A:

Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's economic growth.

In macroeconomics, the guns versus butter model is the classic example of the production possibility frontier. It models the relationship between a nation's investment in defense and civilian goods. In this model, a nation has to choose between two options when spending its finite resources. It can buy guns, butter, or a combination of both. This relationship represents a country's choices between defense and civilian spending in more complex economies.

The "guns or butter" model is generally used as a simplification of national spending as a part of gross domestic product (GDP). The nation must determine the ratio of guns and butter that best meets its needs; its choice is partly influenced by the military spending and military stance of potential opponents.

In state-run economies (where GDP is controlled by a central planning authority or the government), as well as nations with consistently stagnant or declining GDP, the "guns and butter" model becomes a reality.

To learn more, read Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade.

This question was answered by Vijaianand Thirnageswaram.

RELATED FAQS
  1. How does gun control policy affect the stock price of firearm companies?

    In general, companies that manufacture firearms, ammunition, and firearm accessories will find it easier to sell their products ... Read Answer >>
  2. Why do the price of shares of a corporation fluctuate?

    Shouldn't the price of a share be a mathematical equation? Without getting too complicated with the accounts that are within ... Read Answer >>
  3. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
  4. What are some examples of different corporate governance systems across the world?

    Read about the three major types of corporate governance systems: the Japanese model, the Anglo-Saxon model and the continental ... Read Answer >>
  5. What are some examples of different types of business models in major industries?

    Learn what types of business models are currently being used in the marketplace as well as examples of models that work for ... Read Answer >>
  6. What is the difference between financial forecasting and financial modelling?

    Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>
Related Articles
  1. Investing

    The Risks Of Investing In The Gun Industry

    Investing in the gun industry could be an interesting proposition, but it all depends on timing.
  2. Markets

    How the Weapons Trade is Killing It in the U.S. (RTN, LMT)

    Find out the reasons why the weapons trade is expanding abroad and in the United States, and what it means for U.S. defense contractors and gun manufacturers.
  3. Insights

    Will Obama's Regulations Shoot Down the Gun Industry?

    Gun stocks and sales surged in response to news of President Barack Obama's executive orders on gun control Monday. The question is, will the President's new executive orders have any noticeable ...
  4. Markets

    Bang for the Buck: Where Gun Buyers' Cash Could Go

    Some anticipate that stricter gun control laws could reduce the revenue of the firearm industry, but funds not spent on guns could flow into other sectors.
  5. Personal Finance

    All About The Gun Business In America

    A look at the controversial US gun industry, producers, and market share.
  6. Markets

    Will Smith & Wesson Continue its Ascent? (SWHC)

    Smith & Wesson investors have been pleased over the past year. Is there still upside potential?
  7. Markets

    Fresh Market, Whole Foods Look to Keep Guns Out

    Joining the national debate on guns, The Fresh Market (NASDAQ: TFM) has asked its customers to no longer bring firearms into its stores. The move comes partly in response to a petition from ...
  8. Markets

    How Military Spending Affects The Economy

    Military spending is a one area where there is no private solution to replace the public purse, but it does end up impacting the economy.
  9. Markets

    Why Colt Went Out of Business (SWHC, RGR)

    Even as the gun industry has enjoyed good sales the last few years, iconic gun manufacturer Colt recently filed for bankruptcy. What went wrong?
  10. Markets

    Sturm, Ruger Accused of Misleading Investors

    New York Public Advocate Letitia James is accusing gun maker Sturm, Ruger (NYSE: RGR) of failing to warn investors that it faces "grave reputational risk" over who is actually using its products. ...
RELATED TERMS
  1. Guns And Butter Curve

    The classic economic example of the production possibility curve, ...
  2. Beating The Gun

    A slang phrase used when an investor purchases or sells a security ...
  3. Gun Jumping

    1. The illegal practice of soliciting orders to buy a new issue ...
  4. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  5. Smoking Gun

    Something that serves as indisputable evidence or proof, especially ...
  6. Fed Model

    A model thought to be used by the Federal Reserve that hypothesizes ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center