term "markets" has a variety of meanings. To many, a market is a grocery store or the vegetable stand seen frequently on the side of the road. Economists have broadened the meaning of the word market or economic market to mean any avenue that allows buyers and sellers to deal readily in a certain economic good or service. In the United States, a study of the two basic types of markets can shed light on the dynamics of our economy. In the resource markets, individuals earn their income as they sell labor for wages, provide land for rent and lend money for interest. Businesses buy productive resources in the markets and then use these resources to produce goods and services. We can also examine the products markets to see that individuals spend their income as they buy the goods and services they want. Businesses receive revenues in these markets as they sell their goods and services to individuals. These interactions between buyers and sellers can be depicted in the circular flow diagram shown below. This is a simplified model of a market economy.

Graphic Organizer

Product

Markets

Produce Goods

....--

~~p"e""nd
--, Income

~,

and Services

.:J Recelve "
Revenues ,=...-------,

Households

Businesses

~

,Earn Income

Pay wages/

"

Lt

Resource

Markets

53

Key - - =Real Flow
- =Money Flow

Microeconomic Concepts Introduction
Goal 11
Compare and contrast the various forms of business organizations, the advantages and disadvantages of each and the sources of funding for these various enterprises.

Explanation
The business organization is one of the major institutions in the American economy. Business organizations serve as a link between scarce resources and consumer satisfaction as they produce goods and services to meet wants and needs. Businesses often appear to be iust an organization. Often we forget that businesses are initiated, organized, run by and made up of people! As we look around our community, we see many businesses, some large and some small. Clearly the organization varies from business to business. Once an entrepreneur has an idea for a new business and how to effectively combine the factors of production needed to make it successful, then he or she must decide how to organize the business. There are three main ways this can be done: the sole proprietorship, the partnership, or the corporation. The sole proprietorship is owned and operated by one person. The partnership is owned by two or more persons. The corporation is owned by one or more individuals but is recognized as a separate legal entity. Each form of business organization has advantages and disadvantages, and each is founded with the hopes of returning a profit to its owner(s).

Graphic Organizer
Forms of Business Organization

I

Sole Proprietorship

Partnership

Corporation

I
Advantages Disadvantages

I
Advantages Disadvantage~ Advantages Disadvantage

-Self-Employment -Umited Life

-Close Employee -Difficulty Raising

Relationship

Money

-Pride of Ownership

-Unlimited Liability

-Ease in Dissolution

-Umited Resources

-Easy to Fonn -Difficulty Raising

-Flexibility

Money

-Easier Decision -Unlimited Uability

Making

-Umited Life

!-Opportunity to Spread Losses
Umited Uability
Attractive to Investors

-Enjoyment of Profits

-Umited.Resource~ Unlimited Life Easy Transfer of

Ownership

-Complicated Structure
-Uttle Control Exercised by Individual Stockholders

-Ease in Decision -Umited

Making

Managerial Pool

"' "' /
Sources of Funding .,.

-Easier

--

,~~<;'~tr:;lulation of

7

7

Sources of Funding

-Owners/Partners' Saving
-Borrowing Against Business Assets

-Sales of Stock -Reinvestment Money -Borrowing -Gifts/Subsidies (for nonprofit)

54

Microeconomic Concepts Introduction
Goal 12
Apply the concepts of supply, demand, money, and prices to the assessment of economic problems.

Explanation
Buyers and sellers trade resources, goods, services, and money in markets. As trade occurs, signals are sent back and forth between buyers and sellers. Consumers of goods and services must make decisions about what and how much to buy.
As consumers desire certain goods and services and have an ability to purchase
these goods and services, signals are sent to suppliers and prices are affected. Suppliers of goods and services must decide how much to offer for sale. This decision is based, in large part, on the cost of producing the good and service. In making these decisions, signals are sent to consumers and prices are affected.

A closer look at demand and supply will reveal that businesses make sound economic decisions when they view the market as a whole. It is important to know the various amounts people will demand at each possible price. This can be seen on a demand schedule.

Here we see the law of demand. At higher prices, people will tend to demand less of an item than they will at lower prices. Likewise, producers will tend to supply greater quantities of an item at higher prices (since at the higher prices, they are better able to cover their costs and to make more profit). This relationship is known as the law of supply.

Price
$5.00 $4.00 $3.00

Quantity Demanded
200 400 600

Quantity Supplied
600 400 200

The analytical concepts of supply and demand enable us to explain many production and distribution questions in a market economy. These constructs are useful to explain and solve problems in micreconomics as well as in the study of national and international economies.

Product Markets
Price

Resource Markets

X Price

S (Households) (Businesses)

55

Quantity

Microeconomic Concepts

Goal 13

Introduction

Differentiate among the various types of market structures with regard to the number of firms, degree of competition, types of products and determination of prices by competitive or noncompetitive processes.

Explanation
Market structure has to do with the degree of competition within a certain market, such as the market for baby clothes, fresh fruit or automobiles.
Economists have developed different classifications and market models to explain how market structures differ. As with any model, it is important to recognize that these models of market structures should be viewed to gain insight and not taken as an exact replication of reality.
By looking at the number of firms (are there many, few, or one?); the type of product made (are they all the same or are there differences?); the conditions of entry (how easy would it be for someone to start a business?); price-setting behavior (is price determined by the interaction of buyers and sellers or is it set only by sellers?); and specific market examples, we can gain insight into how these various structures differ.

Graphic Organizer

Market

Number Type of

Structure of Firms Product

Conditions of Entry

Price-Setting Behavior

Pure Competition

Many

Same

Very Easy

Determined by Market

Examples Wheat & Corn

Monopolistic Competition

Many

Different

Relatively Easy

Market

Gasoline, Fast Food

Oligopoly Monopoly

Few One

Same

Barriers

Price Leadership
Formal Agreements

Only One

Many Barrier~

Price Established at Most Profitable Level

56

Steel, Aluminum Utilities

Microeconomic Concepts

Goal 14

Introduction

Describe the development of organized labor in the American economy and analyze current issues facing organized labor.

Explanation
While businesses are made up of individuals who are each striving for very different goals, these individuals have similar wants and needs when it comes to the common characteristics of their work. Over the years, workers have recognized that there is strength in numbers and have organized into unions to address workplace problems and issues.
Unions first began in the 1830s and grew rapidly after 1900 and the Great Depression. Labor unions, over the years, have tried to address issues such higher wages and benefits, shorter workdays, safer working conditions and job security. Typically, unions have been organized by craft or industry. Since 1970, the total union membership has grown more slowly and the number of workers belonging to unions has decreased.
Unions do, however still have an impact on the workplace environment. As unions negotiate between workers and owners, they use tools such as collective bargaining and strikes.
The future holds many issues for the American worker, and it will be interesting to see what role unions playas workers face automation, technological unemployment and other workplace changes.

Graphic Organizer
Highlights of Organized Labor Time Line

~I Late 1700.
Printers try to organize for higher pay

I

Mid 1800. 1886

I

AFL
Begins

Industrialization

I

Development of Unions

1890
Sherman Antitrust

1914
Clayton Antitrust

1935
National Labor Relations Act

1938
Fair Labor

r7

1947

1955

Taft-Hartley AFL-CIO

Act

Merge

Craft

Industrial

57

Microeconomic Concepts Introduction
Goal 15
Analyze the skill requirements for various job choices and assess the personal qualifications, education, and training necessary to acquire and retain these jobs, as well as rewards associated with various positions.
Explanation
Everyone owns something very precious. Each person has control over his/her own human resources: knowledge, skills, creativity, and know-how. One's human capital can be made more productive through further education and training. It is natural to try to become skillful in the type of work you want to do. However, it is important to help young people realize these relationships as they prepare for adulthood. The world of work in the contemporary world is changing very swiftly. Desired today are people who are highly literate, good problem solvers, and good critical thinkers.
Graphic Organizer
Human Resources

Investment

- - - - - - - -I Education and Training

58

Instructional Time for Unit
12 Week Quarter Microeconomic Concepts, goals 9-15 2 Weeks

Microeconomic Concepts Introduction
18 Week Semester Microeconomic Concepts, goals 9-15 3.5 Weeks

Related Textbook Topics
Listed below are typical textbook titles that relate to microeconomic concepts. -The American Economic System -Business and the American Economy -The Individual and the Economy -The Role of Production -The Role of the Market -Profits and Competition -The Role of the Consumer -Balancing Supply and Demand -When the Market System Fails

59

Microeconomic Goals
9. Money

Resource Matrix JCEE Instructional Lessons and Georgia Economics Goals

High School

Teaching Strategies Books

Videos

Junior Basic Inter-

U.S.

World Entre- Capstone Give & Econ U$A Tax

High Business national History Studies preneurship

Take

Software
Income Outcomes

5

4

16,17,18 4

14

5,7

11,12

3,4,5,8

10. Circular 1 Flow

4

13

6

1,5

1,2

1,6,8

11.Business Organizations

eon 12. Supply 5,6,7,8 7,8

&

9,10,11

Demand

13. Market 12,3 Structure

6,7,9, 12,13,14 8 10,11,18 15
2,8,10,12 10,11,16 7 14,15,16 17,18,19
16,17 9,8,10

1,13

12

3

6

3

9,10,11,16 2,3,7

1,9,10 3,4,5

3,4,5

5,15,6,16

9,10,11, 2,4,5,7

6,7

12

14. Organizec

3,4

8

19

7

3

7

Labor

15. Jobs &Careers

3,4,6

7

1

1,5

5

6,8,9

MICROECONOMICS Lesson 9
GOAL 9
Using historical perspective, explain how economic transactions have been and are facilitated (e.g., by using barter and money).

TOPIC Money

BACKGROUND
This lesson is designed to help students understand that money has specific characteristics and is a powerful tool since it serves more functions than simply buying things. That is, money is a medium of exchange, a store of value and a measure of value.
Banks are important economic institutions since they hold demand deposits (or checking accounts). The banking system influences the total money supply in the economy through its lending functions. When banks make new loans, that money increases the money supply, or the total amount of money in the economy.

OBJECTIVES
Students will be able to
identify the useful characteristics of money as acceptability, durability, stability and divisibility
give examples of the functions of money: source of value, medium of exchange and measure of value

acc RELATED

SKILL OBJECTIVES

A-1 0; B-11; C-22

MATERIALS
Chalkboard Dollar bill

61

MICROECONOMICS
Lesson 9
LEARNING ACTIVITIES Lesson Opener 1. Begin the activity by asking why we do not use goats for money. Student re-
sponses will be varied but should focus on these problems: you would have to feed your money daily, it might die, the value could drop if everyone bred more goats, maybe others would not trade with you because they do not want goats, and it would be difficult to make small purchases or give change. 2. After these conclusions are drawn, show the class a dollar bill and identify it as fiat money: money because the government says it is money. Then ask students what qualities the dollar has that the goat does not have. Answers should include the following: Acceptability: Everyone is willing to accept the dollar in exchange for goods and services. Durability: It lasts. It does not die or melt! Divisibility: It can be divided into smaller units for change. Portability: It can be carried around and exchanged easily. 3. Write these four characteristics of money on the chalkboard. Tell students that, throughout time, people have used lots of things to represent money. Have students assess the strengths and weaknesses of these examples: a) the giant stones used on the island of Yap (Not portable or divisible) b) cheese (Not readily acceptable and not durable) c) English pounds, German marks, Japanese yen (must be exchanged for the currency of a particular country)
62

MICROECONOMICS Lesson 9
Extension of Concept 4. List on the board the three uses or functions of money.
medium of exchange measure of value store of value Ask students what they think these functions mean. Develop the three functions of money with examples such as the following. medium of exchange: with money you can buy whatever you want. measure of value: money can be used to set prices for goods and services and compare the values of different goods and services. store of value: you can save money and it generally will not lose its value as goods might if you purchased them to keep (like goats or cheese).
EXTENSION AND EVALUATION Ask students to imagine this situation. There has been a worldwide depression and drought. Farmers have been unable to grow crops and workers have been laid off from factories and businesses. The production of goods and services is at a virtual standstill. Meanwhile, you have been saving money for a long time, and you have all of your savings hidden under your mattress. You have $4,000. The problem: What's your money worth? Have students explain their answers in a short essay. Students should realize that their savings are virtually worthless because money really represents the value of the goods and services it can "command." In this case, there are no goods and services; thus, the value of the money is little more than the paper on which it is printed. Have students share their essays. Be sure students understand the basic relationship between money and the goods and services the money can buy.
63

MICROECONOMICS Lesson 10
GOAL 10 Illustrate the economic relationships between households, businesses and government by using a diagram of the circular flow of resources, goods, services and money payments through markets.
TOPIC Circular flow
BACKGROUND Economists often use models to help explain how people and processes tend to behave in real life. The circular flow of payments and resources is a model or simplified picture of how people in households and people in businesses relate to one another in a market economy. In this model, two basic markets are shown: (1) the markets where products and services are bought and sold and (2) the markets where resources are bought and sold. Using the model, we can illustrate how consumers and producers relate to one another in these markets. (In more complex models of a market economy, we can illustrate the roles of governments and financial institutions.)
OBJECTIVES Students will be able to explain how individuals in households and businesses relate to one another as
producers and consumers in resource and product markets and using a circular flow model, explain how real goods and services and money
flow between households, businesses and resource and products markets
RELATED acc SKILL OBJECTIVES
A-2, A-5, A-7; 8-11,8-12,8-14,8-15
MATERIALS Transparency for the overhead projector prepared from transparencies
10-1 and 10-2
64

MICROECONOMICS Lesson 10
LEARNING ACTIVITIES Lesson Opener 1. Before class, give a copy of role cards 1, 2, 3 and 4 to four students in the class
and ask them to read these in preparation for class. 2. Using the overhead projector, show transparency 10-1 and begin a discussion
about economic models and a market economy. Make sure these points are emphasized in the discussion using either lecture or lecture and questions: a) Economists use models to describe how people and economic processes
tend to behave in an economy. b) This is a model of a market economy used in 1he U.S. and in many
industrialized countries. Many Eastern European countries are also integrating more elements of a market economy into their ways of life. c) In a market economy, the central players are people in households and in businesses who become the producers and consumers of the economy. 3. Cover the top half of the circular flow model so that students see the bottom portion:
Markets
Tell students that today they will figure out the basic ways people interact in two markets. First, label the visible market on the transparency Resource Markets. Students should be drawing the circular flow model in their notebooks as you work at the overhead projector.
65

MICROECONOMICS Lesson 10
EXTENSION OF CONCEPT
4. Ask the students who have role cards 1 and 2 to come to the front of the room and to stand at each side of the overhead projector: Role 1 should be on the Households side and Role 2 on the Businesses side. Write in the words Households and Businesses on the diagram. Have the two students tell why they are going to the resource markets (to buy and sell labor resources). Now, show on the circular flow how real resources (in this case, labor) flow from households to businesses through the resource market. Also show how money in the form of income or wage payments flows from the businesses back to households (use the answer key on Transparency 10-2 for assistance). Be sure students understand that when people meet in the resource market, usually the producers are those who own the resource. In this case, people in households own the labor resources and are supplying this resource to businesses. Businesses are the consumers of the labor resource.
5. Next, uncover the top half of the circular flow diagram and ask the two students holding role cards 3 and 4 to come to the front of the room. The person with Role 3 should stand near the Businesses side of the diagram, Role 4 near the Households side. Again, have these two students explain why they interact in the product markets (label this on the transparency). As students are explaining, ask the class members to show the flow of real goods/services and money on the diagrams they are developing in their notebooks.
APPLICATION AND EVALUATION
Expand the class lesson with follow-up reading from the economics textbook. Then have students develop two paragraphs, one discussing the resource markets and one the product markets. In each paragraph, students should use a portion of the circular flow diagram along with an explanation describing the transactions that occur in each market.
66

MICROECONOMICS
Lesson 10
HANDOUT 101 Role Cards
TIME ONE: Role 1. You are an adult member of a household. You are looking for employment. You have completed college and are ready to offer your labor, skills and expertise to an employer.
Role 2. You own a business and are looking for a good employee to hire. You need someone who is bright and eager to work hard and can learn the business fast. You are willing to pay a fair wage.
TIME TWO: Role 3. You are the head of a business that produces clothing, which you are eager to sell.
Role 4. You are a member of a household; your children need back-to-school clothes for the fall. You are off to spend your hard-earned income to purchase some new clothes for the family.
67

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MICROECONOMICS
Lesson 11
GOAL 11
Compare and contrast the various forms of business organizations, the advantages and disadvantages of each and the sources of funding for these various enterprises.

TOPIC Business organizations

BACKGROUND
The purpose of the lesson is to help students understand that there are different types of business organizations, each with certain advantages and disadvantages. In a mixed market economy, businesses are not free to do anything they wish. They are restrained by laws aimed at protecting the best interest of the public and the economic system. Today, there are well over 16 million businesses in the United States. They range from the individual proprietor selling handmade crafts or hot dogs at the county fair to the General Motors Corporation, which has over 700,000 employees and over $40 billion in assets.

OBJECTIVES
Students will be able to
describe the three basic forms of business organizations, sole proprietorship, partnership and corporation
list and describe the advantages and disadvantages of each of the three basic forms of business organizations
describe at least four reasons why the U.S. government has enacted antitrust legislation
identify and describe current, basic antitrust laws

acc RELATED

SKILL OBJECTIVES

B-16; C-21, C-22, C-24, C-26

MATERIALS Handouts 11-1 and 11-2

70

MICROECONOMICS Lesson 11

LEARNING ACTIVITIES

Lesson Opener

1. Ask students how many businesses they think they interact with daily. Then ask them to keep a log for one entire day. From the time they wake up until the time they go to sleep that night have them log all of the products and services they use and the names of the businesses that produced them. Ask them to record the following information on a chart like this one:

Product/Service

Name of Business

Class Brainstorming
2. The next day, have student volunteers discuss their business logs with the class. How many businesses touched their lives in a day? Briefly compare students' lists and note the range of products and services each student used in only one day.
Ask students how businesses are organized and how many different types of business organizations there are. (Students may know that there are proprietorships, partnerships and corporations.)
Small Group Cooperative Study
3. In this activity, students will work in small groups to learn about the three basic types of business organizations and about the advantages and disadvantages of each.
4. Give students Handout 11-1 and explain that they will read about several young people who want to start their own business. Ask students to read the three scenarios to find out in which scenario the person chooses to start a corporation, a partnership or a proprietorship.
Then ask them to use the information in the three scenarios to fill in the chart on Handout 11-2. On the chart they need to identify the advantages and disadvantages of each type of business organization.

71

MICROECONOMICS Lesson 11

Synthesis and Evaluation
5. After the groups have completed their work, call the class back together and have the students help you complete Handout 11-2 on the overhead projector. (Refer to the major points on the answer key for Handout 11-2.) Stress the idea that the people described in the scenarios want to own their own business and have to make business plans in order to succeed. Every choice implies a trade off. For example, if a person decides to organize as a proprietorship and not as a corporation, the person chooses personal responsibility and gives up limited liability.
Have students identify other examples of things people trade off when they decide how to organize a business. Using the information they generated in today's lesson, have students write a brief statement about how they are interdependent with businesses.
6. To give students a national perspective, present the following data.

Number of Firms

Percent of Total Sales

Percent of Total Assets

Partnerships Corporations

8%

15%

Partnerships 4%

Proprietorships 9%

Partnerships 2%

Proprietorships 3%

Source: U.S. Dept. of Commerce (1980)

7. Students should consider the data and be encouraged to draw conclusions including the following.

a) Corporations are the most powerful form of business organization (in terms of productivity and resource control).

b) Corporations have the potential to monopolize markets either regionally or nationally because of their size and resource control.

c) Proprietorships are the most numerous and most common type of business organization.

72

MICROECONOMICS
Lesson 11

8. Inform students that the U.S. government has developed policies over the past 100 years that are intended to control business practices in order to

a) ensure competitive markets/prevent monopolies,

b) control necessary monopolies (such as utility companies),

c) protect small businesses from large businesses, and

d) protect the public from unfair business practices.

9. Distribute Handout 11-3 and explain that these are some of the more significant pieces of antitrust legislation.

10. It may be necessary to do some vocabulary building for unfamiliar terms for students to understand Handout 11-3. Have pairs of students look for definitions in their economics textbooks or in a dictionary for terms such as the following.

Carriers Business combinations Restrai nt of trade Discriminatory price cutting Typing contracts Acquisition of stock

Interlocking directories Misrepresentation Retailers Merger Acquisition

11. Instruct students to read each of the antitrust laws and then match the antitrust legislation with the four goals listed under part 8 of this lesson. The results should be something like this:

Piece of Legislation

Goals

1

B,C,D

2

A,C,D

3

A,C,D

4

A,C,D

5

C,D

6

A,C,D

12. Discuss how each piece of legislation is related to the four goals. In each case point out that preventing monopolies or controlling necessary monopolies also protects smaller businesses and the public from unfair business practices.

