Lesson 3/55 min
Basic concepts, systems and national income
Basic concepts
- Want: the wish or desire for material and non-material goods that can meet human needs. Economic activity starts from the feeling of want.
- Consumption: using up the utility of a good through use. Burning a car is not consumption, because utility must be used up through normal use.
- Investment: the part of saving that is used in production.
- Wealth (resource): what can meet human needs and is limited in supply. Money is a non-human form of wealth.
- The main economic problem of human life: scarcity of resources.
- The solution to economic problems depends on distribution.
Economic systems
| System | Features |
|---|---|
| Capitalism | Private ownership; freedom of individual enterprise; the working class is the exploited class |
| Socialism | Work according to ability and pay according to work; balanced development; collective social ownership. An automatic price system is not a feature |
| Free market economy | Competitive markets; free flow of goods and capital. Tariff and non-tariff barriers are not a feature |
Did you know?: The ‘laissez-faire’ policy is linked with the free market; the book names Adam Smith as its champion.
National income measures
| Measure | Meaning |
|---|---|
| Gross Domestic Product (GDP) | The money value of final goods and services produced inside a country's borders by citizens and foreigners in a given period |
| Gross National Product (GNP) | The money value of final goods and services produced by a country's citizens, at home and abroad, in a given period |
| Net National Product (NNP) | What remains of GNP after deducting depreciation of capital |
| Net Domestic Product (NDP) | What remains of GDP after deducting depreciation |
Watch out: The book writes GNP = GDP + (X − M) and calls X and M exports and imports. The standard formula is GNP = GDP + net factor income from abroad (citizens' income earned abroad minus foreigners' income earned at home). It counts income, not trade in goods. The World Bank now reports GNI instead of GNP.
Check yourself
What is the main difference between GDP and GNP?
At a glance
- 1
The main economic problem of human life is scarcity of resources; the solution depends on distribution.
- 2
Investment is the part of saving that is used in production.
- 3
Socialism: work by ability, pay by work. Capitalism: private ownership, the working class is exploited.
- 4
GDP = output inside the borders; GNP = output of citizens; NNP = GNP minus depreciation.