3 iss 225 power authority exchange economic order 4

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ISS 225 – Power, Authority, Exchange Economic Order 4. Market Economy An economy where commodities and factors of production are bought and sold in the market is called a market economy. In a market economy, the price system is the mechanism that allocates the scarce factors of production to the production of the different commodities, that is, the price system determines what, how, and for whom commodities are produced. There is a market for each commodity and for each factor of production. The markets for the different commodities constitute the commodity (or product) markets , and the markets for the different factors of production form the factor markets . Product or Product or output output markets are the markets in which goods and services are exchanged. Input or Input or Factor Factor markets are the markets in which resources used to produce products are exchanged. Firms supply commodities in the commodity markets and demand factors of production in the factor markets. Households supply factors of production in the factor markets, and demand commodities in the commodity markets. 5. The Input or Factor Markets Labor Markets Labor markets are the input markets in which households supply work for wages to firms that demand labor. They include decisions of employers and employees to offer and accept jobs at specified wages (prices). Capital Markets Capital markets are the input markets in which households supply their savings, for interest or for claims to future profits, to firms that demand funds in order to buy capital goods. They include decisions of lenders and borrowers to make and accept loans at specified interest rates (prices). Land Markets Land markets are the input markets in which households supply land or other real property in exchange for rent. 4
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ISS 225 – Power, Authority, Exchange Economic Order A circular flow diagram brings this all together and describes the interaction of firms and households in markets for outputs and inputs. See Figure 8-2 on page 202 of the Harrison textbook. III. Measuring the Economy A. Components of Gross Domestic Product From the earliest days of our nation's history, the government has kept statistical records on the performance of our economy. As our economy has grown larger and more complex, the importance of keeping economic statistics has increased. One such statistic is Gross Domestic Product. One way to measure a nation's economic performance is to look at output, or who is doing the purchasing. This is where gross domestic product comes in. Gross domestic product measures the total value of goods and services produced by a nation in a year. Gross domestic product is calculated by adding three components, and then either adding or subtracting exports, based on the nation's trade balance.
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