73

MICROECONOMICS Lesson 11 13. This part of the lesson can be expanded by examining recent mergers or takeovers; having someone from the U.S. or Georgia Department of Commerce speak to the class about antitrust laws and business regulations; or examining a recent antitrust court case such as the breakup of AT&T. 14. In summary, review each of the objectives and relate them to the content of the lesson.
EVALUATION A simple quiz could be constructed from the four objectives emphasizing each student's ability to do the following. list and define the three types of business organizations describe the advantages and disadvantages of each of the three types of
business organizations describe four reasons why the U.S. government has antitrust legislation identify current antitrust legislation
74

MICROECONOMICS Lesson 11
HANDOUT 11-1
Scenario 1: Allison Miora always wanted to have her own business. She had worked in a number of clothing store businesses before and felt that she knew how to organize and run such a business. She especially liked the idea of opening an accessory shop. She felt that it would be a fun place to work and something that she could do well. She also thought it would be a business that she could operate very profitably. To get started, she used her own money and some that she borrowed from a local bank to rent a small building in a popular area, buy the needed equipment and stock the store.
Since her funds were limited, she had to begin with a small business. She became a sole proprietor. She liked being her own boss and making all of the decisions for the business. Of course, she had to spend a lot of time at the business personally supervising everything and had to do without some personal things because her money was all tied up in the business. There were so many things that were needed! Some of them, like insurance, were very important because, as the sole proprietor of the business, she was personally responsible for any accidents or injuries that might happen at her store. Still, Allison got a lot of personal satisfaction from her business. It took up much of her time and was not as profitable as she had hoped that it would be, but she had created it herself and was very proud to be the owner.
Scenario 2: Bill Finkler had big plans -- bigger than he could afford. He had long thought that people would like to spend the evening at an entertainment center that would provide a number of activities including a bowling alley, theater, skating rink and a number of other smaller fun places. Since nothing like this existed nearby, Bill thought it would be a very profitable business. He had saved some money and had some property that he could sell or use as collateral to borrow money from the bank. But he knew that it would not be enough. Then he met Sara and Tim. Both Sara and Tim were enthusiastic about the entertainment mall idea and had money that they could invest in the business. Sara had a lot of experience in public relations and advertising. Tim had a lot of experience in managing a business. Together they could make a good team.
After much discussion, they decided they would put their resources together into an equal partnership and share control of the whole mall.
Everything went according to the plan. The mall was built and opened for business. Profits were slim because they had many debts to pay. Generally the partners got along with each other, but sometimes they argued about business decisions. Bill and Tim were very cautious about how money was spent, but Sara was much more willing to take chances to increase their profits.
75

MICROECONOMICS
Lesson 11
Handout 11-1 (continued) Generally, they were happy with their enterprise. The only real scare was when the Johnson boy injured himself by falling while he was skating. Since the manager of the roller rink had not been watching the skaters as he should have been, the insurance company told Bill, Sara and Tim that they would have to be personally responsible for any medical bills or lawsuits. Luckily the boy was all right, but for a while the partners thought that they might lose everything they owned. Scenario 3: Ho Chang was always fascinated with electronics and math. While he was working on a master's degree in physics, he began experimenting with computers. After a lot of hard work, he developed an inexpensive but very powerful computer that was appropriate for home and business use. He did not have the resources to produce the computer on his own. He realized that to compete with the well-established computer companies, he would have to begin production on a big scale. After seeking legal advice and much support from friends and interested investors, Ho incorporated "ChanCo," a legal corporation that would manufacture and distribute his computer system. By making ChanCo a corporation, Ho was able to benefit from its legal status. If the company failed or was sued, all Ho could lose was what he had invested in ChanCo. This was true for all of his investors. Also, it was easy to raise money for the business since shares or stock in the company could be sold to other investors.
When additional investment money was needed, the assets in the corporation could be used as collateral to get loans. Ho owned a controlling interest in the company and was chairman of the board. Other large shareholders were the other members of the board of directors. They all shared in making decisions concerning the future of the corporation. Even though the business was a success, sometimes Ho Chang felt that he had little control over the day-to-day functioning of the company. His design was selling well and ChanCo was making profits, but there was no time or opportunity for Ho to personally work in the research department or supervise production. Of course, the corporation now had professionals doing those jobs.
76

MICROECONOMICS Lesson 11

HANDOUT 112
Use the information in the three scenarios on Handout 1-11 to write a definition for each of the three types of business organization.

Proprietorship:

_

Partnership:

_

Corporation:

_

Now, use the information in the three scenarios to identify advantages and disadvantages for each type of business organization. Write your answers below.

Type of Business

Advantages

Disadvantages

Proprietorship:

Partnership:

Corporation:

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MICROECONOMICS Lesson 11
HANDOUT 11-2 - ANSWER KEY
Definitions
Proprietorship: A business in which an individual invests money, starts the business, runs it and has all of the profits and unlimited liability.
Partnership: A business with joint provision of funds, joint management, joint benefit from gains and unlimited joint responsibility for losses.
Corporation: A business that legally exists apart from the people who own and control it. It can sell stock, enter contracts, be sued, own property and borrow money; a corporation has liability for losses limited to the value of its assets.
Advantages/Disadvantages
Proprietorship:
Advantages: The owner is the boss. Decisions are made by one person. The owner gains personal satisfaction.
Disadvantages: The owner must provide all resources. It is often difficult to get extra investment money. Size is often limited. The owner has unlimited liability for losses. The owner may feel overwhelmed by the amount of personal investment and responsibi lity.
Partnership:
Advantages: Responsibility and liability are shared. Additional capital is somewhat easier to get. Additional thinking and skills help solve business problems.
Disadvantages: Some decisions are difficult due to disagreements. Owners may be limited in ability to get loans/investment capital. Owners have less personal satisfaction due to shared responsibility. Owners face unlimited liability for losses.
78

MICROECONOMICS Lesson 11 Page 2 Corporation: Advantages: The owners are able to acquire large amounts of investment capital. The business can grow rapidly. The owners have limited burden on time and resources (responsibility is shared). The owners have limited liability. Disadvantages: The owner/originator has little personal control. Because he or she is not as closely involved, the owner may get little personal satisfaction from the business. The structure of the business is more complicated.
79

MICROECONOMICS Lesson 11
HANDOUT 11-3 ANTITRUST LAWS IN THE UNITED STATES
1. Interstate Commerce Act (1887) Placed price, amount and quality of services under control of the Interstate Commerce Commission in industries such as rail transportation where the limited number of carriers makes it impossible for competition to regulate the market.
2. Sherman Antitrust Act (1890) Outlawed business combinations that might create a "restraint of trade or commerce" or "monopolize or attempt to monopolize any part of trade or commerce."
3. Clayton Antitrust Act (1914) Lists specifically as illegal a) discriminatory price cutting, b) contracts that require buyers to purchase other items as a condition for getting one item, c) acquisition of stock in other companies to obtain monopoly powers, and d) interlocking directories in competing corporations.
4. Federal Trade Commission Act (1914) Created a watchdog agency against unfair business practices that are aimed at creating a monopoly or injuring competitors. The FTC plays an important role in policing cases of seller misrepresentation such as selling artificial silk as real silk or domestic lace as Irish lace.
5. Robinson-Patman Act (1936) Prohibited price discrimination that might benefit such large buyers as chain stores and permit them to undersell small retailers.
6. Celler-Kefauver Antimerger Act (1950) Forbade the acquisition of, or merger with, other companies where the effect "may lessen competition, or tend to create a monopoly."
80

MICROECONOMICS Lesson 12 GOAL 12
Apply the concepts of supply, demand, money and prices to the assessment of economic problems.
TOPIC Supply and demand
BACKGROUND "Supply" and "demand" are analytical concepts used by economists to describe the way buyers and sellers tend to behave in the resource and product markets. The "law of demand" expresses a relationship between price and buyer behavior: i.e., as the price of an item rises, the quantity demanded by buyers will fall (in general, all things being equal). Also, as the price of an item falls, the quantity demanded will rise (an inverse relationship). Likewise, the "law of supply" expresses a direct relationship between price and the quantities sellers or producers would be willing to supply. That is, as prices for a good rise, the producers are willing to supply more of that good (because at the higher prices, producers can better cover their costs and make greater profits). The concepts of supply and demand are very important to understanding fundamental behavior and prices in a market economy. These concepts are very well developed in other instructional materials (refer to the introductory material for this unit), as well as in most high school textbooks. Therefore, the lesson presented here is not extensively developed.
OBJECTIVES The students will be able to
use the supply and demand schedules to construct and interpret supply and demand graphs
determine equilibrium price and explain its meaning explain the effects on supply and demand of selected determinants and be able
to show these effects graphically
RELATED QCC SKILL OBJECTIVES A-5, A-7; 8-11,8-12; C-24
81

MICROECONOMICS Lesson 12
MATERIALS Handout 12-1 for each student team Overhead projector and Transparency 10-2 Graph paper for students
LEARNING ACTIVITIES Lesson Opener 1. Show Transparency 10-2 and focus on the product markets where producers
offer goods and services for sale to consumers. Ask students how producers know how much the consumers would be willing and able to buy at various prices. (Often a market survey is conducted to obtain this information.) This lesson focuses on the concepts economists use to describe ways buyers and sellers tend to behave in the product markets. These concepts are "supply" and "demand." Development of Concept 2. Have students work through the activities presented on Handout 12-1. Work with them on using graph paper to represent different demand scenarios. Be sure students can explain each step in their own words. Have students read the corresponding sections in their textbook to supplement this activity. Extension and Evaluation 3. After the teams have completed the activity on Handout 12.1, have them develop another similar scenario. Have the teams swap the problems they developed and work-out the answers. Teams should then check their answers with each other. Have several teams present their work to the rest of the class.
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MICROECONOMICS Lesson 12

Handout 121
Demand
A group of economists studied the prewashed blue jean market in Atlanta. They wanted to find out how many pairs of jeans consumers would buy at various prices during the winter months. The chart below summarizes their results.
Demand Schedule for Prewashed Blue Jeans in Atlanta in December

Price Per Pair

Quantity Demanded Pairs (in hundreds) people are willing &
able to buy Time 1

Quantity Demanded

Quantity Demanded

Time 2

Time 3

$50.00

100

200

50

$40.00

200

300

100

$30.00

300

400

150

$10.00

500

600

200

The data on the demand schedule was developed from a market survey. What relationship do you see between price and the Quantities people would be willing and able to buy at these various prices?

1. Time One You can portray these data graphically by plotting the coordinate points on a graph. Label the vertical axis price and the horizontal axis quantity. and plot the coordinate points for Time 1. Join these, and label your demand curve D1. What does this demand curve show?

2. Time TWQ Suppose a ''blue jean craze" hits Atlanta, and people, with their increased incomes, are eager to buy more jeans. At each price, the new market survey shows people are willing to buy more jeans than during Time 1. Examine the quantities demanded during Time 2 on the demand schedule. Then plot this curve on your graph. This shows an increase in demand, given an increased preference for jeans and increased income.
3. Time Three Suppose the economy takes a serious downturn and many people in Atlanta lose their jobs. Income is low, and people are making do with what they have. Examine the changes in the demand for jeans at Time 3. Plot this curve. This curve shows a decrease in demand, given decreased income due to a recession.
4. Activity Now, you and your partner should make up a scenario similar to the one presented here. Show the correct answers on another sheet of paper and plot the changes in demand on a graph as you did here.

83

MICROECONOMICS Lesson 13 GOAL 13 Differentiate among the various types of market structures with regard to the number of firms, degree of competition, types of products and determination of prices by competitive or noncompetitive processes.
TOPIC Market structure
BACKGROUND The market structure is primarily determined by (1) the number of firms selling in the market; (2) the extent to which the products of the firms are the same or different; (3) the ease with which firms can enter or exit from doing business in the market. Using these criteria, markets may be categorized as
a) pure competition b) monopoly c) oligopoly d) monopolistic competition.
OBJECTIVES Students will be able to distinguish the four types of market structures using market structure criteria identify examples of businesses that illustrate the four types of market
structures
RELATED acc SKILL OBJECTIVES
A-10; C-23, C-24 MATERIALS Overhead projector; Transparency 13-1
84

MICROECONOMICS
Lesson 13
LEARNING ACTIVITIES Lesson Opener 1. Remind students that the class has been focusing on the ways buyers and sell-
ers relate to one another in product and resource markets as well as the basic ways businesses organize themselves (proprietorship, partnership, corporation). In this lesson the class will examine how the markets for different kinds of products and services (for example, automobiles, electricity, fruit or steel) are organized. Development of Concept 2. Write the two words "competition" and "monopoly" on the chalkboard. Have students list words, meanings and examples they know for these two concepts. Explain that a purely competitive market and a monopolistic market are at opposite ends of a spectrum. 3. Using the chart on Transparency 13-1, tell students that markets differ in terms of (1) how easy it is for a new firm to enter or exit from the market; (2) how many firms are present in the market; (3) how standard or differentiated the products or services are; and (4) how the prices for the products are established. EVALUATION Working alone, have students read the relevant section of their economics textbook that explains the categories presented on the chart. Each student should read to be able to explain the chart on Transparency 13-1 in their own words and to be able to give examples that illustrate the four types of markets.
85

MICROECONOMICS Lesson 13
Transparency 13-1

Market Structure

Entry/Exit No. of Firms

Price-Setting Behavior

Examples

Pure Competition

Many Finns; Easy Entry
& Exit

Detennined by Market

Monopolistic Competition

Many Sellers; Relatively
Easy Entry & Exit

Market Plus Nonprice Competition

Oligopoly

Few Sellers; Fairly Difficult
to Enter Market

Market Plus Much Price Leadership by Individual Firms

Monopoly One Seller; Difficult Seller Can Control Price to Enter Market

86

MICROECONOMICS Lesson 14
GOAL 14
Describe the development of organized labor in the American economy and analyze current issues facing organized labor.
TOPIC Labor
BACKGROUND
Labor unions in the U.S. grew out of the resistance of workers in mills, factories and mines in the late 1800s to their poor working conditions and salaries. The U.S. was primarily an agricultural economy before the 1800s. Industrial development in the 1800s resulted in larger businesses, mass production and a number of abuses involving workers and their working conditions. The workers had virtually no voice in promoting their interest or protecting themselves. Such areas of concern as wages, safety standards, job security, working hours, sick leave, vacation days, retirement plan, and hiring, firing and layoff policies were under the exclusive control of the employer. As a result, a number of company, craft and industrial unions were formed.
Later, two national unions were founded: The American Federation of Labor (AFL) was founded in 1886, and in 1936 the Congress of Industrial Organization (CIO) was established. These national unions merged in 1955 to form the AFL-CIO, which is a mixture of craft and industrial unions. Today over 20 million workers, or approximately 17 percent of all employees, in the U.S. belong to some type of labor union. In the U.S. a company can become unionized if a majority of its employees vote to belong to a union. Unions are free to organize, to elect their own leaders, to represent their membership in collective bargaining with management and to strike for better working conditions, salaries and other benefits. In the process called collective bargaining, representatives of unions meet with management to negotiate a contract. In 98 percent of the cases, collective bargaining is successful in peacefully resolving the conflict.
Unions have resorted to strikes on very few occasions and only after attempting peaceful negotiation. Presently, there are 95 national and international unions with 55,000 local unions. They have negotiated more than 150,000 collective bargaining contracts. Because unions represent over 20 million workers, they are a vital force for progress in this nation. Because of the changes in the work force today, there is a need for change in traditional union programs. A search for more effective ways to advance the interest of workers is needed. New methods to approach current issues, new categories of membership, direct services and benefits are likely to be implemented in the future.
87

MICROECONOMICS Lesson 14
OBJECTIVES
Students will be able to
identify labor-management problems in the workplace and explain how employees might solve these problems
define and give examples of labor, industrial and craft unions
list and explain major labor legislation in the U.S.
identify strengths and weaknesses of the labor unions historically and explain the rationale for unions
analyze current issues facing organized labor and evaluate alternative solutions

acc RELATED

SKILL OBJECTIVES

A-I, A-3, A-6, A-7, A-8; 8-10, 8-11, 8-12; C-17, C-20, C-21

MATERIALS
Chalkboard Handouts 14-1, 14-2 and 14-3 Student text Media center access

LEARNING ACTIVITIES
Lesson Opener
1. 8egin this lesson with a brainstorming activity about what a labor union is and who is a part of the American labor force. Write the students' ideas on the chalkboard. Have students look up the definitions of these two terms in their economic textbook. Then tell the students that about 17% of our work force today belongs to a labor union.
2. Using graph paper, have the students plot the civilian labor force and union membership from 1920-1990.

88

MICROECONOMICS Lesson 14

Year

Civilian Labor

Union Membership

1920

43*

5*

1930

50

3

1940

60

10

1950

63

16

1960

70

19

1970

78

21

1980

99

20

1990

120

20

*numbers in millions

Have the students study the numbers and graph for patterns and trends. At the bottom of the page have them record their observations about these data.

3. Ask students why they think 20 million people have joined a labor union. Sketch
these ideas on the chalkboard. Be sure the ideas include the need for a voice to represent labor to management in job security, work hours, sick leave, vacation days, retirement plans, and hiring, firing and layoff policies.

Extension of Concept

4. For students to apply this information, have them interview an employed person (using Handout 14-1) about fringe benefits they have received. Once they have completed the interview, have them rate the list of benefits on a scale from good to poor. Then have them design their own contract. Have the students write a
paragraph explaining why they desire certain benefits over others.

5. Ask students what methods are used between labor and management to negotiate contracts and solve conflicts. Sketch a chart on the chalkboard and have the students list all available methods used on both sides of the bargaining table.

Example:

Organized Labor

Management

Strikes Picketing Boycotts Propaganda Political Pressure

Injunctions Lock outs Strikebreakers Propaganda Political Pressure

Discuss with students when and why these methods have been used and if they were successful.

89

MICROECONOMICS Lesson 14
6. Discuss the role of the government in labor-management relations. Ask the students how the government has helped solve conflicts between labor and management.
Schedule research time in the media center so that teams of three or four can research the significant labor legislation since 1890. Have each team report on their assigned legislation. All students should take notes during the oral presentations to help them complete the next assignment. Use Handout 14-2 to help guide students' research.
7. Conclude with Handout 14-3. The students must give examples of how the government has fulfilled all six obligations using legislation and other methods available.
8. Finally, you may use the extension activities to enhance or supplement one or more of the objectives. They may also be used for enrichment or advanced placement classes.
EVALUATION
The student should be able to complete the activities in this lesson and report on the government's role in labor-management relations.
EXTENSION
1. Prepare a report on unions in your community. Include types of unions, number of unions and total union membership. Use your local telephone directory and the school media center for names and office addresses of unions. An interview with a labor union official might be an excellent way to begin this research.
2. Prepare a report on the current status of the AFL-CIO on a nationwide basis. Include the latest membership figures, current trends in membership drives, current contract negotiations and any other current union activity.
3. Select a business in your local community and find out what kinds of benefits are provided for its employees. Write a report showing how these fringe benefits would influence your decision whether or not to work for that firm.
4. Interview workers about lack of job security. Ask whether they have ever had this problem and if the difficulties were with management, labor or elsewhere.
90

MICROECONOMICS Lesson 14
Handout 14-1

Interview an employed person in your community. Ask what benefits he or she is currently receiving. Also ask if there are benefits he or she would prefer to have. What is the most valuable benefit and the least valuable benefit?

Extra Income Paid Time Off
Insurance
Expenses Retirement Other

Fringe Benefits
1. Bonuses 2. Overtime 3. Profit Sharing
1. Vacation 2. Sick Leave 3. Maternity-Paternity Leave 4. Holidays 5. Sabbatical 6. Leave of Absence 7. Bereavement Leave
1. Medical 2. Dental 3. Life 4. Optical 5. Disability
1. Transportation 2. Meals
1. Pension Coverage 2. Insurance
1. 2.

