Mendiola, Roz Rainiel M.

BSA 2-4

1.) Market System

Definition: A market system is the network of buyers, sellers and other actors that come together to
trade in a given product or service. The participants in a market system include: Direct market players
such as producers, buyers, and consumers who drive economic activity in the market. A market system
can be specific to a product (coffee, mangoes, dairy) or a cross-cutting sector (finance, labor, business
development services). A market system’s strength depends on how well the participants obtain
financing, launch businesses and adopt new technologies and best practices.

Command System

Definition: is one in which the government separately or jointly owns the factors of production. The
central problems of the economy, i.e. what to produce, how to produce, when to produce, how much to
produce, for whom to produce, and at what price goods are to be offered for sale, will be ascertained by
the government only.

The central government has the authority to take all the economic decisions. And to do so, the central
planning authority determines five-year plans in which economics and societal objectives are defined for
different sectors and regions. Moreover, resources are allocated by the central planning authority in the
best possible manner.

Difference between Market System and Command System

A market system is an economic setting in which free flow of goods and services takes place, on
the basis of their demand and supply. Further, the resources are owned and controlled by private
individuals and businesses. Conversely, a system is said to be command system in which the government
owns and controls the factors of production and also decides the distribution of output. In a market
system, the consumers and business houses play an important role in production decision. In contrast, in
a command system, it is the government which decides what is to be produced as per the plan which
depends on the calculated needs of the people.

2.) Classical Economics

Definition: Classical economics is a broad term that refers to the dominant school of thought for
economics in the 18th and 19th centuries. Most consider Scottish economist Adam Smith the progenitor
of classical economic theory. However, Spanish scholastics and French physiocrats made earlier
contributions. Other notable contributors to classical economics include David Ricardo, Thomas
Malthus, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say, and Eugen Böhm von Bawerk.

Self-regulating democracies and capitalistic market developments form the basis for classical
economics. Before the rise of classical economics, most national economies followed a top-down,
command-and-control, monarchic government policy system. Many of the most famous classical
thinkers, including Smith and Turgot, developed their theories as alternatives to the protectionist and
inflationary policies of mercantilist Europe. Classical economics became closely associated with
economic, and later political, freedom.

Keynesian Economics

Definition: Keynesian economics is a macroeconomic economic theory of total spending in the economy
and its effects on output, employment, and inflation. Keynesian economics was developed by the British
economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.
Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy
over the short run. Keynes’s theory was the first to sharply separate the study of economic behavior and
markets based on individual incentives from the study of broad national economic aggregate variables
and constructs.

Based on his theory, Keynes advocated for increased government expenditures and lower taxes
to stimulate demand and pull the global economy out of the depression. Subsequently, Keynesian
economics was used to refer to the concept that optimal economic performance could be achieved—
and economic slumps prevented—by influencing aggregate demand through activist stabilization and
economic intervention policies by the government.

Difference between Classical Economics and Keynesian Economics

The major difference is the role government plays in each. Classical economics is essentially
free-market economics, which maintains that government involvement in managing the economy
should be limited as much as possible. Keynesian economics espouses the view that government should
take an active role in managing the economy, particularly in depression/recession like periods.

3.) Gross Domestic Product

Definition: GDP is the final value of the goods and services produced within the geographic boundaries
of a country during a specified period of time, normally a year. GDP growth rate is an important
indicator of the economic performance of a country. It is also the total monetary or market value of all
the finished goods and services produced within a country's borders in a specific time period. As a broad
measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s
economic health.

Gross National Income

Definition: GNI is the total amount of money earned by a nation's people and businesses. It is used to
measure and track a nation's wealth from year to year. The number includes the nation's gross domestic
product plus the income it receives from overseas sources. GNI is an alternative to gross domestic
product (GDP) as a means of measuring and tracking a nation's wealth and is considered a more
accurate indicator for some nations.

Difference between Gross Domestic Product and Gross National Income

GDP is the total market value of all finished goods and services produced within a country in a set time
period. However, GNI is the total income received by the country from its residents and businesses
regardless of whether they are located in the country or abroad.
 4.) Factor Income Approach to GDP

Definition: The factor income approach, or simply income approach, measures gross domestic product
(GDP) by adding up employee compensation, rent, interest, and profit. is based on the accounting reality
that all expenditures in an economy should equal the total income generated by the production of all
economic goods and services. It also assumes that there are four major factors of production in an
economy and that all revenues must go to one of these sources. Therefore, by adding all of the sources
of income together, a quick estimate can be made of the total productive value of economic activity
over a period. Adjustments must then be made for taxes, depreciation, and foreign factor payments.

Expenditure Approach to GDP

Definition: The expenditure approach to calculating gross domestic product (GDP) takes into account the
sum of all final goods and services purchased in an economy over a set period of time. That includes all
consumer spending, government spending, business investment spending, and net exports. Expenditure
is a reference to spending. Another word for spending is demand. The total spending, or demand, in the
economy is known as aggregate demand. This is why the GDP formula is the same as the formula for
calculating aggregate demand. Because of this, aggregate demand and expenditure GDP must fall or rise
together.

Difference between Income Approach to GDP and Expenditure Approach to GDP

The major distinction between each approach is its starting point. The expenditure approach
begins with the money spent on goods and services. Conversely, the income approach starts with the
income earned (wages, rents, interest, profits) from the production of goods and services.

5.) Fiscal Policy

Definition: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a
central bank influences a nation's money supply. These two policies are used in various combinations to
direct a country's economic goals. Here's a look at how fiscal policy works, how it must be monitored,
and how its implementation may affect different people in an economy.

Monetary Policy

Definition: Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by the
government of a country to achieve macroeconomic objectives like inflation, consumption, growth and
liquidity.

Difference Between Fiscal Policy and Monetary Policy

Monetary policy refers to the actions of central banks to achieve macroeconomic policy
objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to
the tax and spending policies of the federal government. Fiscal policy decisions are determined by the
Congress and the Administration; the Fed plays no role in determining fiscal policy.