What does "guns and butter" refer to?

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 Halloween affect the economy?

    Discover some of the differing ways in which economists evaluate the impact of Halloween on the American economy and whether ...
  2. What's the difference between binary options and day trading?

    Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. ...
  3. If a LEAP option is purchased and held for more than 12 months, is the tax treatment ...

    A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the ...
  4. Where can I purchase options?

    In the United States, all options contracts go through one of several options exchanges. An investor must have an account ...
RELATED TERMS
  1. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  2. Short Put

    A type of strategy regarding a put option, which is a contract ...
  3. Global Recession

    An extended period of economic decline around the world. The ...
  4. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  5. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  6. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
Related Articles
  1. Stock Safety: Top 3 Ways to Limit Your ...
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

  2. Applying Binary Options To Equity Markets
    Options & Futures

    Applying Binary Options To Equity Markets

  3. Can You Buy Stock Insurace? 3 Strategies ...
    Options & Futures

    Can You Buy Stock Insurace? 3 Strategies ...

  4. ETF Options Hedge Risk of ETF Trades
    Mutual Funds & ETFs

    ETF Options Hedge Risk of ETF Trades

  5. Pick The Right Options To Trade In Six ...
    Options & Futures

    Pick The Right Options To Trade In Six ...

Trading Center