)D H2 Prefer

91

MICROECONOMICS Lesson 14
Handout 142
Significant Labor Legislation
Listed below are significant national labor relations legislation. Mark the one your teacher has assigned your team to research and present to the class. Be sure to include in your report the answers to questions 1-6 below.
1890 Sherman Antitrust Act 1914 Oayton Antitrust Act 1926 Railway Labor Act 1932 Norris-La Guardia Act 1935 Walsh-Healey Act 1935 National Labor Relations Act (Wagner) 1938 Fair Labor Standards Act 1947 Labor-Mangement Relations Act 1958 Landrurn-Griffin Act
Research Questions:
1. What was the significance of this legislation? 2. Who or what groups were instrumental in getting support for the legislation? 3. What were the results once the legislation was passed? 4. Was the ultimate purpose of the act fulfilled? 5. Would you have supported this act? Why? 6. Have there been any repeals or updates since the passage?
92

MICROECONOMICS Lesson 14
Handout 143
Role of Government in Labor-Management Relations
The list below describes the government's role in labor-management relations. After each area give at least one example of how the government has fulfilled its role. 1. Establish and enforce standards of minimum wages and maximum hours in both
public and private employment. Example:
2. Interpret and enforce the rules of collective bargaining. Example:
3. Assist in prevention and settlement of labor-management disputes. Example:
4. Prevent discrimination based on race, religion, sex, age, or national origin. Example:
5. Prevent child labor, set and enforce safety standards. Example:
6. Enforce training standards and assist in training programs. Example:
93

MICROECONOMICS Lesson 15
GOAL 15
Analyze the skill requirements for various job choices and assess the personal qualifications, education and training necessary to acquire and retain these jobs, as well as rewards associated with various positions.
TOPIC Careers
BACKGROUND AND ACTIVITIES
The world of work is changing dramatically; chances are great that today's young people will change jobs several times in their lifetime.
As the world becomes increasingly dependent on technology, today's workers must be technologically literate. In addition, employers are looking for employees who are able to think, to solve problems and to generate creative alternatives.
Many young people have only generalized knowledge about the world of work; they know about jobs they see most often: teacher, police officer, doctor and professional sportsperson, for example. Even high school students know little about new fields of career opportunities, such as the range of jobs and careers related to computers.
At least four types of career activities should occur during the high school years; some of these will be appropriate for the economics class, but the scope of Goal 15 is broader than merely the economics class. The economics teacher should work with the school counselor and others to plan a coordinated program that includes these objectives.
1. Students will explore a wide range of career and occupational opportunities and will become knowledgeable about the characteristics of the contemporary world of work. This can be done through active inquiry by students and teachers and might include interviews, guest lectures, visits to various industries/businesses and library research.
2. Students will identify their own areas of interest, skill and knowledge and will begin identifying careers of interest. Students should work with career counselors to better understand their own career interests.
3. Students will identify the prerequisite skills, knowledge and attitudes needed for a career of interest to them. Students will understand how and where one gains the necessary prerequisites. What kind of education or training does one need after high school to enter certain fields?
4. Students will have actual internship and mentoring experiences in their career area of interest. In many areas, local businesses and schools collaborate to sponsor summer or after-school visits and internships for students. These ideas are presented as possible schoolwide activities. Students should be urged to be divergent in their exploration of career alternatives.
94

Macroeconomic Concepts Introduction
Macroeconomic Concepts

While microeconomics focuses on individual economic decisions, macroeconomics looks at the broad issues of the national economy. Macroeconomics exam ines the combined effects of individual actions, looking at such aspects of the economy as how a society uses its resources, what determines the overall prices of goods and services, what causes inflation and deflation and how the employment or unemployment of resources is determined. Macroeconomics deals with such national issues as economic growth, unemployment, inflation, stagflation, and monetary and fiscal policies.
An important aspect of macroeconomics is the role of government in economic activity, one of the most controversial issues in the study of economics. In 1946, Congress officially assigned econom ic functions to the government in its Employment Act of 1946, which set macroeconomic goals for the nation. In part, the act reads:
The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means... to promote maximum employment, production, and purchasing power.
A number of important questions must be addressed in the study of the national economy. This unit examines the following questions.
-What are the goals of the national economy? -What problems might the economy experience? -How do we measure the size and characteristics of the national economy? -How does the federal government influence the economy through its fiscal policies? -How does the Federal Reserve Bank influence the economy through its monetary policies?

The Macroeconomic Concepts unit will cover the following major ideas.

Government regulation Gross national product Consumer price index Unemployment rate Economic growth Efficiency Stability Security

Justice Aggregate supply Aggregate demand Inflation Federal reserve system Monetary policy Fiscal policy Taxation
95

Macroeconomic Concepts

Goal 16

Introduction

Identify and evaluate the effects of government regulation on consumers and producers in the American economy.

Explanation
The federal government participates in the economy in many ways. One of these ways is to regulate economic activity. Regulation may occur for economic or social reasons.
Since our economy is based on the values of competition and private ownership of property, one goal the federal government has assumed is the protection of these basic economic values. Economic regulation refers to the ways the government acts to preserve our essential economic values. An example of an economic regulations is antitrust legislation that limits the growth of monopolies. Social regulation refers to the ways the government intervenes in economic activity to protect society. Examples of social regulations include policies by agencies such as the Food and Drug Administration or the Occupational Safety and Health Administration to protect consumer health or ensure employee-safety.

Graphic Organizer

Government Regulation

Economic Regulation Definition: Examples: Issues:

Social Regulation

96

Macroeconomic Concepts Introduction
Goal 17
Explain how the key indicators of economic performance (such as gross national product, the consumer price index, and the unemployment rate) measure the general condition and direction of the economy.

Explanation
Just as individuals attempt to measure growth and success in jobs, hobbies and life in general, countries also attempt to measure the success of their national economies. Such an analysis of a national economy involves many factors. Some elements of the economy can be measured by data analysis and some cannot. Some of the key indicators of economic performance include the gross national product (GNP), the unemployment rate and the consumer price index (CPI). Each of these measures can give insight about the general condition of the economy.
Each of the quantitative measurements of the macroeconomy has its limitations. One should know how each indicator is derived in order to judge the accuracy and completeness of measurement. In general, economic indicators can tell us how well or how poorly the economy is performing.

Graphic Organizer

Economic Economic

Goal

Issue

Growth

Productivity,

Efficiency

Economic Measurement
Gross National Product

Common Name Indicator
GNP

Stability Inflation

Consumer Price

CPI

Index

Security Justice

Unemployment
Discrim ination, Bias in Hiring, etc.

Unemployment Rate

Unemployment Rate

Difficult to measure; can exam ine data for patterns that might indicate bias

-------------------

97

Macroeconomic Concepts Introduction
Goal 18
Explain how aggregate supply and aggregate demand reflect the overall activity of the economy.
Explanation
Supply and demand analysis is used in the study of the microeconomy to describe and analyze how buyers and producers relate to one another in resource and products markets. We can also use supply and demand analysis to better understand the national economy and the various issues of productivity, inflation and employment of resources. In macroeconomics, we use aggregate demand (AD) to refer to the sum of information about what buyers in the total economy are willing and able to purchase at various prices in a certain time period. Aggregate supply (AS) refers to the amount of total production for the nation for a particular time period. Using this analysis, we can examine causes of inflation, unemployment and productivity and can analyze the effects of fiscal and monetary policies.
Graphic Organizer
Price Level
AD
RGNP*
= *RGNP Real Gross National Product
98

Macroeconomic Concepts Introduction
Goal 19
Explain causes and effects of unemployment and distinguish among the basic types of unemployment.

Explanation
Unemployment is a major problem in modern societies. In addition to the obvious psychological and social effects to the person and his or her family, unemployment bears a double cost for the economy. First, potential output is lost because valuable resources (people) are not being used to their full potential. Secondly, resources must be diverted from competing uses and spent to try to cushion the economic effects of unemployment for the people who are not working.
The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force. An unemployed person is one who is willing and able to work and who is actively seeking work.
There are various types of unemployment. Cycli~al unemployment results from decreases in aggregate demand; for example, during a recession, consumers tend to buy fewer automobiles, so auto workers are laid off as demand for autos decreases.
Structural unemployment results from a poor matching of worker skills with job needs. Frictional unemployment results from imperfections in the labor market such as poor information about jobs, barriers to job entry or lack of worker mobility.

Graphic Organizer
Unemployment Rate

= Unemployed Persons Total Labor Force

Types of Unemployment

Cyclical

Structural

Frictional

99

Macroeconomic Concepts Introduction
Goal 20
Identify the nature and causes of inflation and deflation and analyze the impact of inflation and deflation on economic decisions made by businesses and households.

Explanation
Inflation refers to a substantial, sustained increase in the general level of prices. Deflation is the opposite: a substantial and sustained decrease in the general level of prices. Both inflation and deflation cause problems for consumers, producers and others in the economy.
The consumer price index is the most widely used measure of inflation; it measures the prices of a typical market basket of goods and services that a typical family might buy. Inflation tends to hurt people who are living on a fixed income. It also affects borrowers and lenders and discourages savings.
Two types of inflation are cost-push and demand-pull inflation. Cost-push inflation occurs when costs of the factors of production increase and push up the price of final goods. Demand-pull inflation occurs when increased demand occurs without a corresponding increase in supply.

Graphic Organizer

Demand-Pull Inflation

S

Price Level

PI
Pt

e

Cost-Push Inflation SI

D I
Quantity

Price Level
PI
Pt e

I,
/l

Quantity

D 100

Macroeconomic Concepts Introduction
Goal 21
Describe the structure and organization of the banking system and the effects on the economy of the Federal Reserve System's implementation of monetary policy.
Explanation
The Federal Reserve System (FED) is the central banking organization of the U.S. The FED consists of a board of governors, 12 regional Federal Reserve Banks, member commercial banks, the Federal Open Market Committee and the Federal Advisory Council. The Federal Reserve System provides currency, lends money to member banks, and controls the money supply though its monetary policy actions.
The FED uses monetary policy to achieve the economic goals of growth, employment, price stability and trade balance. The FED uses three primary tools to achieve these goals: the reserve requirement, the discount rate and open market operations. Monetary policy actions affect the money supply and interest rates. Therefore, they can affect the overall economic level of inflation, productivity and unemployment.

GraDIh"Ie 0 raamzer FED Tools
Reserve Requirement a) Increase b) Decrease
Discount Rate a) Increase b) Decrease
Open Market Operations a) Sell Securities b) Buy Securities

General Effects
Contractionary effect Money Supply,J,Interest Rate't Expansionary effect Money Supply'f'rnterest Rate,J,
Contractionary effect: Money Supply .J,Interest Rate't Expansionary effect: Money Supply'tInterest Rate.J,
Contractionary effect: Money Supply.J,Interest Rate't Expansionary effect: Money Supply'tInterest Rate!,
101

Macroeconomic Concepts

Goal 22

Introduction

Explain how the federal government's taxation, expenditure and borrowing policies (fiscal policy) affect inflation, employment, productivity, the national debt and the economic behavior of producers and consumers.

Explanation
The word ~ is derived from the Latin word ~ or purse. Fiscal refers to the government's purse, or the treasury; fiscal policy has to do with the government's spending, taxation and debt actions and policies. The government has many roles in the U.S. economy, but it basically performs the following three functions.

a) Allocation function - to provide the appropriate amount and mix of public and private goods; public goods include defense and educational services.

b) Distribution function - to provide an acceptable distribution of income to individuals in the society.

c) Stabilization function - to promote full employment, economic growth and stable prices.

Government spending, taxing and debt policies can affect aggregate demand and supply, inflation, savings and employment as well as international trade balances and exchange rates.

Graphic Organizer

Government

Households
Key
= Taxes leakage from private sector
- - - - Spending =injection into economy
102

Businesses

Macroeconomic Concepts Introduction
Instructional Time for Unit
Macroeconomics is often quite difficult for high school students, especially for younger and less mature students. This is true because so much prior knowledge is demanded of the learner to fully understand many of the macroeconomic ideas. If the economics course is taught at the ninth-grade level, it is best to stress a "common-sense" understanding of the basic ideas in this unit. Most ninth graders will find the aggregate supply-demand analysis suggested by Goal 18 very difficult; this goal should only be stressed with older and more sophisticated students.
An understanding of macroeconomics is essential to all citizens, for most of the nation's problems deal with economics in some form. Thus, this unit is particularly important for all high school students, and a sufficient amount of instructional time should be allotted to the study of the goals included here.

12 Week Quarter Macroeconom ic Concepts Goals 16-22 4 Weeks

18 Week Semester Macroeconom ic Concepts Goals 16-22 5.5 Weeks

Related Textbook Topics
Titles of chapters in economics textbooks devoted to macroeconomics might include the following.

-Money, Banking and the Economic System -Government and the Economy -Challenges on the Domestic Scene -Unemployment and Inflation -The Federal Reserve System -Monetary and Fiscal Policies -Measuring National Economic Activity -Econom ic Growth

103

Macroeconomic Goals

High School

16. Govem-

1

ment

Regulation

Resource Matrix

JCEE Instructional Lessons and Georgia Economics Goals

Teaching Strategies Books

Videos

Junior High

Basic InterBusiness national

U.S. History

World Entre- Capstone Studies preneurship

Give & Econ U$A Tax Take

14,15,5 20

10

16,17

4

7

17. Economic 14,15 8,10 Indicators

5,6

6,7

Software Income
Outcomes 6,7
2,3,4,5 6,7

18. Aggregate 17,18

4

2,3,4,6 11,12

11

15

7

Demand,

7,8,9,10

Aggregate

11,12,18,

Supply

......

o
+:>.

19. Unemp1oy-

15

ment

22 21,22,23 12

5

5,7,12 7

7

20. Inflation

15,16,17 8,9

4,9

4

14

4

9,3

7

21. Federal Re- 18,16 serve System! Monetary Policy

22. Fiscal

19

Policy

4,11,12

3,13,16 8,13

11,12,5

5

10,11,12

3,5,7

11

4,5,6

7,8

8,12,13 2,3,4,5, 7

6,7,8,9

MACROECONOMICS
Lesson 16
GOAL 16
Identify and evaluate the effects of government regulation on consumers and producers in the American economy.
TOPIC Government regulation
BACKGROUND
The two types of government regulation are economic regulation, in which the government exerts actions to ensure competition and market values; and social regulation, in which the government exerts actions to promote safety, health and welfare of consumers and employees.
Since competition is so important to a mixed market economic system such as ours, government regulation has been used to make sure that this important aspect of the market is protected.
During the late 1800s, some business firms entered into a formal relationship known as a trust, which essentially converted a group of businesses into a single monopoly. In this way, they were able to eliminate competition. For example, John D. Rockefeller organized more than 40 oil companies into the Standard Oil Trust in the late 1880s and 1890s. Following the public outcry over such monopolization, state and federal governments began enacting antitrust legislation. Five major antitrust federal laws were enacted from 1890 to 1950: the Sherman Antitrust Act of 1890; the Clayton Antitrust Act (1914); the Federal Trade Commission Act (1914); the RobinsonPatman Act (1936); and the Celler-Kefauver Antimerger Act of 1950.
Social regulation has to do with general problems such as pollution or worker and consumer safety that cut across particular industries. Federal agencies charged with aspects of social regulation include the Occupational Safety and Health Administration (OSHA), the Food and Drug Administration (FDA) and the National Highway Traffic Safety Administration (NHTSA).
OBJECTIVES
Students will be able to
identify examples of economic regulation and explain the effects of these regulations on consumers, businesses and the economy
identify examples of social regulation and explain the effects of these regulations on consumers, employees, employers and the economy
explain the costs and benefits of economic and social regulation and justify their own position on the regulatory role of government
105

acc RELATED

SKILL OBJECTIVES

A-1, A-9, A-10; B-11; C-17

MACROECONOMICS Lesson 16

MATERIALS Handouts 16-1 , 16-2 and 16-3.

LEARNING ACTIVITIES
1. Ask students what the word regulation means. What might a regulatory agency do? (Regulate or limit the actions of business.)
2. Explain to students that regulatory agencies may be broadly categorized as having economic or social functions. An economic function is to limit or control prices, the competitive practices of a firm or the availability of a product or service. A social function is to control or deal with problems such as pollution or the health of employees or the safety of consumers.
Ask students to name agencies that might fall into either of these categories. (Students should recall such agencies as the FDA and OSHA which are social regulatory agencies.)
3. Direct students' attention to Handout 16-1. Working in pairs, have students examine the functions of the 13 agencies listed and identify the type of regulation as economic, social, or both.
Handout 16-1 answers are:
Economic = 1,2,3,4,6,7 Social = 8,9,10,11,12,13
Both = 5
4. To explore some of the costs and benefits of social regulation, direct students to Handout 16-2. Have students read the case study and answer the questions. Then hold a class discussion using the questions on Handout 16-2 as a framework for the discussion.
Extend the discussion with these questions.
a) How will the ban on three-wheeled vehicles affect the demand for other types of recreational vehicles? Can you show this on a supply-demand diagram?
Answer: The demand for other vehicles will probably increase since consumers will substitute other recreational vehicles for three-wheeled bikes.)

106

MACROECONOMICS Lesson 16
Increased demand for other bikes p
Q
b) In the next week, look in the news for examples of regulation by a federal agency. Bring these examples to class and analyze the pros and cons of the regulation and its effect on producers, consumers and employees.
EVALUATION: Have students answer yes or no to each question in the following exercise, 16-3. Assess the reasoning students provide for their answers on the basis of completeness, logical thinking and the assessment of the likely consequences of such regulation. Then ask students to select five of the items and provide the reasoning for their answers. Also ask them to identify the consequences of their answers on consumers, producers and employees.
107

MACROECONOMICS Lesson 16 HANDOUT 16-3 SHOULD THE FEDERAL GOVERNMENT REGULATE THESE ACTIVITIES? _ _ _ _ 1. Environmental damage created by factory output _ _ _ _ 2. Sale of cigarettes _ _ _ _ 3. Sale of alcoholic beverages _ _ _ _ 4. Handling of explosive chemicals in factories _ _ _ _ 5. Conditions for workers in factories _ _ _ _ 6. Minimum amount workers should be paid _ _ _ _ 7. Standards of education and skills for doctors _ _ _ _ 8. Safety standards for household appliances such as toasters _ _ _ _ 9. Employment practices aimed at ethnic groups, women or children ____ 10. Prices that monopolies, such as electric or gas companies, can charge
108

MACROECONOMICS Lesson 16
HANDOUT 16-1 SOME REGULATORY AGENCIES

Regulatory Agency
1. Interstate Commerce Commission
2. Antitrust Div. of Dept. of Justice
3. Federal Trade Commission
4. Federal Energy Regulatory Comm.
5. Food and Drug Administration
6. Federal Communications Commission
7. Civil Aeronautics Board
8. Federal Aviation Administration
9. Equal Employment Opportunity Comm.
10. Environmental Protection Agency
11. Occupational Safety & Health Administration
12. Consumer Product Safety Commission
13. Nuclear Regulatory Commission

Year Established
1887 1890 1914 1930 1931 1934 1938 1958

Main Function
Regulates rates and routes of railroads and trucking
Prohibits monopolization & other restraints of trade
Handles complaints of unfair competitive practices
Regulates interstate gas & electric power markets
Regulates drug availability and food safety & labeling
Regulates broadcast and telephone services
Regulated domestic airline fares and routes until 1985
Regulates standards for airline safety

Social or Economic

1965 1970 1970

Handles complaints of employment discrimination
Regulates standards for pollution control
Regulates safety and health conditions in workplaces

1972 1975

Regulates standards for product safety
Regulates civilian nuclear safety

109

HANDOUT 16-2 SOCIAL REGULATION EXAMPLE: SAFETY PROTECTION
Press release: April 14, 1989
The U.S. Consumer Products Safety Commission (CPSC) today announced that it is banning all future sales of three-wheeled all-terrain vehicles. The vehicles became popular as recreation vehicles in rugged terrain because they were more comfortable than regular motorcycles and could go places four-wheeled vehicles could not go. The size and weight of the all-terrain vehicle, however, have been related to a number of accidents in which the driver was injured or killed. These accidents occurred most often when the vehicles rolled over on the driver during regular driving over rough terrain. In banning the vehicle, the CPSC cited the lack of safety features, the tendency of drivers to drive too fast and the false sense of stability drivers have in these vehicles. The Turbo Cycle Company, whose main plant is in Abbyville, Alabama, is a major producer of the all-terrain vehicles. Company spokespersons criticized the CPSC decision, citing similar threats to human safety from both automobiles and lawnmowers. The company official further suggested that any accidents resulting from the use of the vehicle were the result of human error rather than any problem with the structure of the vehicle.
QUESTIONS:
1. Why did the Turbo Cycle Company want to produce the three-wheeled all-terrain vehicle?
2. Why did consumers want to buy the Turbo vehicle?
3. What is the position of the CPSC regarding the all-terrain vehicle?
4. How will the CPSC ban affect the Turbo Cycle Company? Consumers?
5. Who will benefit from the ban? Who will be hurt?
6. How will the ban affect the price of dirt bikes? Demonstrate the effect of the ban on price using supply and demand curves.
7. Do you think a government agency should regulate the types of vehicles sold in the U.S.? What about toys for infants?
110

MACROECONOMICS Lesson 17
GOAL 17
Explain how the key indicators of economic performance such as the gross national product, the consumer price index and the unemployment rate measure the general condition and direction of the economy.

TOPIC
Key economic indicators (unemployment rate, CPI, real GNP, inflation, recession, business cycle)

BACKGROUND
Americans are constantly confronted with economic data concerning economic growth, inflation, recession and unemployment. As informed citizens, Americans should be able to understand the data and interpret it in light of past data. The ability to understand the meaning of such data is the important first step in evaluating the appropriateness of current economic policies. The most commonly used data are measures of the value of total production or the gross national product (GNP); measures of overall price levels or the consumer price index (CPI); and the measure of those unemployed or the unemployment rate.

OBJECTIVES Students will be able to define key indicators of economic performance: real GNP, CPI and the
unemployment rate plot economic data on a line graph analyze economic data for trends identify periods of economic expansion or recession

acc RELATED

SKILL OBJECTIVES

A-5, A-7, A-10; 8-11; C-24, C-26

MATERIALS Handouts 17-1 and 17-2; graph paper

111

MACROECONOMICS
Lesson 17
LEARNING ACTIVITIES 1. Give a copy of Handout 17-1 to each student. Briefly explain the meaning of
each indicator. A basic textbook on economics should give sufficient background on how these indicators are formulated and what they mean. Emphasize the following points. The CPI represents an index number rather than a dollar amount or
percentage. The CPI is composed of market prices for a broad range of goods and
services. The base year for the CPI figures listed is 1972, when the CPI equals 100. The year-to-year percent change in CPI is derived from the CPI in column 1.
The CPI percent change indicates how much the CPI increased from the previous year. The unemployment rate here indicates the percentage of the civilian labor force that is unemployed, yet actively seeking employment. The real gross national product indicates the GNP after it is adjusted for inflation or deflation. All figures here are stated in dollars that are of the same value as was a dollar in the base year, 1972. 2. Give a copy of Handout 17-2 and graph paper to each student. Explain that by graphing economic data, students will be able to see and interpret the changes in the data more easily. 3. Have students graph the data as directed in items 1-4 of Handout 17-2. Since the answers to the questions in part 5 depend on accurate graphs, check the students' work for accuracy before students attempt to answer the questions. This might best be done by showing a correct overhead transparency of each graph that the students can use to correct any mistakes on their graphs.
112

MACROECONOMICS Lesson 17
4. When students have finished the graphs, they should answer the questions in item 5 of Handout 17-2.
5. After students have answered the questions, review each question with the entire class. Suggested answers are as follows. From 1970 to 1984, inflation was present during each year. Graph II because it shows the changes in the rate of inflation more clearly. The highest inflation rate was in 1980 at 13.5 percent. In graph III, the CPI never went down. In graph II, the percent of CPI change was never negative. 1973 through 1974, 1979, 1981 It went up each time. In 1973-74, it went up, peaked and went down. In 1979 it went up. In 1981, it went down. 1970 through 1972, 1975 through 1978, 1980, 1982 through 1983 The longest period was 1975 through 1978; the shortest period was 1980. 1970-1972: went up, peaked, went down. 1975-1978: went down. 1980: went up slightly. 1982-1983: went down slowly, then rapidly. 1970-1972: went down. 1975-1978: went down sharply, then went up. 1980: went down. 1982-1983: went down sharply, then went up.
113

MACROECONOMICS Lesson 17

6. Review the following main points by questioning students.

a) What are business cycles? Locate a business cycle using your graphs.

Students should identify patterns of rises and falls reflected in the data, particularly in real GNP. On the board you might draw a typical business cycle and label the parts as follows:

Peak 1

Peak 2

I

I

I

I

I
<--------

>

I<---------->

I<---->

I<------- >

I<---------->

I

etc

ExpansionlContraction ITroughlExpansionlContraction

Point out that expansion is represented by an increase in real GNP. The peak is seen when expansion changes to contraction. Contraction is represented by a decrease in real GNP. The trough is a period of little contraction or expansion.

In the data, the business cycle should be seen as follows.

1970-1973: expansion 1973: peak
1973-1975: contraction 1975: trough
1975-1979: expansion

Ask the students to continue the real GNP analysis of the business cycle by interpreting the data for 1979-1984.

b) What happens to prices and unemployment during periods of contraction or recession?

Prices tend to decline or their rise slows, although the effect is sometimes delayed. Unemployment rises.

c) What happens to prices and unemployment during periods of expansion?

Prices tend to increase, although less during the early stages of a recovery than during the latter stages. Unemployment declines.

114

MACROECONOMICS Lesson 17 EVALUATION Assess students' answers to the question in Handout 17-2 and their graphs. A quiz could be easily generated using the objectives for the lesson. EXTENSION Students might be assigned to locate data for the unemployment rate, CPI, CPI percentage change and real GNP for 1984 through the current year. Activities similar to those used in this lesson could be used to interpret the data.
115

MACROECONOMICS Lesson 17
HANDOUT 17-1

Year

CPI

1970

92.4

1971

96.7

1972

100

1973

106.2

1974

117.0

1975

126.1

1976

131.9

1977

138.4

1978

146.1

1979

157.4

1980

170.9

1981

181.3

1982

187.4

1983

190.6

1984

194.9

Base Year 1972

CPI yr-to-yr
% Change
5.9% 4.3% 3.3% 6.2% 11.0% 9.1% 5.8% 6.5% 7.7% 11.3% 13.5% 10.4% 6.1% 3.2% 4.3%

Unemployment Rate

Real GNP billions
of 1972 $s

4.9%

$1,085.6

5.9%

$1,122.4

5.6%

$1,785.9

4.9%

$1,254.3

5.6%

$1,246.3

8.5%

$1,231.6

7.7%

$1,298.2

7.1%

$1,369.7

6.1%

$1,438.6

5.8%

$1,479.4

7.1%

$1,475.0

7.6%

$1,512.2

9.7%

$1,480.0

9.6%

$1,534.7

7.5%

$1,639.9

116

MACROECONOMICS Lesson 17
HANDOUT 17-2
Study the economic data in Handout 17-1. Then use the data to make graphs on your graph paper. Follow the instructions in items 1-4 below. Then analyze the resulting graphs by answering the 11 questions in item 5 below. 1. Create Graph I: Unemployment Rate. Plot the years along the horizontal axis
and the rate of unemployment along the vertical axis. The unemployment rate indicates the percentage of the civilian labor force that is currently unemployed, yet actively seeking work. In general, low unemployment rates are considered to be good. High rates are thought to be undesirable. 2. Create Graph II: Year-to-year change in the CPI. Again, plot the years along the horizontal axis and the percentage change along the vertical axis. The CPI is the most commonly used indicator of changes in the average level of prices. A rise in the CPI is called inflation. A decline in the CPI is called deflation. Both inflation and deflation are undesirable in terms of the economic goal of price stability. 3. Create Graph III: CPI index numbers, found in the first column of Handout 17-1. Plot the years along the horizontal axis and the index numbers along the vertical axis. The index number is what is most commonly given when the CPI is cited in economic data. It is always important to note the base year, when the CPI equals 100. Here it was 1972, but it changes with different data. The consumer price index numbers are used to determine the year-to-year percentage change in the CPI plotted on your second graph. 4. Create Graph IV: Again, plot the years along the horizontal axis and the value of real GNP in billions of dollars along the vertical axis. The real GNP measures the output of final goods and services in the economy after adjusting for any inflation or deflation that might have occurred. Thus, real GNP is said to be stated in "constant dollar value." Here the dollar values are all equal to the values of the dollars in 1972. Typically, increases in real GNP are considered to be desirable, while decreases are thought to be undesirable.
117

MACROECONOMICS Lesson 17
Handout 17-2 (continued)
5. Based on the graphs you have plotted, answer these questions. What does the CPI (graph III) tell you about inflation? Compare the CPI (graph III) with the year to year percent change in the CPI (graph II). Using graph II, when did the highest rate of inflation occur? When did the lowest rate of inflation occur? What evidence from the graphs can you use to support the argument that there was no period of deflation between 1970 and 1984? A recession is often defined as a period when real GNP drops for six months or more. During which years did the U.S. experience recessions? What happened to the unemployment rate during these recessions? What happened to the CPI (graph II) during and after these recessions? The real GNP increases during a period of economic expansion. During which years did the economy expand? Which was the longest period of economic expansion? Which was the shortest period of economic expansion? What happens to the unemployment rate during periods of economic expansion? What tends to happen to the CPI (graph II) during economic expansion?
118

MACROECONOMICS Lesson 18

GOAL 18
Explain how aggregate supply and aggregate demand reflect the overall activity of the economy.

TOPIC Aggregate supply and aggregate demand

BACKGROUND
The purpose of the lesson is to introduce aggregate supply and demand analysis and to demonstrate how shifts in aggregate supply and aggregate demand reflect the overall activity of the economy. This lesson provides a background for the consideration of macroeconomic issues such as government regulation, inflation and unemployment.
Note: This lesson is for advanced students.

OBJECTIVES
Students will be able to
define aggregate supply (AS), aggregate demand (AD), fiscal policy, monetary policy and restrictive or expansionary policies
identify goals of the national economy: stability, security, full employment, growth and justice
explain how changes in monetary or fiscal policies affect AS, AD, employment, inflation and production

acc RELATED

SKILL OBJECTIVES

A-7, A-8, A-9, A-10; 8-11,8-12,8-14

MATERIALS

Handouts 18-1, 18-2 and 18-3

119

MACROECONOMICS Lesson 18
LEARNING ACTIVITIES:
1. Distribute Handout 18-1, which introduces the macroeconomic concepts of aggregate supply and aggregate demand. Students should read the handout and study the four possible shifts and the resulting effects. Individually, in small groups or as a class, the students should generate situations that could cause each of the aggregate shifts and explain their reasoning.
The following are examples of causes for each shift.
An increase in AD might be caused by lower interest rates; increased government spending without additional taxes or increased wages.
A decrease in AD might be caused by higher interest rates; tax increases without more government spending; or decreased government spending without tax reduction.
An increase in AS might be caused by new, less expensive sources of raw materials or new technology or productive methods.
A decrease in AS might be caused by increased raw material costs or fears that aggregate demand may decrease.
Be sure to emphasize the aggregate nature of both supply and demand in macroeconomics. One approach to this exercise might be to elicit and discuss student-generated causes for each of the four shifts and then to use the causes listed under the above causes in random order to test the students' ability to place the cause with the correct supply/demand shift.
2. Then students should analyze the effects of the shifts in AD and AS pictured on Handout 18-1. What are the probable effects on inflation, growth and unemployment given each of these four scenarios?
3. Ask students what the effects would be if AD and AS each experienced similar steady increases. Have students demonstrate this graphically and explain the effects in their own words. (This model suggests that similar, steady shifts to the right in both aggregate supply and aggregate demand provide both economic growth and price stabilization. Other goals such as justice and full employment are not well addressed by this model since it does not reflect changes in employment levels or whether or not the increased aggregate supply is being justly distributed.)
120

MACROECONOMICS Lesson 18
It is important at this point to discuss the difficulty in achieving similar shifts in both aggregate supply and aggregate demand and consequently, the difficulty of maintaining both growth and price stabilization. Explain that many factors influence AS and AD, and ask students how the following factors might affect AS and AD.
Fiscal policy Monetary policy Resource availability Consumption patterns Investment patterns Foreign trade
4. Distribute Handout 18-2 and have students read it and respond to the questions and exercises on monetary and fiscal policies.
The concepts involved here might be best reinforced by placing the two aggregate supply/demand curves on the board and going over each part. It should be pointed out that it is difficult to target specific sectors of the economy through monetary policy.
Once students understand the effects of expansionary and restrictive monetary policy on aggregate supply and demand, the relationship could be reinforced and expanded by examining conditions under which each type of
policy might be used. Why would the FED want to "warm up" the economy
with expansionary monetary policy? Why would they want to "cool down" the economy with restrictive monetary policy? A film on monetary policy or a speaker from a local bank or the Federal Reserve Bank might provide an interesting focus for discussion.
5. The second part of Handout 18-2 introduces the students to fiscal policy and the effects of fiscal policy decisions on the economy.
Federal taxation and expenditures are only lightly covered, but they could be expanded to emphasize the ability of fiscal policy to provide either expansionary or restrictive stimuli for the economy.
After the students have read the text of Handout 18-2, they should identify the elements of expansionary fiscal policy as "decreased taxes" and "increased government spending." They should identify the elements of restrictive fiscal policy as "increased taxes" and "decreased government spending." It might be best to have students explain how these elements work in a full class discussion. They should label Figure 1 "restrictive fiscal policy" and Figure 2 "expansionary fiscal policy."
121

MACROECONOMICS Lesson 18 EVALUATION Handout 18-3 is designed to check on student comprehension of the lesson objectives. Distribute it to students and direct them to consider each change in aggregate supply or demand and list four potential causes. In each case they should list either "expansionary" or "restrictive" for monetary and fiscal policy. The two "other" causes for each situation should be taken from the list at the bottom of the page.
ANSWERS: Number 1 could be caused by "expansionary" monetary or fiscal policies, new technology or new sources of raw materials. Number 2 could be caused by "expansionary" monetary or fiscal policies, consumer optimism or an increase in real wages. Number 3 could be caused by "restrictive" monetary or fiscal policies, fears or higher energy costs. Number 4 could be caused by "restrictive" monetary or fiscal policies, consumer fears or high unemployment.
Students should graph the shift for each situation and completely label the supply/demand curves. The exercise could be expanded by having students explain orally or in writing why each cause might affect aggregate supply or demand as it does. Further discussion could focus on change in macroeconomic (aggregate) equilibrium prices and the effects the shifts and new prices might have on the economy.
122

MACROECONOMICS Lesson 18

Handout 18-1

Introduction
In microeconomics one examines how changes in different factors can cause either supply or demand of a specific product to increase or decrease. For instance, an increase in the mosquito population will probably result in an increase in the demand for mosquito repellent. This results in

a shift of the demand curve to the right and an increase in the equilibrium price as shown in the

diagram.

S

P

Markets for MosqUito Repellent

When we study the national economy, we can use supply-demand analysis to help describe the general behavior of all the markets in the country or in the aggregate. Aggregate supply refers to the total production of all businesses in the United States at various price levels. Aggregate demand refers to the total demand for goods and services in the United States by the govemment, consumers and investors. Aggregate demand is actually the same as the gross national product since the GNP is the sum total of all final goods and services sold by U.S. producers.
A. Aggregate Demand increased P with no change in supply.
RGNP
B. Aggregate Demand decreased P with no change in supply.
RGNP

C. Aggregate Supply increased with no change in demand.

P
RGNP

D. Aggregate Supply decreased

P

with no change in demand.

RGNP

Key
p. = Price Level RGNP= Real Gross
National Product

123

MACROECONOMICS
Lesson 18

HANDOUT 18-2

Monetary Policy: The Federal Reserve System, through its monetary policies, can
influence aggregate supply and aggregate demand. For example, if the FED wanted to stimulate the economy during a recession, it would adopt an expansionary monetary policy, perhaps by decreasing the discount rate (or the interest rate the FED charges to member banks). The banks would be more willing to make loans to consumers and businesses; when the FED lowers its discount rate to member banks, they in turn usually lower the prime interest rate for their customers.

The Federal Reserve Bank's expansionary monetary policy would stimulate the economy. Given lower interest rates, producers would borrow more money to expand businesses and consumers might borrow more to purchase additional goods and services. Thus, an expansionary monetary policy would stimulate an increase in AD. As consumers bought more goods and services, employers would hire more workers, thus increasing employment and stimulating the overall economy.

By contrast, a restrictive monetary policy decreases the amount of money available for loans, causing interest rates to rise. This causes producers to reduce investment in businesses and consumers to reduce purchases of additional goods and services. Thus, aggregate demand would decrease. To show that you understand the difference in expansionary and restrictive monetary policies on aggregate supply and demand, draw the proper graphic representations below:

Figure 1: Expansionary

Figure 2: Contractionar~

Monetary Policy

Monetary Polley

P

P

RGNP

RGNP

Fiscal Policies: To promote economic stabilization, the federal government uses fiscal policies. Fiscal policies refer to the government's power to tax and to spend, which influences the economy. In times of recession, the government uses an expansionary policy to stimulate aggregate demand; in inflationary times, a restrictive fiscal policy dampens AD. These powers are referred to as fiscal policy. An expansionary fiscal policy uses either decreased taxation or increased spending to stimulate aggregate supply and demand. Increased government spending directly increases aggregate demand. Decreased taxation can increase either aggregate

124

MACROECONOMICS Lesson 18

Handout 18-2 Continued

supply or aggregate demand, depending on which taxes are decreased. If taxes on consumers are decreased, consumers will probably use the additional money to increase their demand for goods and services. If taxes on businesses are decreased, the total cost of production is decreased; thus, producers are willing and
able to produce more at various prices, and AS increases.

A restrictive fiscal policy might be used during times of high inflation. The government could use either decreased federal spending or increased taxes to decrease aggregate supply and demand. Decreased federal government spending would directly reduce aggregate demand. Increased taxation would take more money from producers or consumers, depending on which taxes were increased. Increased taxes on producers might take away investment money, thus decreasing aggregate supply. Increased taxes for consumers would force them to cut back on their spending, thus limiting aggregate demand.

To show that you understand the difference between the effects of expansionary and restrictive fiscal policy on aggregate supply and demand, complete the following exercise:

Which of these are elements of an expansionary fiscal policy? Select from the list below and write them on these lines:

a)

_

b)

_

Which are elements of a restrictive fiscal policy? Select from the list below and write them on these lines:

a)

_

b).

_

Increased Taxes Decreased Taxes Increased Government Spending Decreased Government Spending

125

MACROECONOMICS Lesson 18

Handout 18-3
Putting It All Together

1) An Increase In aggregate supply?

monetary policy fiscal policy

P

(other)

(other)

2) An Increase In aggregate demand?

monetary policy fiscal policy

P

(other)

(other)

RGNP RGNP

3) A decrease In aggregate supply?

monetary policy fiscal policy

P

(other)

(other)

RGNP

4) A decrease In aggregate demand?

monetary policy

fiscal policy

P

(other)

(other)

Ideas for the "other" sections:

RGNP

a) new technology b) new source of raw materials c) consumer optimism d) increased real wages

e) higher energy costs f) consumer fears g) business (producer) fears h) high unemployment

126

MACROECONOMICS Lesson 19

GOAL 19
Explain causes and effects of unemployment and distinguish among the basic types of unemployment.

TOPIC Unemployment

BACKGROUND
Unemployment is a persistent problem in any economy, for it represents underused human resources and lost productivity. In addition, unemployment is usually associated with serious psychological and social problems.
There are three basic causes or types of unemployment.

a) Frictional unemployment includes those who are "in between" jobs, those who have quit one job to find another or those who have been laid off.
b) Structural unemployment includes those who are unemployed because of basic changes in the characteristics of the markets.
c) Cyclical unemployment includes those who are unemployed because the total demand for goods and services is insufficient to employ all the workers in the labor force.

OBJECTIVES

Students will be able to

use data to explain the relationships between the unemployment rate and the real GNP

explain the major causes of unemployment

identify the social, psychological and economic effects of unemployment

acc RELATED

SKILL OBJECTIVES

A-1, A-2, A-4, A-5, A-7, A-8; 8-13, 8-15, 8-16; C-21, C-22

MATERIALS

Handout 19-1

127

MACROECONOMICS Lesson 19
LEARNING ACTIVITIES Introduction of Concept 1. Ask students to develop a meaning for the word unemployment. What causes a
person to be unemployed? What are the effects of being unemployed? Hold a general discussion on these questions. Analyzing Data 2. Distribute Handout 19-1 and review together the two graphs. Point out that the top graph represents the percentage of change (either growth or decline) in the real GNP for each year, but the graph doesn't tell the absolute GNP level. For instance, in 1950 the real GNP was growing by about 8% per year. In 1951, real GNP growth rate was only half as great as the 1950 rate; it is important to point out that the economy was still growing, but at a slower rate. Therefore, at the end of 1951, the real GNP was still 4% greater than it was at the end of 1950. 3. Point out that in three years (1954, 1975 and 1975) the real GNP actually declined. After each of these years was over, the real GNP was less than it had been when the year began. 4. Then examine the unemployment rate graph. Inform students that the percentage rate for each year represents the percent of the civilian labor force that was unemployed, yet actively seeking work. 5. Have students circle each of the points where the unemployment was highest, beginning with 1954. They should circle 7 points: 1954, 1958, 1961, 1963, 1971, 1975 and 1980.
6. Next, ask them to circle the point on the real GNP graph where the real GNP growth rate reaches a low point (the bottom of a trough). They should circle 1954, 1958, 1960 (to 1961), 1963, 1970, 1974 (to 1975) and 1980.
Drawing Conclusions 7. Now ask the students to compare the circled points on the two graphs and ask
them if they can see a relationship between the two sets of points. They should conclude that low real GNP growth rate coincides with high unemployment rates.
128

MACROECONOMICS Lesson 19
8. The next question should focus on whether low GNP causes unemployment or whether high unemployment causes low GNP. This question might come from the students or the teacher. Of course, there are no easy answers. These two important elements of the economy are closely related and interdependent. Each results in the other: Unemployment and its decrease in consumer spending can contribute to a decline in GNP growth. As well, a decline in GNP growth, among other factors, can contribute to increasing unemployment, as workers are laid off when sales decline.
9. Help students perceive unemployment in economic terms as representing idle resources that could be used to increase real GNP productivity. If the unemployed persons were being used productively, more goods and services would be produced, and more families would receive income with which they can purchase these additional goods and services. Therefore, higher levels of productivity and lower levels of unemployment result in an increased standard of living.
10. Next, ask students, "But beyond these economic effects of high unemployment rates, what other effects does unemployment have? What social, psychological and perhaps other economic problems result from high unemployment?" Have students categorize the effects into these three categories.
11. Have students refer to their economics textbook to find the definitions of the three types of unemployment: frictional, structural and cyclical.
EXTENSION
Have students collect current data on the unemployment rate in their region state and in the nation. These data are regularly (usually at least weekly) published in local newspapers.
Students can plot the data graphically over the rest of the course and try to identify clues to explain fluctuations in the unemployment rate.
EVALUATION
Ask students to explain in a short paper the meaning of unemployment and its causes, effects and types.
129

MACROECONOMICS Lesson 19

Handout 19-1

Annual Change In Real GNP
10

8

6

4

2
o

-2

1950

1955

1960

1965

1970

1975

1980

Unemolovment Rate
10

8

6

4

2

o

1950

1955

1960

1965

1970

1975

1980

130

MACROECONOMICS Lesson 20

GOAL 20
Identify the nature and causes of inflation and deflation and analyze the impact of inflation and deflation on economic decisions made by businesses and households.

TOPIC Inflation

BACKGROUND
Inflation refers to a period of generally rising prices in the economy. When inflation occurs, the cost of living rises; that is, each dollar spent buys fewer goods and services. Inflation is a social problem. The understanding of the causes, the measurement of, and the effects of inflation are important steps in evaluating solutions to inflation.

OBJECTIVES
Students will be able to
define inflation and explain how the consumer price index (CPI) and the producer price index (PPI) are determined and used
use supply and demand graphs to demonstrate cost-push and demand-pull causes of inflation
propose viable solutions to inflation

acc RELATED

SKILL OBJECTIVES

A-2, A-4, A-7, A-9, A-10; 8-11, 8-12, 8-15, 8-16 C-24, C-26, C-28

MATERIALS Handouts 20-1 and 20-2 for pairs of students

131

MACROECONOMICS Lesson 20
LEARNING ACTIVITIES:
Introduction of Concept
1. Ask students what the term inflation means to them. (Inflation refers to an overall rise in price levels.)
2. Point out that while it is rather easy to demonstrate that inflation does occur, accurately measuring the level of inflation is more difficult. Confront students with the problem of determining how much inflation has taken place in a specific period of time. Brainstorm ideas of how this might be done. Eventually the discussion should focus on using selected goods and services to represent certain sectors of the economy such as automobiles or housing. Tell students that a "market basket" of goods and services is used to measure inflation.
3. Use Handout 20-1 to build on the "market basket" nature of the consumer price index (CPI). Have students work in pairs or in small groups to complete Handout 20-1.
Answers to Handout 20-1 :
a. $42.90 b. $45.75 c. $106.6 d. 6.6 percent
e. $105.5
f. Yes. The price of milk went down. g.6.6% h.1.1% i. Period 1 to Period 2
4. After the students have completed the exercise, work through the responses to clarify them and reinforce the following ideas.
What the CPI is and how it is generally constructed.
How the formula works to generate an index number.
What a base year is.
How the base year is used as a point of comparison.
How examples of deflation might exist even during inflation.
How percentage of change helps to compare changes in inflation.
132

MACROECONOMICS Lesson 20 5. Once the students have a grasp of what inflation is, how it is measured and variations in the degree of inflation, it is time to examine the causes of inflation. One way to begin is to have students brainstorm a list of the factors that they believe cause inflation. Such a list, if left on the chalkboard, can be used after Handout 20-2 to review what the students have learned about the causes of inflation. Have students work in pairs to complete Handout 20-2 after discussing causes of inflation. In a summary decision, be sure students can: identify the factors that cause demand-pull and cost-push inflation. EVALUATION: Have students react to quiz items taken directly from lesson objectives 1-4.
133

MACROECONOMICS Lesson 20

Handout 20-1
Consumer Price Index

The consumer price index (CPU is composed of unit prices collected for about 400 different goods and services. They fall into the eight main categories below that together make up the "market basket" for the index.

1. Apparel and Upkeep 2. Entertainment 3. Food and Beverages 4. Housing 5. Medical Care

6. Personal Care 7. Transportation 8. Other

Prices for the market basket are collected at 24,000 different retail outlets. To figure the final value, the price of each good or service is multiplied by the average quantity of that good purchased by a typical family during the time period being used (typically a month).

Let's try a simplified example. Figure the total food cost for both Period 1 and Period 2.

Period 1 (January of the First Year)

Item

Average Price

Per Unit

Milk (gallon) Bread (1 pound loaf) Hamburger Meat (1 pound) Eggs (dozen large)
I

$1.60 $ .80 $1.50 $ .65

Period 2 (January of the Second Year)

Quantities Bought
5 20 10 6

Total expenditures
$ $ $ $

Item
Milk (gallon) Bread (1 pound loaf) Hamburger Meat (1 pound) Eggs (dozen large)

Average Price Per Unit
$1.65 $ .85 $1.60 $ .75

Quantities Bought
5 20 10 6

Total Expenditures
$ $ $ $

a) The total food expenditure for Period 1 was $

_

b) The total food expenditure for Period 2 was $

_

134

MACROECONOMICS Lesson 20

You have now determined the total cost for each of the two periods. Now, you have to convert those figures to an index number. You do that by using the fonnuIa:

Total Market Basket Prices for the current year

CPI

X 100

Total Market Basket Prices for the base year

For this simplified example, you will substitute total food costs for total market basket prices. Period 1 is our base year. The CPI for the base year always equals 100. We can prove this by applying the formula to the total food costs for Period 1.
$42.90 CPI = - - X 100 = 100
$42.90

Now, with Period 1 as the base year, compute the CPI for Period 2.

CPI= - - Xl00 $42.90

c. What was the CPI number for Period 2?

_

d. What was the percentage change between Period 1 and Period 2?

% (Hint. The

Period 2 index number minus the Period 1 index number equals the percentage of change in the

CPU

Now, let's add a third year to our figures. Please compute the total food cost. Period 3 (January of the Third Year)

Item

Average Price

Quantities Total Expenditures

1-------------Pe-r U-ni-t ---- -- Bought ---------1

Milk (gallon) Bread (1 pound loaf) Hamburger Meat (1 pound) Eggs (dozen large)

$1.55 $ .85 $1.60 $ .75

5

$

_

20

$

_

10

$

_

6

$

_

Now figure the CPI number for Period 3. Don't forget to use Period 1 as the base year.

e. The CPI for Period 3 is

_

Deflation is when prices actually go down or decrease.

f. What is an example of deflation between Periods 2 and 3?

_

Now let's put alI of our figures together in the chart below and analyze them.

Period Total Food Cost CPI Percent Change

1

$42.90

100 None

2

$--

-- --_%

3

$--

-- --_%

i. According to the data above, which of these two intervals had the greatest level of inflation?

Circle One:

Period 1 to Period 2

Period 2 to Period 3

135

MACROECONOMICS Lesson 20
Handout 20-2
The Causes of Inflation
Inflation doesn't just happen. Generally, inflation is caused either by demand-pulI forces or cost-push forces in the economy. While the names may sound somewhat funny, they are actually very descriptive of what happens.
Demand-Pull Inflation
In demand-pulI inflation, increased demand for goods or services actually pulIs the prices of products up. This is simply a reflection of the law of demand which you learned earlier. When the demand for goods increases, the price for those goods increases. On a supply/demand graph, this relationship is readily seen. If the demand for bicycles increases at every price level, the demand curve will shift to the right. As a result, the equilibrium price will increase.
prK:e:% Supply/demand curve for bicycles D1 Do uantl
The same is true for aggregate demand. Remember that aggregate demand is the total demand for all goods and services. If consumers wanted more of alI or many goods, aggregate demand would increase and the curve would shift to the right, indicating a general increase in prices. A general increase in prices is what we call inflation. Which of the folIo wing situations would probably result in demand-pull inflation? Circle the letter of each correct response. Remember that demand-pulI inflation happens when demand increases and the demand curve shifts to the right.
a. Consumers are generalIy borrowing more money to make purchases. b. Consumers are beginning to save more of their income. c. Income taxes have been reduced for most workers. d. Levels of production have increased to record highs. e. There is a shortage of gasoline and other petroleum products.
HopefulIy you only circled letters "a" and "c." In "a," the borrowed money increases demand and "pulIs" inflation up. In "c," reduced taxes would mean that workers would have more income to spend and they would probably increase their demand for goods and services. More savings by consumers (item "b") would suggest that demand is actualIy decreasing. The changes suggested in items "d" and "e" would affect supply and are not related to demand-pulI inflation. Now, on the supply/ demand curves below, show the shift that would result if consumers are generally borrowing more money to make purchases, as item "a" suggests.
x : Prk:e
136

MACROECONOMICS Lesson 20

Lesson 20-2 Continued

Cost-Push Inflation

p x: a

Demand-pull inflation is the result of increased demand without an increase in supply. Cost-push inflation happens when there is an increase in the costs of the factors of production. If the costs of the factors of production increase, the cost of the final product has to increase. This is cost-push inflation. On the supply/ demand curve, show the shift that would probably occur if there was an increase in the cost of labor, materials or other factors involved in the production of bicycles.

Correct responses indicate that the supply curve would shift upward and to the left, resulting in increased prices for bicycles.
Now, look at items "d" and "e" from the previous page. Which of these two items would result in
cost-push inflation? The correct answer is item "e," A shortage of gasoline and other petroleum products would mean an increase in the cost of the factors of production and would result in a shift of the supply curve upward and to the left. This would indicate cost-push inflation. TItem "d," an increase in levels of production would result in a shift in the supply curve downward and to the right, suggesting greater quantities available at lower prices.
Draw supply/demand curves to represent each of the following four situations. Be sure to show the shifts clearly and label each graph as showing either demand-pull inflation, cost-push inflation or no inflation.
a. New sources of iron ore, coal and oil have been discovered. b. Fear of inflation has caused consumers to increase spending. c. The cost of factory machinery has gone up 17%. d. New import restrictions have raised the prices of raw materials.

137

MACROECONOMICS Lesson 21

GOAL 20
Identify the nature and causes of inflation and deflation and analyze the impact of inflation and deflation on economic decisions made by businesses and households.

TOPIC Inflation

BACKGROUND
When inflation occurs, some individuals and businesses may suffer losses while others may gain. In this lesson, students will examine the effects of inflation on lenders and borrowers, people living on fixed incomes and a range of others.

OBJECTIVES
Students will be able to
describe and demonstrate the effects of inflation on nominal and real wages; on the buying power of consumers; on people who live on fixed incomes; and on lenders and borrowers

acc RELATED

SKILL OBJECTIVES

A-7, A-9, A-10; 8-11, 8-12; C-14, C-15, C-16, C-24; D-31

MATERIALS Handouts 21-1 and 21-2

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MACROECONOMICS Lesson 21

LEARNING ACTIVITIES

1. Introduce the lesson by stating that inflation affects everyone, but it affects different groups of people in different ways. The purpose of the lesson is to determine who is helped by inflation, who is hurt by inflation and who is unaffected by inflation.

2. Distribute Handout 21-1. Have students work in small groups to study each scenario carefully and label each according to whether the people in the scenar-
io are helped, hurt, or unaffected by inflation. The correct word should be placed on the line at the end of the scenario.

3. Once students have completed their work, the class should check and discuss responses together. Since correct answers are needed for the next steps, be sure students make corrections. Answers should be the following.

1. Hurt

6. Hurt

11. Helped

16. Hurt

2. Hurt

7. Hurt

12. Hurt

17. Hurt

3. Helped

8. Hurt

13. Helped

18. Helped

4. Unaffected

9. Helped 14. Hurt

19. Unaffected

5. Hurt

10. Hurt 15. Hurt

20. Helped

4. Distribute Handout 21-2. This handout presents the students with nine composite groupings. Each of the 20 scenarios from Handout 21-1 fits under one of these groups. Ask the students to place the number of each scenario in the correct category.

5. Now, have students complete each of the nine statements in Part II of Handout 21-2 by explaining the effect of inflation on each person or group. This exercise will result in nine generalizations about the effects of inflation. These generalizations should provide the student with a good idea of the overall impact that inflation has on our economy and on individuals and groups.

139

MACROECONOMICS Lesson 21
6. As a summary, ask students to write a short paragraph summarizing the overall impact of inflation on the economy. This can be written on the back of Handout 21-2. It can also be shared orally with the class.
7. As a follow-up, direct students to interview several people in their neighborhood or community about inflation. Have them ask questions such as those below. a) In what ways (if any) has inflation hurt you? b) In what ways (if any) has inflation helped you? c) Do you think the current level of inflation is acceptable? If not, how would you recommend improving the level of inflation? You can use the responses to these questions as the basis for further classroom discussion on who wins or loses from inflation. The students can summarize their data on a chart.
8. For an additional follow-up activity, the class can stage a hearing before a hypothetical Governor's Commission on inflation. Students can each take one of the roles suggested by the 20 scenarios and testify before the commission. The extra students can serve as the commission panel, hear the testimony, question the witnesses and render a final decision on the seriousness of inflation as a problem in our state's economy.
EVALUATION Review and evaluate responses to Handout 21-2 and any additional follow-up assignments.
140

MACROECONOMICS Lesson 21

HANDOUT 21-1

1. A worker who is paid the minimum wage.

_

2. A person who lives off of the interest from $100,000 in a savings account that

pays 6.5% interest.

_

3. A person who bought an $80,000 home 10 years ago. She must pay $450 per

month for the next 19 years.

_

4. A construction worker who has a cost of living adjustment (COLA) in his

contract.

_

5. A textbook company that has signed a five-year contract to sell textbooks for

$20 each.

_

6. A bank that has loaned large amounts of money for 30-year home loans at a

fixed rate of 8% interest per year.

_

7. A retired person who lives off a $600 per month pension.

_

8. A government organization that uses a 20 cent per gallon tax on gasoline to

repair highways and build new highways.

_

9. A person who has invested in gold and silver bars.

_

10. A retired person who lives off $5,000 per month earned from fixed-interest

bonds.

_

11. A company that issued 30-year bonds at 8% interest.

_

12. A young couple saving money to buy a house._ _

13. A person who bought land as an investment 20 years ago.

_

14. A family saving for their childrens' college education.

_

15. A person who sold a house five years ago, letting the buyer make payments to

the seller over a 20-year period.

_

16. A company that has contracted to sell 500 planes to the government over the

next 10 years for $15 million per plane.

_

17. A city government that has had a 1O-year ceiling placed on the amount it can collect for business licenses. - - - - - -

18. Government collection of income taxes by using a progressive scale that in-

creases the amount paid as income increases.

_

19. Union employees whose wages increase under their contract, at the same rate that inflation increases. - - - - - -
20. Government collection of sales tax at a rate of 6% per dollar spent.

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MACROECONOMICS Lesson 21

HANDOUT 21-2

Part I

Examples from Handout 21-1

A. Workers who have cost of living adjustment (COLA) in their contracts

B. Those on fixed incomes

C. People who have borrowed money

D. People who have loaned money

E. Government collection of taxes assessed at fixed rates

F. People who have tangible assets

G. People who have saved money

H. Businesses that have signed long-term fixed-rate contracts

I. Government collection of taxes assessed at progressive rates

Part II

A. Workers who have cost of living adjustments tied to inflation are _ _ by inflation because ...

B. Persons on fixed incomes are

by inflation because...

C. People who have borrowed money are

by inflation because...

D. People who have loaned money are

by inflation because...

E. Government collection of taxes assessed at fixed rates is because ....

by inflation

F. People who have tangible (material) assets are because ...

by inflation

G. People who have saved money are

by inflation because...

H. Businesses that have signed long-term fixed-rate contracts are

_

by inflation because...

I. Government collection of taxes assessed at progressive rates is _ _ _ _ _ _ _ by inflation because ...

142

MACROECONOMICS
Lesson 22

GOAL 21
Describe the structure and organization of the banking system and the effects on the economy of the Federal Reserve System's implementation of monetary policy.

TOPIC Monetary policy

BACKGROUND
Changes in the money supply and interest rate affect the level of economic activity in the economy. The Federal Reserve System (FED), the central banking system in the U.S., has the major responsibility for managing the money supply. The purpose. of this lesson is to explore the role of the FED and the monetary policy actions it is able to apply.

OBJECTIVES
Students will be able to
explain how the price of money, or the interest rate, relates to the supply of money avai lable
list and describe the Federal Reserve Bank's powers to
a) set the discount rate b) set the reserve requirement c) conduct open market operations
describe and give examples of how the Federal Reserve Bank can use its monetary policy powers to have expansionary or contractionary effects on the economy

acc RELATED

SKILL OBJECTIVES:

A-2, A-7, A-B, A-10; B-13; C-17, C-21 , C-24, C-26, C-27, C-2B, C-30

MATERIALS
Students will conduct a mini simulation in this lesson and make their own "props" as the lesson progresses. Students should study chapters in their economics textbook on monetary policy and the FED prior to this lesson.

143

MACROECONOMICS Lesson 22
LEARNING ACTIVITIES
Getti ng Ready
1. Explain to students that the level of the money supply refers to the amount of cash and demand deposits (money in bank accounts) that exist at a given time. If the demand for money or for credit is greater than the supply, the price of money (interest rate) will increase. A relatively high price for credit will result in cutbacks in business investment and decreased borrowing for personal consumption. If the demand for money is less than the money supply, the price of money will decrease. Lower interest rates will result in increased borrowing and spending for investment and consumption. The job of the Federal Reserve System is to promote the stabilization of the economy by managing the money supply and the interest rate.
2. Introduce the activity by stating that the class will do an exercise that will demonstrate the monetary powers of the Federal Reserve Bank and how these powers can be used to influence the level of the money supply.
3. Choose one student to play the role of the FED. Select another student to play the role of the "Big Investor." These two students should sit separately from everyone else and from each other. Equally divide the remaining students into three groups. Group A will be consumers, Group B will be banks, and Group C will be bond holders.
It might help if each student makes a quick sign that states his or her role.
4. Students should use notebook paper to make a visual representation of their props. Have each student in Group A make a certificate representing $1,000 cash, which is actual money in their immediate possession. Students in Group B have certificates representing $1,000 in bank deposits. Students in Group C have certificates representing $1,000 in bonds. (Explain that this is not cash or part of the money supply. Rather, a bond is an IOU for money someone owes you that will be paid in the future.)
5. Have the FED student make 10 certificates for $1,000 cash and one certificate for $5,000 cash. Tell the class that cash held by the FED is not part of the money supply as long as the FED has it.
Have the "Big Investor" make 10 IOU certificates for $900 each (certificate E) and $5,000 each (certificate G). Explain that these 10Us are not cash either.
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MACROECONOMICS Lesson 22
6. Now you are ready to play. First, inform the students that you need to have some sense of how much money is in the economy ready to be used. We will call it the money supply. Ask all students with $1000 cash to raise their hands. Count them and write the total amount of cash on the board. Do the same thing with bank deposits in group B. Add the two together and label the sum the money supply. Make sure everyone realizes that this is the amount of money currently in circulation.
Round One: Buying and Selling in the Open Market
7. Introduce the first power that the FED has to influence the money supply: open market transactions or operations. State that "the FED can expand the money supply by buying government securities or bonds on the open market. In such transactions, the FED buys the bonds from investors and exchanges money for those pieces of IOU paper. This money goes to the investor, who deposits it in his or her checking account. This payment thus becomes part of the money supply. Banks are then able to create money by making loans, using this new payment as part of the bank's deposits. Let's see how it works."
8. Set the scene by stating that the demand for money is increasing. Interest rates are rising. Current bondholders can get a better return on their money by investing it in other areas of the economy. Direct the FED to give all interested bondholders $1,000 cash for their bonds. After the transactions are completed, count the cash and demand deposits to determine the new money supply. Write the number on the board.
9. Ask students to explain what has happened. They should reply that the FED has followed an expansionary monetary policy, increasing the money supply by buying bonds. What would happen to the money supply if the FED sold government securities? Have students enact this option. (Basically, selling securities has a contractionary effect because it takes money out of the economy.) The FED sells a treasury security to an individual, who draws $10,000 from his or her bank account. This withdrawal leaves the banking system with $10,000 less than before. Thus, fewer loans can be made; the money supply will contract.
Round Two: Reserve Reguirement
10. Introduce the second power of the FED: increasing or decreasing the reserve requirement. Tell the students that the FED requires that banks keep a certain percentage of their deposits on hand or on reserve in the vault to cover withdrawals by customers. The rest of their deposits may be loaned out to borrowers. If the reserve requirement is 10 percent, each bank with $1,000 in deposits can lend $900 to borrowers, but must keep $100 on reserve. Now, the "Big Investor" wants to borrow all that you can lend. How many of your banks want to lend $900 to the Big Investor?
11. Direct each bank that wants to lend $900 to create a cash certificate for $900 and trade it to the Big Investor for a $900 IOU. Once this activity has been completed, count all cash (including that of the Big Investor) and demand deposits again.
145

MACROECONOMICS Lesson 22
12. Place the amount of the new money supply on the board. Discuss with the students why it has increased and point out that a) the banks can still count their demand deposits as part of the money supply since money is available to the depositors; and b) through this lending process by banks, money is created and the money supply expanded. The FED can raise the reserve requirement and thus have banks hold greater amounts of their total assets in reserve; this would lead to a decrease in the money supply. Lowering the reserve requirement allows banks to make more credit available, thus increasing the money supply.
Round Three: Discount Rate
13. The discount rate is the interest rate the FED charges member banks when they borrow money from the FED. The discount rate functions as a signal to the member banks: When the FED raises the discount rate, it is signaling that the economy needs to "slow down," because inflation is too high. Thus, banks will tend to raise interest rates and credit will be "tight." The FED has signaled a contractionary message. In times of recession, the FED is likely to lower the discount rate, thus signaling the need for an expansionary policy.
Have students talk through the effects of raising and lowering the discount rate on interest rates and the money supply.
Summary and Evaluation
14. Review the three methods the FED can use to expand or contract the money supply. Have students describe each alternative.
15. Have students complete the following chart as a summary and evaluation activity. The blank chart can be placed on the chalk- board and copied by the students.

FED POWERS

How used to expand money supply

How used to contract money supply

Open Market Transactions
Reserve Requi rement
Discount Rate

146

MACROECONOMICS Lesson 23

GOAL 22
Explain how the federal government's taxation, expenditure and borrowing policies (fiscal policy) affect inflation, employment, productivity, the national debt and the economic behavior of producers and consumers.

TOPIC Fiscal policy

BACKGROUND
Fiscal policy involves taxing and spending by the government (this includes all governments, state, local, and federal). When taxing, spending and debt management are used by the government to influence general economic activity, the actions are referred to as fiscal policy.

OBJECTIVES
Students will be able to
defi ne fiscal policy
identify and describe how the federal government might use taxing, spending and borrowing to influence the economy
describe the effects of fiscal policy actions on levels of personal income and expenditures and on the degree of inflation, unemployment and productivity

acc RELATED

SKILL OBJECTIVES

A-7, A-9, A-10; B-12, B-14

MATERIALS Handouts 23-1 , 23-2 and 23-3

147

MACROECONOMICS Lesson 23
LEARNING ACTIVITIES Building on Prior Knowledge 1. Remind students that our economy is described as a mixed market economy
and that the government plays a major role in the economy. Through taxing, spending and debt management policies (or fiscal policy), the government tries to achieve desired economic goals. Have students recall the meanings for the goals of the U.S. economy: stability, security, growth, efficiency and justice. Ask students how the government could affect these broad economic goals by taxing or spending. Challenge the class to think of any linkage between government actions and these economic goals. Have students (either alone or in teams) identify ways that a taxation increase or decrease or government spending could affect the five broad economic goals. Then have students share these relationships with the rest of the class. 2. Distribute Handout 23-1. This handout graphically displays the components of the three parts of fiscal policy. Explain that this part of the economy and its connection to the rest of the economy is generally called the public sector. Direct the students to study the figure in Handout 23-1 carefully and then use the figure to answer the five questions. In addition, students should read the fiscal policy chapters in their economics textbook.
3. Once students have completed the questions, review the answers with them as follows. Question 1: Borrowing, revenue (taxation) and expenditure (spending) Question 2: Business taxes, personal income taxes and Social Security taxes
148

MACROECONOMICS Lesson 23
Question 3: Government purchases of goods and services, transfer payments and Social Security payments
Question 4: Borrowing through the sale of government treasury securities
Question 5: Individuals, insurance and investment groups, companies and foreign investors all buy government bonds and securities.
4. Use Handout 23-2 to review the basic steps in macroeconomic flow. Stress that this is generally called the private sector.
a) The final sales of all goods and services results in the measure we call GNP or gross national product.
b) The GNP is actually the sales revenue of the nation's businesses.
c) This sales revenue provides income for workers/consumers (everyone from investors and managers to minimum wage employees) and savings the businesses use to reinvest in their businesses.
d) Workers/consumers may consume all their income, invest some or save part of it. They may also borrow additional funds from gross savings to increase consumption temporarily.
e) Personal savings and business savings form a pool of money called gross savings. From these savings, individuals or businesses can borrow money for investments.
f) Consumption and investment then form the total purchase of goods and services that becomes the gross national product.
5. For students unfamiliar with this type of flow-chart, it might be best to have them write down each of the six steps and practice discussing the step in their own words, as they use the diagram. You could also develop greater depth of understanding by playing "What if?" with the figure by asking questions such as the following.
What would happen if
a) personal borrowing increased greatly? b) personal savings or business savings decreased greatly? c) investment decreased sharply? d) consumption increased sharply?
149

MACROECONOMICS Lesson 23
Note: The purpose here is to familiarize students with the figure and generate thinking about the relationships in the model. Do not spend too much time playing with the model or it might distract from the lesson focus: fiscal policy. 6. Now, explore with the class how the government's spending, taxing and borrowing behavior influence the economy. Have student teams examine Handout 233. Students should note that the private sector (Handout 23-2) is embedded in Handout 23-3. Now, however, we see that the public sector has been added. Using Handout 23-3, have students answer these questions. a. Name the types of expenditures made by the federal government (purchase of goods and services, Social Security payments, transfer payments). b. How do each of these types of expenditures affect the gross national product? (The purchase of goods and services directly affects GNP; however, transfer payments and Social Security payments become income for workers and thus directly affect aggregate demand.) c. Name the government's sources of revenue (personal income tax, business tax and Social Security tax). d. How do these taxes affect busi nesses and households? (The higher the taxes, the greater the resource shift from the private to the public sector.) e. What happens to gross savings in the country if the government increases its rate of borrowing? (The pool of available credit will decrease, making it harder for individuals and businesses to borrow.)
EVALUATION Have students practice (orally and in writing) discussing Handouts 23-2 and 23-3. Students should be able to a) identify each component on the diagrams; b) describe the relationships between and among the various components; and c) predict the effects of increasing or decreasing specific fiscal behaviors, such as raising or lowering taxes, raising or lowering transfer payments and so on.
150

MACROECONOMICS Lesson 23

Handout 23-1

The Fiscal Powers of the Federal Government
Figure 1

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Government Borrowing from Saving.

4illt4illt 4illt
f - - Government Purcha.. of
Good. and Service.

~_ _ Peraonallncome Tax

Social Security
Taxe.
I
I
I I

AnalyZing Rgure 1

1. What are the three major types of federal fiscal powers?

a)

b)

c)

_

2. What are the three major components of Federal Revenue System?

a)

b)

c)

_

3. What are the three major components of federal expenditure?

a)

b)

c)

_

4. Even the federal government cannot spend money that it does not have. If the amount of revenue

collected is smaller than the amount of expenditure planned, the government must get the money

by

_

5. From whom does the government borrow money?

_

151

Handout 23-2
Macroeconomic Flow
Without Government (Fiscal) Activities

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(B)

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(E)

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Handout 23-3

Macroeconomic Flow

With Government (Fiscal) Activities

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i f Government Purchase of Goods and Services

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Personal Income Tax

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GOAL 24:

MACROECONOMICS
Lesson 24

Explain how the federal government's taxation, expenditure and borrowing policies (fiscal policy) affect inflation, employment, productivity, the national debt and the economic behavior of producers and consumers.

TOPIC Fiscal policy

BACKGROUND
In addition to understanding the basic fiscal powers of the federal government, students should also understand how these actions affect the economy. As citizens, students should understand the effects of expansionary and contractionary policies and should be aware of the conceptual underpinnings of fiscal policies.
It should be noted that this is an advanced lesson; a solid prior knowledge of fiscal policies is prerequisite to this lesson.

OBJECTIVES
Students will be able to
describe how fiscal policy can be used to affect expansion or contraction of the economy as a whole
identify and describe ways fiscal policy can be used to affect economic growth or restraint
identify and explain policies that affect the "supply side" and the "demand side" of the economy

acc RELATED

SKILL OBJECTIVES

A-7, A-B, A-9, A-10; 8-12, 8-14; C-26, C-27

MATERIALS Handouts 24-1, 24-2, 24-3 and 24-4

154

MACROECONOMICS Lesson 24

LEARNING ACTIVITIES

1. Before starting the lesson, students should be familiar with the meaning of the terms fiscal policy, recession, inflation, economic growth, GNP and expansionary and contractionary policy.

2. Distribute a copy of Handout 24-1 to each student. Have students carefully read the handout and answer all of the questions.

3. After the students have completed this work, reemphasize the definition of aggregate demand and aggregate supply. Relate fiscal policy actions to aggregate demand and review the elements of expansionary and contractionary fiscal. policy. Discuss the answers to questions a-d as follows.

a) Expansionary: Lower taxes mean greater money for consumption and therefore, greater demand. The increased government spending would also increase aggregate demand since government contracts bring income to businesses and individuals.

b) Contractionary: Although government spending stays the same, increased taxes would 1) shrink the government budget deficit (or increase the surplus) and 2) decrease aggregate demand because money would be diverted from consumption into government savings.

c) Expansionary: The increase in government spending without an increase in taxes would increase aggregate demand and the budget deficit (or decrease the surplUS).

d) Contractionary: In this case, government employees, consumers and businesses would all have less money available to spend on consumption. As a result, aggregate demand would decrease.

4. Exercise 24-2 is an application of the content learned in Exercise 24-1. Give a copy of Handout 24-2 to each student. Ask them to follow the directions carefully and complete the two sections. When they have finished, review the answers to part I.

Handout 24-2 Answers

ABCD

ABCD

1. +

+

+

3.

+

2.

+

4. +

++

Items 1 and 4 require an expansionary fiscal policy. Items 2 and 3 require a contractionary fiscal policy. Section II requires the students to make generalizations about both expansionary and contractionary fiscal policy. Answers will vary but in general they should be something like the following.

155

MACROECONOMICS Lesson 24
Expansionary
a) Unemployment too high, business sales down, inventories growing, economy close to a recession, level of investment is declining or other indicators signal a sluggish economy.
b) Increase government spending, reduce taxes, increase Social Security or transfer payments, increase government employee wages.
c) Expansionary policy may lead to inflation if carried on too long.
Contractionary
a) Inflation rate too high or rising, inventories shrinking, level of investment increasing too rapidly, other indicators of a rapidly expanding economy.
b) Decrease government spending, increase taxes, decrease Social Security or transfer payments, or other actions that would decrease aggregate demand.
c) Contractionary policy may lead to recession if carried on too long.
The Brain Teaser
The economy has been a real brain teaser for the past 15 years. Generally there is a trade-off between inflation and unemployment. We can have higher inflation with lower unemployment rates or lower inflation with a higher rate of unemployment. When the country is experiencing both high unemployment and high inflation, "stagflation", as it has over the last 15 years, fiscal policy decisions are extremely difficult. A contractionary policy may curb inflation, but it also aggravates unemployment. An expansionary policy may stimulate employment, but may also lead to inflation.
When stagflation occurs, policy makers must decide which economic problem they want to address, unemployment or inflation. How would you decide?
4. Handout 24-3 applies fiscal policy decision making to certain economic conditions and to societal goals.
Distribute a copy of Handout 24-3 to each student. Review the four indicators (GNP, CPI, unemployment and gross investment). Ask students to study the data and answer the four questions. When they have finished, review the responses as a class. Their answers should resemble the following.
a) Although GNP is growing and the unemployment rate is declining, the CPI and gross investment changes suggest that the economy is expanding too rapidly. In the past year prices have increased by almost 50% and investment has increased by almost 20%.
156

MACROECONOMICS Lesson 24
b) The increasing inflation threatens the stability of the economy and those on fixed incomes, such as the elderly or those working at the lower income levels.
c) Any of the elements of a contractionary fiscal policy: decrease government spending, increase taxes, decrease Social Security or transfer payments, etc.
d) To decrease Social Security or transfer payments would further injure those most hurt already by inflation. Perhaps the best solution would be a moderate increase in both personal income tax and business taxes to dampen both consumption and investment. A cut in government spending might also be necessary because the inflation rate is so high.
The answers to the first three questions will probably not involve much controversy. The answer to the last question will probably generate a lot of discussion. Some students will insist on a stronger policy while others, fearing increased unemployment, will insist on a weaker policy. This discussion should be made to focus on the effect of too much (possible recession) or too little (possibly continued inflation) fiscal contraction.
5. Handout 24-4 provides a second problem. This time, however, an expansionary policy is warranted. Distribute a copy to each student and ask students to study the data and answer the questions.
When they have answered all four questions, review the answers with the class. The answers should be similar to those below.
a) Although inflation is increasing at a moderate rate, the major problem results from increasing unemployment, declining investment and shrinking GNP: the elements of a recession.
b) Economic growth, stability, security and justice in the economy all suffer.
c) Any of the expansionary fiscal policy elements such as increasing government spending, decreasing taxes or increasing Social Security and transfer payments.
d) The economy at this point needs a strong expansionary fiscal policy. This policy would include moderate increases in government spending and relatively large decreases in both personal income taxes (to bolster consumption) and business taxes (to encourage investment).
Again, discuss each question thoroughly and focus on the effect of policy decision making in the last question. In this case, too little expansion might allow the recession to deepen, while too much expansion might result in runaway inflation.
157

MACROECONOMICS Lesson 24 Review and Evaluation Review the elements of the lesson either as an oral exercise or as a test. The summary evaluation should include the following. a) a definition of a contractionary and an expansionary fiscal policy b) the policy actions available under both an expansionary and a contractionary policy c) the economic conditions that warrant both an expansionary and a contractionary policy
158

MACROECONOMICS Lesson 24
HANDOUT 24-1 THE ELEMENTS OF FISCAL POLICY
Changes in federal taxes and federal government spending that are designed to affect the level of aggregate demand or aggregate supply in the economy are called fiscal policy. Aggregate demand is the total amount of spendi ng for goods and services in the economy during a specific period of time. Aggregate demand consists of consumer spending, government spending and investment spending. Aggregate supply consists of the total amount of goods and services available in the economy during a specific period of time.
During a recession, aggregate demand is typically too low to bring about full employment of resources. Government can increase aggregate demand by spending more, by cutting taxes or by doing both. These actions typically result in budget deficits because the government spends more than it collects in taxes. Increasing government spending without increasing taxes or decreasing taxes without decreasing government expenditures should increase aggregate demand. Such an expansionary fiscal policy should increase employment, inflation or both.
If the level of aggregate demand is too high, causing inflation, the government can reduce its spending, increase taxes or do both. These actions should result in a larger bUdget surplus or a smaller budget deficit than existed before. Such a contractionary fiscal policy should lower the level of aggregate demand, and the economy will experience less employment of its resources, less inflation or both.
Using the information in the reading, decide whether each of the following fiscal policies of the federal government is expansionary or contractionary. Write "expansionary" or "contractionary" and explain your reasoning for each choice. Try to show these relationships on a supply-demand graph.
a) The government cuts business and personal income taxes and increases its own spending.
b) The government increases the personal income tax, Social Security tax and corporate income tax. Government spending stays the same.
c) Government spending goes up while taxes remain the same.
d) The government reduces the wages of its employees while raising taxes on consumers and businesses. Other government spending remains the same.
159

MACROECONOMICS Lesson 24

Section I

HANDOUT 24-2

To see how well you understand the elements of fiscal policy, complete the table below. All of your choices must be consistent with either an expansionary or a contractionary fiscal policy. Use this key to fill in the spaces:

Column A: Goal for Aggregate Demand (AD)

Write "+" if you wish to increase AD. Write "-" if you wish to decrease AD.

Column B: Change in Taxes

Write "+" if you wish to increase taxes. Write "-" if you wish to decrease taxes.

Column C: Change in Government Spending

Write "+" if you wish to increase government spending. Write "-" if you wish to decrease government spending.

Column D: Effect on Budget Deficit

Write "+" if you wish to increase the deficit. Write "-" if you wish to decrease the deficit.

The Problem

Goal for Aggregate Demand

Change in
Taxes

Change in Gov't Spending

Budget Deficit

1. National unemployment is at 12% which is too high.

2. Inflation continues to rise, and its rate is now 13% per year.

3. Business sales and investment are expanding rapidly, causing concerns about increased inflation.

4. Polls show consumers lack confidence in the economy, retail sales are down and busi ness inventories are increasing.

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MACROECONOMICS Lesson 24 HANDOUT 242 Continued Section II Now let's make some generalizations about the two types of fiscal policy. Expansionary A. Under what circumstances would one want to use an expansionary policy?
B. What actions can the government take to implement an expansionary policy?
C. What bad side effects do you think might result from such a policy?
Contractionary A. Under what circumstances would one want to use a contractionary policy?
B. What actions can the government take to implement a contractionary policy?
C. What bad side effects do you think might result from such a policy?
Brain Teaser What might the federal government do if both the rate of inflation and the rate of unemployment are high?
161

MACROECONOMICS Lesson 24

HANDOUT 243
YOU ARE THE GOVERNMENT I
If you were the economic adviser to the President and you had the following statistics on the economy, how would you answer the questions below?

Economic Measure

1 year ago

3 months ago End of the present quarter

Real GNP (in billions of 1988 do liars)

$2,156

$2,347

$2,405

Consumer Price Index

105

140

150

Unemployment Rate

10%

8%

7%

Gross Private

$215

$244

$254

Investment (in billions

of 1988 dollars)

------------------------------------------------------------------------------------------------------------

A. What economic problem is important here? Why?

B. What important social goals are threatened by this problem?

C. What fiscal policy actions could be used to remedy the problem and achieve the desired goals?

D. What exact fiscal policy measures would you recommend? Why?

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MACROECONOMICS Lesson 24

HANDOUT 24-4 YOU ARE THE GOVERNMENT II

If you were the economic adviser to the President and you had the following statistics on the economy, how would you answer the questions below?

Economic Measure
Real GNP (in billions of 1988 dollars)

1 year ago 3 months ago

$2,405

$2,390

End of the present quarter
$2,380

Consumer Price Index 150

15

152

Unemployment Rate

7%

9%

10%

Gross Private Investment (in billions of 1988 dollars)

$254

$230

$215

A. What economic problem is important here? Why?

B. What important social goals are threatened by this problem?

C. What fiscal policy actions could be used to remedy the problem and

achieve the desired goals?

_

D. What exact fiscal policy measures would you recommend? Why?

163

MACROECONOMICS Lesson 25

GOALS 16-22
This lesson serves as a synthesis and application of macroeconomic ideas learned in this unit of instruction.

TOPIC Everyone's Role in the Macroeconomy

BACKGROUND
The macroeconomy is much more than data and institutions. People in households and in businesses contribute to and are affected by fiscal and monetary actions. Society as a whole has a stake in the health of the economy. The health of the economy really has to do with people's lives, their well-being and their abilities to secure jobs and income and to satisfy their wants. The health of the economy affects a nation's ability to produce goods and services necessary for the people of the society, and with the society's ability to trade and compete with other nations.
In this lesson, students will apply their knowledge of the macroeconomy to a variety of economic problems.

OBJECTIVES
Students will be able to
identify and describe how macroeconomic problems affect different people in the society
recognize how macroeconomic problems threaten goals such as economic growth, price stability, employment security, economic justice and efficiency
interpret data to describe economic conditions and problems
recommend and justify specific solutions to macroeconomic problems

acc RELATED

SKILL OBJECTIVES

A-5, A-7, A-B, A-10; 8-11, 8-12, 8-15; C-17, C-26, C-27

164

MACROECONOMICS Lesson 25
MATERIALS
Duplicate a copy of the simulation roles and prepare the role-cards for each group. Handouts 25-1, 25-2 and 25-3 present economic scenarios. Either duplicate one copy of each scenario for each role-group or prepare a transparency of each handout for the entire class to use.
LEARNING ACTIVITIES
Organizing the Class
1. Now that students have learned the elements of the macroeconomy, it is time for them to become analysts and policy makers. Today, the class will simulate a "town meeting of the macroeconomy" where various groups will meet to discuss economic conditions (from their various perspectives) and propose economic policies.
2. Prepare the simulation roles information from the following pages and divide students into the seven designated groups. Allow students time to discuss their roles and to personalize their interpretation of the role. Students should be prepared to introduce themselves in the context of their role. Have each group prepare a group name card (Economists, for example).
3. Following group introductions, present the data on Handout 25-1. In their groups, have students analyze the data and answer these questions.
a) What is the economic situation that is confronting me?
b) How does this economic situation affect my particular role? How serious is the problem?
c) What economic goals are most important for everyone to consider?
d) What should be done to solve the problem and achieve the desired goals? Who is responsible for this action?
Conducting the Town Meeting
4. After students in their groups have fully assessed the data in scenario #1 and have proposed policies for addressing the economic issues, call the groups together for a meeting. Have students use the four questions above as the guide for the class discussion. Be sure students are addressing the issues from the perspective of their assigned role.
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MACROECONOMICS Lesson 25
Help students recall how different people are affected differently by the same economic conditions. Be sure students can trace the effects of their proposed policies on the various factors of the economy as well as on their particular role.
5. Continue the simulation using scenarios 25-2 and 25-3. Answers Scenario 25-1: Most groups will agree that the problem is inflation. Group 7 (those on fixed income) will probably assess the problem as very serious, while businesspersons and those who owe money may not think it is very serious. Goals should include price stability: Restrictive fiscal and monetary policies will be suggested to dampen aggregate demand. Scenario 25-2: The problem here is recession, characterized by declines in GNP, investment and business activity. Unemployment is high. An expansionary policy will be proposed to stimulate business activity, employment and aggregate demand. .Scenario 25-3: Here we have stagflation, with rising unemployment and rising inflation along with declining GNP. If an expansionary policy is proposed, it will address unemployment and growth while aggravating inflation. A contractionary policy will address inflation, but negatively affect employment and growth.
EVALUATION: Have the class build and analyze a fourth scenario using current data. Have groups propose policy solutions in which they address how the proposed solutions will affect various groups of people.
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MACROECONOMICS
Lesson 25
SIMULATION ROLES
Group 1-Economists (2) The members of this group are well known and very objective. Each, however, has his or her own perspective. One might favor strong fiscal/regulatory control by the federal government. Another might favor a limited federal government role in the economy, preferring to allow the economy to solve its own problems. The economists will cite the data, use aggregate supply-demand analysis and try to propose viable economic solutions.
Group 2-The President and His or Her Advisers The members of this group are politically oriented with concerns about everyone's opinion. They are also committed to an economic philosophy concerning the role of government in economic problems. You will have to develop and agree to this policy. The advisers could include the secretary of commerce, director of the bureau of the budget, House majority leader or anyone else the group chooses. Deference should be made to the President's policy and philosophy, at least in public statements.
Group 3-Federal Reserve Bank Officers The members of this group represent the Federal Reserve Bank and are strong supporters of monetary policies. One member can be the chairperson of the FED and others can be the board of governors. You should view the problems of the economy in terms of the level of money in the economy and consider the best monetary actions to take.
Group 4-Businesspersons The members of this group should represent the full range of businesses in the U.S. economy, from large corporations to small proprietorships. Your perspective should focus on what is best for businesses similar to your own. Your analysis of the economic situation and proposed solutions serve your business interests first, although other factors might be considered as well.
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MACROECONOMICS Lesson 25
SIMULATION ROLES
(Continued)
Group 5-Workers/Consumers You represent the full range of workers: the well-paid professional, the middle-class union member factory worker, the minimum-wage employee, the unemployed worker. Each member of this group should develop his or her role, but all of the four basic roles could be represented. Other roles can be easily created. Your perspective should focus on level of income, taxes and interest rates. You should also be interested in unemployment rates.
Group 6-High School Students The members of this group represent the hopes, needs and plans of high school students. In developing your roles, you should consider future employment opportunities, the cost of college education or training and the availability of money for student loans and auto purchases. You should also be concerned with the current level of wages available to teenagers.
Group 7-People on Fixed Income The members of this group represent the elderly, retired persons on fixed pensions or Social Security, young disabled persons who receive Social Security payments, or persons with young children who are receiving welfare payments and/or food stamps. You are painfully aware of the effects of inflation on their standard of living and need to be vocal or else you will be forgotten in the economic strategies of the other groups.
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MACROECONOMICS Lesson 25

Real GNP (in billions of dollars)

HANDOUT 251 Scenario #1
Three Months Ago $2,347

Current $2,405

Consumer Price

140

150

Index

Unemployment

8%

7%

Rate

Gross Private Investment (in billions of dollars)

$244

$254

Prime Interest Rate

11.75%

10.2%

Discount Rate

11.0%

11.2%

Reserve Requirement

12.0%

12.5%

Average Federal Income Tax Rate

13.0%

13.05%

Average Percentage of Income Saved by Consumers

6.0%

5.5%

Dow Jones Industrial Average

2,168

2,215

Business inventories are shrinking. The purchase rate of homes is increasing. The same is true for automobiles and other large purchases. Wages are continuing to rise. Overall, these economic trends have been continuing for over a year.

169

MACROECONOMICS
Lesson 25

HANDOUT 25-2 Scenario #2

Real GNP (in billions of dollars)

Three Months Ago $2,390

Current $2,380

Consumer Price Index

157

159

Unemployment Rate

9%

10%

Gross Private Investment (in billions of dollars)

$230

$215

Prime Interest Rate

11.7%

12.0%

Discount Rate

12.0%

12.0%

Reserve Requirement

12.0%

12.0%

Average Federal Income Tax Rate

13.0%

13.0%

Average Percentage of Income Saved by Consumers

6.0%

6.0%

Dow Jones Industrial Average

2,215

2,220

The purchase rate for homes, autos and other large purchases is decreasing. Wages are showing little real growth, and more people are unemployed. All of these trends have been developing consistently for the past six months.

170

MACROECONOMICS Lesson 25

Real GNP (in billions of dollars)

HANDOUT 25-3 Scenario #3
Three months ago
$2,550

Current $2,508

Consumer Price

100

120

Index

Unemployment Rate

9%

11%

Gross Private Investment (in billions of dollars)

$216

$226

Prime Interest Rate

15%

16%

Discount Rate

14.5%

14.5%

Reserve Requirement

12.0%

12.0%

Average Federal Income Tax Rate

14%

14%

Average Percentage of Income Saved by Consumers

6.0%

5.5%

Dow Jones Industrial Average

2,215

2,305

Business layoffs of workers continue as inventories shrink steadily but slowly. Investment is being made in new technology. Sales of new autos and new homes are continuing to drop slowly. Polls indicate that confidence in the economy is low. These conditions have continued throughout this election year. It is September.

171

International Trade Introduction
International Economic Interdependence

The economy of the United States is closely integrated into and interdependent with the world economy. Our economic policies have a major impact on other countries, and the policies of other countries have an impact on us. No country in the world today is totally self-sufficient. Every country trades with some other country (and often with many other countries) to improve its standard of living.
Sometimes problems associated with international trade occur; these problems include trade imbalances and barriers to trade, such as tariffs or quotas. Some argue that, rather than trade with other countries, a country ought to protect its own workers and industries by urging consumers to buy only goods made at home. Others argue that the most wealthy nations are the most interdependent nations and the poorest natiol'"!s are the most independent nations. In the modern world, there are many issues associated with international trade and the interdependent relationships countries and regions have with one another.
Basic concepts of international trade include the following.

Worldwide distribution of resources Absolute advantage Comparative advantage Specialization Interdependence Imports/exports Balance of payments Trade deficit Trade surplus Foreign exchange markets Exchange rates Investment flows Fixed/floating exchange rates

Trade barriers -quotas -protective tariffs -revenue tariffs
Protectionism Free trade Developed/industrialized countries Developing countries International labor flows Economic growth International debt World Bank International Monetary Fund

172

Goal 23

International Trade Introduction

Explain why countries trade and how economic specialization promotes foreign trade and interdependence among nations.
Explanation

Countries trade because regions are faced with an uneven distribution of natural, capital and human resources. This uneven distribution of resources makes it difficult for countries to meet the needs of people living there. Therefore, countries must find ways to use existing resources more efficiently. Most countries and regions specialize by producing the goods and services that they can produce most efficiently. Then they must trade with one another so that the individuals in each country will have the goods and services they desire.
As countries specialize, some countries can produce an item more efficiently or better than another can. In other words, the country can produce an item at a lower opportunity cost than its trading partners; the country has a comparative advantage to produce that item. When a country is able to produce an item using fewer resources than other countries, it has an absolute advantage in the production of that item. A country with either an absolute or a comparative advantage benefits by trading those goods and services for goods and services they do not produce as efficiently.
As countries trade with one another, they become more interdependent. Economic interdependence links people and countries closely together.
Graphic Organizer

173

Goal 24

International Trade Introduction

Identify and analyze some of the problems associated with international trade (e.g., exchange rates, balance of payments and barriers to trade).

Explanation
In 1947, the U.S. and 22 other nations signed the General Agreement on Tariffs and Trade (GAIT). GAIT provided patterns for multilateral trade negotiations among the member nations, which now number more than 70 countries. In spite of such agreements, problems tend to arise between nations as they trade with each other. Econom ie, political, domestic and cultural factors often interact to "get in the way" of smooth economic exchanges.
In today's vastly changing political and economic world, new trade alliances and new issues are evolving. For example, changes in the European Community will bring new trade relationships and issues.

Domestic Industries

Trade Issues Barriers to Trade Balance of Payments Exchange Rates

Historical Issues and Relationships

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International Trade Introduction
Goal 25
Analyze how events in one country (e.g., drought, debt, migration) have an impact on the other members of the world economy.
Explanation
Since the regions and countries of the world are interdependent and related to one another in many ways, political, economic or natural disaster events in one country or region may create a ripple effect of action and reaction in many other places in the world. For example, a drought in one country may contribute to that country's increased demand for food on the world market. Increased demand can lead to higher prices for wheat, other grains and food; higher prices on the world market may lead to higher prices in the domestic market and decisions by farmers to grow more wheat the coming season. An increased supply of wheat the following year will also influence prices.
Graphic Organizer
An event in one country affects events and decisions in other countries as a rock thrown in a pond creates ripples.
175

Instructional Time for Unit

International Trade Introduction

Understanding the global nature of economic interdependence is an important part of the economic knowledge needed for effective citizenship. This unit often is "crowded into" the economics course, in part because it usually comes at the end of the textbook or course guide. Even though this global unit is also listed last in this guide, this placement should not indicate its unimportance. Rather, global understanding should be developed throughout the course.

Basic concepts for the International unit should be introduced in the unit on Comparative Economic Systems. In the Comparative unit, we suggested that students begin a study of two contrasting societies and that this study continue throughout the course. If students have done this, and if attention has been given to current issues throughout the course, then this unit on International Economic Interdependence will be an extension of the prior topics.

We suggest the following instructional time allotments.

12 Week Quarter 18 Week Semester

International Trade, International Trade,

Goals 23-25

Goals 23-25

3 Weeks

4 Weeks

Related Textbook Topics
The following chapters in your economics textbook might be included as part of this unit. -The United States and the World Economy -The World Economy -Challenges on the International Scene -International Trade -International Economics and Trade -Developing Countries
176

International Goals

Resource Matrix

JCEE Instructional Lessons and Georgia Economics Goals

High School

Junior High

Teaching Strategies Books Basic Inter- U.S. World Entre- Capstone Business national History Studies preneurship

Videos Give & Econ U$A Tax Take

Software
Income Outcomes

23. Specializa- 21 tion and Trade

8,10 2,3,4,5, 3,6 6,9,14, 15,19, 23

7

14

8

24. Trade Prob- 22 1ems
-'-
-.....J -.....J
25. International Interdependence

2,8,10, 13

11,13

2,7

11,12,13

16,17,18

20,21,22

5,6,8,10 3,6,13 4,5,8,10

2,7

11,12,18

19,20,21

22,23

5,14,15

8

13,15

3,4,5,8

INTERNATIONAL TRADE Lesson 26
GOAL 23:
Explain why countries trade and how economic specialization promotes foreign trade and interdependence among nations.
TOPIC International trade
BACKGROUND
International trade has great significance culturally, politically and economically to the nations of the world. Trade is an exchange between people, consumers and producers. Voluntary exchange exists because it creates wealth and people naturally respond to incentives. Both the buyer and seller have the opportunity to benefit from such an exchange. Because our resources in the world are unequally distributed, specialization of certain goods and services is to the world's advantage.
Trade is becoming increasingly important in the modern age. No country is totally self-sufficient. Therefore, there will always be trade and interdependence. Often, a country can produce a product but chooses to import the product because it is to that nation's economic advantage to produce a different product. Specialization and voluntary trade increases world production, lowers costs of production, increases employment, keeps prices down and provides a variety of products for the consumer.
A country is said to have a comparative advantage when it can offer a good or service at a relative cost advantage (produce it more efficiently) and at least one other country can produce it only at a relative cost disadvantage. The country at a comparative disadvantage would be better off to import that product rather than to produce it. Voluntary exchange expands the production and consumption possibilities of all trading participants. This mutual benefit leads economies to further specialize in goods and services.
People judge their satisfaction with trade by economizing or weighing the expected gains against the expected losses. Just as consumers economize or weigh their opportunity cost by measuring what must be foregone in return for their choice, trad ers also respond to this positive incentive. All choices involve costs. Therefore, trade participants produce and sell the products they can make at the lowest opportunity cost.
178

INTERNATIONAL TRADE Lesson 26

OBJECTIVES
Students will be able to
identify and explain the concepts foreign made products, opportunity costs, international trade and comparative advantage
compare and contrast reasons for trade and identify problems associated with trade
research U.S. trade partners

acc RELATED

SKILL OBJECTIVES

A-1, A-3, A-5, A-7, A-B, A-10; B-11, B-12, B-13; C-17, C-19, C-22, C-23, C-27

MATERIALS
Chalkboard Overhead projector Handout 26-1 Five paper bags Five file cards Trading session items

LEARNING ACTIVITIES:
1. Begin by telling the students that this unit of study will deal with trade. Give them an example of trade between a local business and a manufacturer. Ask them if they can think of any others. List examples on the overhead projector.
2. Tell the students that it is now time to look beyond our national borders. Explain that this unit will specifically deal with international trade. Define international trade on the overhead projector and ask students to identify examples of products that Americans buy from other countries. Once you have a list of products the U.S. imports, then pose the question, "Why do people trade?" Put a few of the answers on the overhead projector.

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INTERNATIONAL TRADE Lesson 26
3. Organize the class into five teams. Ask students to choose a team captain. Each team should then find evidence to support or reject each reason for trade listed on the overhead projector. Once the assignment is completed, have each team discuss their evidence with the rest of the class.
4. Tell the teams that they are going to participate in a trading activity to explore more reasons why people trade. Distribute to each team a paper bag with items that would fulfill the following categories:
Team I Very little to trade Team II Many unpopular items Team III Various items Team IV One or two unpopular items Team V Many very popular items
**Team V should have too many of a good thing.
Example items to use: bags of wheat germ, radishes, paper clips, paper, carrot sticks, candy, etc.
Have the contents written on a card inside the bag. Only the team members should know the contents of the bags.
Provide a five-to ten-minute trading session in which team captains conduct any trades they choose to make. No one is required to participate in the trading session; students may keep what they already have if they wish. At the end of the trading session, have the teams display the items they ended the session with. Have the students answer the questions using Handout 26-1.
5. For homework, assign each team a room in their house (kitchen, bedroom, family room, garage, bathroom) to search for imported products. Have students list the items they find. On the following day, have the teams get together and combine their lists. Once they have a list, have them go through and identify each item as a luxury or necessity and give a substitute for each. When the teams have completed the assignment, have them write an essay explaining how important these imported products are to our society, how people would react if these goods were taken off the market and what the consequences of such an act would be on the seller of these products.
6. Remind students that every voluntary exchange involves opportunity costs. One must give up something in trade because our resources are limited. Now, pose this question: "Should a lawyer who is just opening a firm be self-sufficient?" Tell them that this lawyer has the ability to do many things and could easily handle the clerical duties necessary for the firm without hiring a secretary. The person could also care for the grounds. Ask the teams to decide what they would do if they were the lawyer and why. (Many will probably say the lawyer's time, skills and knowledge are too valuable to be spent on clerical and lawn work. Because she or he probably makes $60 or more an hour, it would be economically wise to hire someone to do the clerical work at the rate of $5-$10 an hour.) In the same way, countries produce and sell the products they can produce at the lowest
180

INTERNATIONAL TRADE Lesson 26
opportunity cost. This is called having a comparative advantage. Comparative advantage, through trade, leads to further specialization and interdependence. Specialization and trade increase world production and the standard of living. 7. Have students interview local merchants asking how the merchant's business would change if he or she were no longer able to sell foreign-made products. Have student write essays using the results of these interviews explaining why imported goods are sold and the consequences to sellers and buyers of these goods if they were taken off the market. Extension of Concept Have students research a U.S. trading relationship with another country. This can be done independently or in teams. Ask students to answer the following questions. 1. Name of trade partner 2. Products traded 3. Yearly cost of imports 4. Why do we import these products? 5. Are there possible substitutes? 6. What if restrictions were imposed? 7. What would the consequences be if the U.S. stopped this import?
EVALUATION: Students can be evaluated by judging class participation and performance on handout, essay, research and team projects.
181

INTERNATIONAL TRADE
Lesson 26
HANDOUT 26-1 1. Did your team trade any items? 2. If so, what did you trade? 3. Which items were most popular? 4. Which items were least popular? 5. Did your team trade more than once to get a particular item?
If so, why? 6. Why did you have to do this? 7. Did you agree with the team trade? 8. Why did people tend to trade away items that they had a large quantity of? 9. Did teams with few items always do poorly in the trading session? 10. Did the teams' trading behavior confirm or contradict the
answers you gave to our opening question about why people trade?
11. What was the cost and benefit of the trade?
12. Was your team happy with the trades made?
182

INTERNATIONAL TRADE
Lesson 27
GOAL 24
Identify and analyze some of the problems associated with international trade (e.g., exchange rates, balance of payments and barriers to trade).
TOPIC Changing patterns in international trade
BACKGROUND
One of the major international economic developments of the late 1980s and 1990s has been the emergence of new regional trading blocs. The implications of such a phenomenon are very important to the prospects of free trade, economic growth and international economic cooperation. The benefits and costs of such regional formations are subjects of considerable debate among economists and politicians. This lesson is intended to introduce the issue of regional trade blocs in the world economy.
OBJECTIVES
Students will be able to
identify the regional trading blocs that appear to be emerging in the world economy
name and locate the member nations of the European Community, and define the goals of the EC
name and locate the nations that make up Asian Pacific Economic Cooperation (APEC) and discuss its goals
identify steps taken by North American countries toward the formation of a regional trade bloc and evaluate arguments regarding the addition of Mexico to this bloc
identify and explain the potential problems that may arise as new trading blocs are formed
RELATED aee SKILL OBJECTIVES
A-1, A-4, A-6, A-7, A-8; 8-11, B-12, 8-14, 8-16; C-12
MATERIALS
Handout 27-1 World maps
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INTERNATIONAL TRADE Lesson 27
LEARNING ACTIVITIES
1. Distribute Handout 27-1 and have world maps available in room; students should also use maps in their texts.
a) After students have read the handout, have them locate the members of the EC on the outline map (Britain, France, Belgium, Luxembourg, Denmark, Germany, Italy, Spain, Portugal, Ireland, the Netherlands and Greece) and any others that have joined recently.
b) Discuss with the students the concept of "Fortress Europe." Call attention to the writer's reference to an additional incentive to Americans resulting from the prospect of a closed market. Point out that the rush by Americans and Japanese to build factories or establish joint ventures in Western Europe is a response that follows the pattern of the early 1960s, shortly after the formation of the EC and the lowering of tariffs among its members.
c) Have students list the advantages and disadvantages of EC-92 from the European perspective and from the American and Japanese perspectives.
d) Ask students to research and investigate the implications for the EC resulting from the transition to market economies in Eastern European nations. Will nations with emerging market economies become members of the EC? If so, what effect will this have on the production and distribution of goods, services and resources in the community? Will the focus of Western Europe, Germany in particular, shift from "exporting goods and capital to rebuilding Eastern Europe and thus importing goods and capital" as stated in a report for an American investment firm (Christian Science Monitor. April 30, 1990)?
e) Have students locate the members of APEC (Japan, South Korea, Thailand, the Philippines, Malaysia, Singapore, Indonesia, Brunei, Australia, New Zealand, the United States and Canada). Ask students if they think Canada and the U.S. should belong to this organization.
f) Discuss with the students the range of economic development among the various nations of Eastern Asia. Have students compare this range with the various levels of economic development among members of the EC. Are there similarities?
g) Call attention to the author's stated reason for the U.S.'s joining APEC (i.e., the U.S. attempt to "beat the potential threat of a Japanese-led 'co-prosperity sphere' by joining it"). Ask students if the prosperity of the Pacific Rim can be attributed, in part, to the role that the U.S. has played in the defense of these smaller nations.
h) Have students identify the possible members of a "North American Common Market."
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INTERNATIONAL TRADE
Lesson 27
i) Have students assume the roles of various groups of Canadians in a class debate over that country's free trade policy. Students might represent economists who generally favor free trade, Canadians who fear the loss of a unique culture and members of Canadian labor unions. Follow up the debate by asking if similar positions prevail in the other emerging blocs. j) Ask students to list the arguments for and against the inclusion of Mexico in a North American Common Market. EXTENSION Assign students any of the following topics for research. 1. Trading blocs and the Third World 2. The role of the U.S.S.R. in the bloc-dominated world 3. Other emerging common markets (e.g., the Arab Maghreb Union of North Africa) EVALUATION Students may be graded on class participation and performance on handout, research projects and simulation roles.
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INTERNATIONAL TRADE Lesson 27
HANDOUT 271
United Europe may be first of three trading blocs Editorial Research Reports/November 24, 1989 (Adapted)
The leveling process that is narrowing the economic gap between the United States and its industrial rivals is hardly news. What some Americans now find alarming is the prospect that countries who already pose a significant economic threat to the United States will soon join together in regional trading blocs whose combined economies would overshadow that of the United States.
Fueling the speculation that the world is being carved up into regional trading blocs is the European Community's plan to remove all remaining barriers to trade among the 12-nation organization by December 31, 1992. Long dismissed as an ineffectual group fragmented by internal disputes over agricultural subsidies and other trade issues, the 32-year-old European Community has stunned its trading partners outside Europe with its newfound determination to pull together in the common economic interest. Since the plan was launched in 1985, the campaign to unify the Common Market, nicknamed EC-92, has picked up momentum. More than half of the 279 directives for liberalizing trade laid out in the plan have already been approved by the European Council of Ministers, the community's lawmaking body based in Brussels.
Officially at least, the United States welcomes EC-92 as a natural extension of American efforts to revitalize the European economy after World War II. Even today, the European Community and the United States are each other's biggest trading partners. As a unified community, the EC would be the world's largest market, bigger than the United States and Japan combined. As long as it remains open to foreign trade, the community, with its 323 million consumers, promises to be an increasingly lucrative market for American exports.
What worries many American observers, however, is the risk that the Europeans will go beyond their announced mandate to remove existing barriers to trade within the community and impose new barriers to protect its members' industries from competition by outsiders such as the United States. The construction of such a "Fortress Europe" would close off this country's most important overseas market and threaten to shuttle the entire movement toward freer international trade painstakingly built since the 1940s.
EC officials have tried repeatedly to dispel such fears among Europe's trading partners, chiefly the United States and Japan, but some observers point to recent community measures that appear to limit outsiders' access to the European market.
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(Handout 27-1 continued)
As intra-European trade barriers fall, Western Europe's trading competitors cannot help but worry about what the future will really be. Because EC-92 rules would treat foreign-owned companies with production facilities in member nations as if they were European firms, American and Japanese corporations are rushing to set up factories in Europe, bringing with them new investment capital and jobs.
EC-92 has invigorated businesses inside the community as well. As barriers are removed, inefficient firms, including the "national champions" that are subsidized or otherwise protected by governments, are becoming vulnerable to more efficient competitors.
The challenge posed by European integration was summed up recently by Roy Denman, formally head of the European Commission delegation to the United States: "After long hesitations, a genuinely single European market and a single European currency are knocking at the door. All this means the need for a fundamental reassessment of the relationship between the United States and a uniting Europe."
For most Americans, however, the prospect of a more united Europe pales beside the notion of a Far East trading bloc dominated by Japan. For the past decade, Japan has been heavily criticized by members of Congress and business representatives for discriminating against American products.
Capital spending in Japan has grown steadily for the past two years. As the plants and equipment that will result from this spending come on line in the next few years, Japan's output of manufactured goods will rise. Despite measures taken in recent years, largely at American prodding, to stimulate consumer demand at home, this increase in output will likely exceed Japan's ability to absorb it. The result will thus be more Japanese exports on the world market.
If Japan by itself poses such a big challenge to the United States, the prospect that it may form a regional trading bloc with other East Asian manufacturing countries has raised even greater concern. Several regional exporters, especially South Korea, Hong Kong, Singapore and Taiwan, known collectively as the four tigers, have expanded their exports during the 1980s from steel and textiles, the typical offerings of newly industrializing countries, to a wide variety of manufactured goods and services.
Fears of falling behind Japan and other countries of East Asia provided some of the impetus to the drive toward market integration in the European Community. European countries have long kept out Japanese products by applying import quotas, especially on automobiles. In France, Italy and Spain, where domestic auto industries depend heavily on government support and protection, the quotas imposed on Japanese imports are so high that Japanese cars account for less than three
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Lesson 27
(Handout 27-1 continued)
percent of ali cars on the road. The Japanese have responded the same way they responded to American voluntary restraints: by setting up factories on European soil.
For its part, the United States is trying to beat the potential threat of a Japan-led "coprosperity sphere" by joining it. A U.S. delegation headed by Secretary of State James A. Baker III, Commerce Secretary Robert A. Mosbacher and U.S. Trade Representative Carla A. Hills joined 11 other nations of the Pacific Rim for a two-day meeting in Canberra, Australia, in November 1990 to discuss the formation of the region's first trade organization. Tentatively named APEC, for Asian Pacific Economic Cooperation, the trade group would be a direct response to EC-92.
The process promises to be a long one, in part because of the wide disparity in levels of industrial development in the Pacific region. Three members, the United States, Japan and Canada, are among the seven most advanced capitalist economies in the world, while others, such as Brunei and the Philippines, are far less developed. Before any such grouping can achieve the cohesion necessary to form a true trading pact, its richer members will have to meet demands of the poorer members, including heavy direct investment in their economies and transfer of modern technology to build their industrial bases.
In 1982, President Reagan launched the Caribbean Basin Initiative (CBI) to strengthen trade relations with the Caribbean nations. The plan offered incentives to trade such as duty-free entry into the United States of Caribbean products and tax incentives for U.S. businesses investing in new plants in CBI countries.
Although limited in its impact, CBI served as a precedent for a more sweeping regional trade pact with Canada, which went into effect January 1, 1989. The pact was the subject of heated debate in Canada between domestic enterprise and employment and opponents who feared their country's economy and culture would be swallowed up by the giant next door.
America's biggest single country trading partner is Canada. Here is the obvious place to look for a free-trade agreement. Bilateral trade between the two North American markets amounts to $190 billion a year. But some economists say the United States should extend its view southward to Mexico. Roger Dornbusch, a professor of economics at the Massachusetts Institute of Technology, sees several advantages to including Mexico in an integrated North American market, especially its large and growing market of almost 100 million consumers. However, not all economists agree. Some think the United States ought to be very clear about what it is gaining and also about the burdens and responsibilities that come with Mexican partnership. The main problem is Mexico's economy, which is burdened by external debt and high unemployment.
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Lesson 28

GOAL 25
Analyze how events in one country (e.g., drought, debt, migration) have an impact on members of the world economy.

TOPIC Economic interdependence

BACKGROUND
The nations of the world are literally dependent on each other because of the unequal distribution of resources. Events (whether political, economic or environmental) in one county often have an effect on other countries and regions. Events such as drought, migration, war and debt affect more than the immediate country. Most recently we have seen the cost of energy skyrocket due to a political crisis in the Middle East. This lesson will focus on interdependence of the world on energy imports, specifically petroleum. Students today know the vital importance of oil as an energy resource. What most students do not know is exactly how and to what extent this country depends on oil. They do not know how the U.S. arrived at this dependency or what came before the oil era. This lesson will address these issues and how it is that this dependency puts the U.S. and other oil-dependent nations in a vulnerable state when an oil crisis occurs in the oil-rich nations. If this interdependence is recognized, the current world oil imbalance might be worked out cooperatively. If "oil haves" and "oil have nots" think of oil as a weapon, the world takes a course in which open military struggle over oil becomes possible. Oil in today's world is an emotional issue. This lesson seeks to defuse some of the emotions by providing knowledge and perspective.

OBJECTIVES

Students will be able to

explain how events in one country can influence events in another

define and give examples of economic interdependence and of the problems that might result from interdependence

acc RELATED

SKILL OBJECTIVES

A-5, A-7, A-10; 8-11, 8-12, 8-13, 8-14, 8-15, 8-16, 8-17, 8-20; C-21, C-25, C-26, C-27, C-28, C-30; D-32

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INTERNATIONAL TRADE Lesson 28

MATERIALS
Handouts 28-1 and 28-2 Transparency 28-3 Chalkboard Overhead projector Media center access OPESTgame

LEARNING ACTIVITIES

1. Open today's lesson with Goal 25 written on the chalkboard. Begin by asking the students if they can think of any event in one country other than drought, debt or migration, that can have an impact on other countries. List the answers on the chalkboard. Remind the students of the previous lessons in the unit on foreign trade and its impact on other countries if an imported product is suddenly discontinued. Define economic interdependency and discuss what it means to the world.

2. From the list generated on the chalkboard, initiate a discussion about the dependency of oil-poor nations on foreign oil imports. Tell students that this lesson will focus more specifically on the oil crises and dependency on oil. List products on the chalkboard that require petroleum to produce. Allow the students to add to the list. The following are examples.

asphalt drugs fabric fertilizer

fuel oil hair spray hockey pucks jet fuel

lipstick liquid petroleum gas nylon paint

plastics synthetic rubber tires

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INTERNATIONAL TRADE Lesson 28

Then draw a chart on the chalkboard similar to the one below:

Business

Need

Consequence

Ask students to name businesses that depend on foreign oil and would be directly or indirectly affected by an oil crisis. Have the students tell why this business needs petroleum and what the consequences would be if an oil embargo were suddenly imposed.
3. Distribute Handout 28-1. Use the directed reading method with this reading .. Have student read the paragraphs one at a time, looking for answers to teachermade questions. Be sure to discuss each passage and answer the questions. This could also be done in teams or in pairs assigned to specific paragraphs with the list of questions on the chalkboard or overhead projector. With teacher direction, the class could then discuss the reading and answers to issues addressed. The students should then write an essay entitled "What the Oil Crisis Means to Me."
4. Divide the class into teams and assign one or more of the questions from Hand out 28-2. Have each team present questions and report their findings.
5. Using Transparency 28-3, review the major historical events on the time line. Have each student choose events they wish to research. Allow media center research time for this project and class presentation time.
6. Optional: Play the game OPEST (Organization of Petroleum Exporting Students and Teachers Simulation/Discussion). This can be found in the Joint Council on Economic Education's The Economics of Energy Activity 10 and also in the International Trade Teaching Strategies Lesson 19.
7. End this unit by allowing students to debate how oil prices, production levels and distribution should be determined and monitored. The two opposing panels should consist of OPEC vs. the U.S., Japan and the European Economic Community.
EXTENSION OF THE CONCEPT
Have students research and prepare reports on oil-related topics like the following.
world energy supply organization of petroleum exporting countries biography on Edwin L. Drake petroleum fossil fuels

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INTERNATIONAL TRADE
Lesson 28
HANDOUT 28-1
Energy is the most important commodity of world trade. It is a necessary ingredient in the creation of wealth and, in turn, of our standard of living. By definition, energy is the capacity of matter to perform work as a result of its motion or its position in relation to a force acting on it. There are four major sources of energy today: fossil fuels, nuclear energy, solar energy and synthetic fuels. These resources have quite literally built the contemporary American civilization and the basis of industrial civilization. Without energy, modern life would cease to exist. Many products, jobs and services are dependent on energy sources.
During the 1970s the world began to painfully realize that energy sources were not unlimited and the availability was not without interruption. In spite of conservation measures and technological advancements, the world has continued to be vulnerable to disruptions in supply.
Wood was the first and major source of energy for most of human history. It was readily available for heating and cooking. During the Middle Ages, charcoal was used and became the dominant energy source during the Industrial Revolution. After World War II oil (petroleum) became the most favored energy source worldwide.
The U.S. continued to use wood as the major energy source throughout most of the 19th century rather than coal because it was plentiful and the land needed to be cleared for housing. Today petroleum plays a vital part of every American's life.
Petroleum is a natural form of energy from the earth called fossil fuel. It is a dark, liquid substance found trapped in certain rock formations below the earth's surface.
It was first discovered by Edwin L. Drake in Pennsylvania in the 1800s. This sub-
stance took hundreds of millions of years to accumulate from remains of water, plants and animals. It is used to produce many products, including gasoline, fuel oil, kerosene, liquid petroleum gas, jet fuel, plastics, synthetic rubber, paint, asphalt, drugs, nylon and fertilizers.
During the last 30 years, this country has been humbled by the dependency on foreign imported oil. The U.S. dominates the world market for oil by consuming onefourth of the worldwide production. In 1980, the U.S. imported one half of what she consumed. Because the U.S. must have fuel to operate industrial and economic arteries, oil is a necessity just like food. Transportation vehicles alone account for 25 percent of the 18.7 million barrels consumed daily. American oil consumption has continued to rise, and its dependency on foreign oil is up 77 percent over the past seven years, while domestic output has steadily declined. Energy prices have risen 73 percent since 1973.
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INTERNATIONAL TRADE Lesson 28
(Handout 28-1 continued)
The 1970s saw turbulent events occur in energy markets worldwide. The disturbance was a sudden and a sharp decline in the annual growth of energy supplies, particularly of oil. The supply of oil became less stable, causing four major oil crises. Along with these supply changes was a sharp rise in prices, which brought higher prices for alternative energy sources. To some extent, the entire economy was affected by energy shortages and high prices. Gasoline prices rose, to the dismay of citizens who had become accustomed to low prices.
The first oil crisis was in 1973, when an Arab embargo was imposed to punish the U.S. for its support of Israel in the Arab-Israeli war. Saudi Arabia cut back on production by 10 percent and threatened to halt all shipments if Washington did not stop sending arms to Israel. This economic sanction led to higher gasoline prices and a shortage of gasoline. It created economic and social problems within the U.S.
The revolution of 1978 in Iran led to the second oil shock. Because Iran was a major producer of oil, the shortage caused prices to soar. The invasion of Iraq into Iran in 1980 created the third oil crisis. This invasion launched an eight-year war that resulted in a slowing down of production while worldwide consumer demand was high. Two thirds of the oil reserves come from the Persian Gulf, and 20 percent comes from Iraq and Kuwait. The U.S. imports 25 percent of her oil from the Persian Gulf.
When the Iraqi leader Saddam Hussein invaded Kuwait on August 2, 1990, he brought about the fourth major oil shock. The Iraqi leader claimed that Kuwait was pumping Iraq's oil and pumping more than the OPEC agreement allowed. Once again the world's industrial economies were threatened by turmoil in the oil-rich Persian Gulf regions. Oil prices increased as the military forces from allied nations were sent into Saudi Arabia. As the price of oil per barrel rose from $18 to $41, the stock market plunged in frenzied trading. The Dow Jones Industrial Average dropped 90 points in two days. Americans immediately felt the pinch at the gas pumps, paying $1.38 per gallon. The pump prices continued to rise as the troop levels rose in the region. During this crisis, experts feared the oil shock would ultimately trigger a worldwide recession.
As we have seen, energy is a vital resource in the industrial world. Events that trigger shortages have staggering effects on the world economies. Trade leads to interdependence through comparative advantage. However, it is clearly important to realize the vulnerabilities of energy-dependent countries and a need for protective measures.
During President Bush's State of the Union Address in February 1991, he said that the Persian Gulf crisis put energy back on top of the political agenda. If we continue this present growth in oil dependency, the U.S. will have to import 60 percent by the end of this decade. To make measurable changes in our foreign oil bill, the U.S. must begin to promote natural gas consumption and other alternative sources of energy, reinforce and extend conservation efforts, pursue research programs, slow U.S. oil production, be more consistent in government policies on long-term energy investments and open new oil fields off the California coast and Alaska North Slope.
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INTERNATIONAL TRADE Lesson 28
HANDOUT 28-2
1. How might the imbalance between oil-rich nations and oil-poor nations be resolved?
2. Do you think the oil crises will end in this century? Explain.
3. Predict when the next oil crisis will occur. How will it affect the U.S. and will we be better prepared?
4. Identify conservation measures citizens could use daily to preserve energy resources.
5. Explore possible methods to distribute gasoline fairly in the event of a sudden gasoline shortage.
6. Explore ways to protect the vital arteries of oil-dependent industrial nations.
7. What lessons could be learned from each of the four oil crises?
8. Why has the U.S. production of oil declined while oil imports have steadily increased?
9. In the next 30 years should the U.S. increase oil production or reduce demand?
10. How can the U.S. encourage more domestic oil production to be less dependent on foreign oil?
11. Is the demand for oil elastic or inelastic? Explain.
12. What lessons could the U.S. learn from oil embargo? In the years since the embargo, has the U.S. learned these lessons? Why or why not? Explain.
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INTERNATIONAL TRADE Lesson 28

Transparency 28-3

Historical Time Line of Oil

!I\ 1850

Wood Era

1859 1880 1912 1950

Edwin L. Drake Successfully Drills For Oil Coal Era First Gas Station Opens In Columbus, Ohio Coal and Oil Era

1960

OPEC Founded

1970

Libya Raises Oil Prices

- - + - Arab-Israeli War

$2.2 Billion U.S. Aid to Israel

Arab Oil Embargo Against U.S.

Oil Crisis I

197 - - I - Iranian Revolution

President Carter Calls For Conservation and Deregulation

Oil Crisis II

1979

Oil Era

198

Iraq Attacks Iran

Oil Crisis III

199U----if- Iraq Invades Kuwait

Oil Crisis IV
\Y

195

Glossary of Terms

Glossary

Definitions of selected economic terms are presented in this glossary. Please consult any economics textbook for a more comprehensive listing.

A absolute advantage aggregate demand
aggregate supply

the ability to produce a specific good or service with fewer resources (per unit of output)
total spending by all people (consumers, businesses, government and net exports) for goods and services produced in an economy during a certain time period
total amount of goods and services produced by the economy during a certain time period

B
balance of payments
barter
business cycle

an accounting record of all of a nation's monetary transactions with other countries
direct exchange of products or services between two parties
periodic fluctuation in gross national product and employment characterized by recession, recovery, troughs and peaks

C capitalism
cartel collective bargaining command economic system
comparative advantage consumer price index (CPI) corporation

an economic system in which businesses are privately owned and operated for profit; markets coordinate most economic activity
a group of producers acting together to control the price of a product
process of negotiating pay, benefits and working conditions between labor and management
an economy in which decisions are made largely by an authority and one in which most of the resources are owned by the entire community
the ability to produce a specific good at a lower opportunity cost
a measure of changes in the average price of consumer goods and services
a business owned by stockholders
196

cost of living adjustment (COLA)
cost-push inflation craft union
currency
currency appreciation currency depreciation cyclical unemployment

Glossary
automatic adjustments on nominal income at the same rate as current inflation
inflation caused by rising production costs
an association of workers who have a common skill or share the same kind of work
the form of legal tender or fiat money used in the United States and most other countries; another word for cash
the rise in the price of one currency relative to another
the fall in the price of one currency relative to another
unemployment caused by insufficient aggregate demand that occurs as part of changes in the business cycle or as part of seasonal changes

D deflation demand
demand deposit
demand-pull inflation direct regulation
discount rate
dumping

general decrease in price levels
the various quantities of a good, service or resource that would be purchased at a given time at a given price
money available by writing a check; money held in a checking account
inflation caused by too much aggregate demand
actions taken by government to influence the economy through means such as agencies and laws
the rate of interest charged by the Federal Reserve System for lending reserves to banks
the practice of selling goods in a foreign country at a price lower than they are sold in the producing country

E
economic growth economic system
electronic funds
equilibrium price
exports

increase in real gross national product per capita
the institutions, values, factors and activities that provide a framework for economic decision making in a country
cashless, checkless transactions that eliminate paperwork and facilitate exchange
that price at which quantity supplied equals quantity demanded
goods and services sold to foreign sources

197

F factors of production
factor/resou rce markets
Federal Advisory Council
Federal Open Market Committee (FOMC)

Glossary
the basic resources (land, labor, capital, entrepreneurship) needed for the production of good and services those markets in which households sell productive resources to businesses and governments the 12 commercial bankers who advise the board of governors on banking policy 12-member committee of the Federal Reserve System responsible for monetary policy

Federal Reserve Banks fiat money fiscal policy fixed exchange rates
floating exchange rates
frictional unemployment full employment

the 12 banks established by the Federal Reserve Act of 1913
money declared legal by government decree
changing of government spending, taxation and/or borrowing to influence economic activity
an exchange rate system under which the price of one currency is fixed in terms of other currencies so the rate does not change
exchange rate system under which the forces of supply and demand determine the value of a country's currency in terms of the value of other currencies
temporary unemployment that occurs when workers are changing jobs
lowest rate of unemployment thought possible in the economy

G government regulation
gross national product (GNP)

any intervention by government, positive or negative, in the natural interactions that occur in the market economy
the market value of the total output of final goods and services produced in one year

I imports industrial union
inflation
interest

goods and services purchased from foreign sources a union composed of all workers in a given industry regardless of the types of jobs they perform an increase in average price levels for all goods and services money paid for the use of borrowed funds
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L
labor force labor union law of demand law of supply
M macroeconomic equilibrium market basket
market economy
markets
medium of exchange mixed economic system mixed market economy monetary policy
monopolistic competition
monopoly

Glossary
individuals at least 16 years of age who are employed or who are actively looking for work
an association of workers that promotes and defends its members' interests
price and quantities demanded vary inversely: at higher prices, people will buy less than they will at lower prices
direct relationship between price and quantity supplied: the higher the price, the greater will be the quantity producers will be willing to supply
a condition that exists when aggregate demand equals aggregate supply
a representative set of goods and services that might be purchased by a certain household during a specific period of time
an economy in which the basic economic questions are answered by households and businesses through freely operating market transactions
the meeting of producers and consumers to exchange resources, goods and services using a medium of exchange
any object that is generally accepted in exchange for goods and services
one having a combination of traditional, command and market decision-making mechanisms
a system in which a third party (beyond buyers and sellers) expresses a degree of control in markets
the actions taken by the Federal Reserve System to control the nation's money supply and interest rates to achieve economic goals
market structure that is characterized by many sellers, differentiated products, nonprice competition and relatively easy entry and exit
market structure characterized by a single seller, product for which there are no close substitutes and strong barriers to entry that limit competition

199

o
oligopoly
open market operations opportunity cost
p partnership
price stability product markets profit public goods
pure competition
Q
quota
R real per capita gross national product (GNP) recession
regional specialization
required reserves

Glossary
market structure characterized by a few sellers, substantial barriers to entry, standardized or differentiated products and substantial nonprice competition Federal Reserve purchases and sales of government securities in the open market the next best alternative use of a resource that is given up when a choice is made
a form of business organization having two or more owners who make decisions, share profits and bear the financial responsibility for any losses absence of inflation or deflation markets in which businesses sell finished good and services to consumers income remaining after all the costs involved in the production and sale of a good or service have been met items that tend to benefit large numbers of people collectively and that would not be available to everyone if each individual had to provide them market structure characterized by many sellers, standardized products, easy entry and exit and no artificial restrictions on the free movement of prices and wages up and down
limit on the quantity of specific goods that may be imported in a given time period
amount of goods and services produced per person, adjusted for inflation
the downward phase of the business cycle characterized by a decline in gross national product and rising unemployment tendency for regions of the world to produce those goods and services they can make the most of, given their own mix of human, natural and capital resources the minimum amount of reserves a bank is required to hold by government regulation
200

S
structural unemployment supply
T trade deficit trade surplus traditional economy
U unemployment rate

Glossary
unemployment caused by a mismatch between job seekers and job openings various quantities of a good, service or resource that will be offered for sale at a given time at a given price
amount by which the value of imports exceeds the value of exports in a given time period the amount by which the value of exports exceeds the value of imports in a given time period an economy in which the basic economic questions are answered directly by the people involved, with the answers usually based on how things were done in the past
the number of people who are unemployed and actively seeking employment expressed as a percentage of the number of people in the labor force

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Federal law prohibits discrimination on the basis of race, color or national origin (Title VI of the Civil Rights Act of 1964); sex (Title IX of the Educational Amendments of 1972 and Title II of the carl D. Perkins Vocational Education Act of 1984); or handicap (Section 504 of the Rehabilitation Act of 1973) in educational programs or activities receiving federal financial assistance.
Employees, students and the general public are hereby notified that the Georgia Department of Education does not discriminate in any educational programs or activities or in employment policies.
The following individuals have been designated as the employees responsible for coordinating the department's effort to implement this nondiscriminatory policy.
Title II - Vocational Equity Coordinator Title VI - Bill Gambill, Associate State Superintendent of Schools, Coordinator Title IX - Ishmael Childs, Coordinator Section 504 - Wesley Boyd, Coordinator
Inquiries concerning the application of Title II, Title VI, Title IX or Section 504 to the policies and practices of the department may be addressed to the persons listed above at the Georgia Department of Education, Twin Towers East, Atlanta 30334; to the Regional Office for Civil Rights, Atlanta 30323; or to the Director, Office for Civil Rights, Education Department, Washington, D.C. 20201.