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. 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 >>
  3. 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 >>
  4. What is the point of developing a business model?

    Learn some of the benefits of developing a business model and how business models are used. Consider an example of business ... Read Answer >>
  5. What does it mean to have "dry powder"?

    The term "dry powder" originated during the days when military battles were fought with guns and cannons that used gun powder. ... Read Answer >>
  6. What goods and services do command economies produce?

    Learn about command economies, how they operate, who decides the production of goods and services, and what command economies ... Read Answer >>
Related Articles
  1. Investing

    Gun Stocks Rally Ahead of Obama Executive Action

    On a day marked by record declines for stock markets on a first trading day of the year, shares of gun makers rallied.
  2. 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.
  3. Insights

    Sandy Hook's Consequences For The Gun Industry

    The mass shooting at Sandy Hook Elementary School resulted in share prices dropping for U.S. gun manufacturers. Will there be further consequences?
  4. Investing

    Obama’s Reforms Fuel Gun Stocks

    On Tuesday, gun stocks rallied after President Obama announced new measures to reduce gun violence in America.
  5. Financial Advisor

    How Hard is It to Dump Gun Stocks?

    Activist group Gays Against Guns is putting pressure on BlackRock to divest gun stocks held by some of its funds.
  6. Investing

    America's Gun Love Boosts Firearm Stocks As Sales Surge

    It’s no secret that Americans love guns. So much so, that even the mere threat of banning their sales has sparked rising firearm adoption. For investors, that might be a good thing.
  7. Investing

    FBI Gun Background Checks Set a Record in 2016

    Well, so much for the Great Gun Demand Deflation analysts were expecting. The FBI just reported it logged more than 27.7 million background checks on potential gun buyers in 2016, up 19% (4.4 ...
  8. Investing

    Gun Stocks Are on Sale Cheap After the Election

    With the election of Republican Donald Trump as president, shares of Smith & Wesson Holding (NASDAQ: SWHC) and Sturm, Ruger (NYSE: RGR) plunged as traders saw any chance of stricter gun control ...
  9. Small Business

    All About The Gun Business In America

    A look at the controversial US gun industry, producers, and market share.
  10. Investing

    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 ...
RELATED TERMS
  1. Multi-Factor Model

    A financial model that employs multiple factors in its computations ...
  2. Financial Modeling

    The process by which a firm constructs a financial representation ...
  3. Hull–White Model

    A single-factor interest model used to price derivatives. The ...
  4. Multistage Dividend Discount Model

    An equity valuation model that builds on the Gordon growth model ...
  5. Anomaly

    A term describing the incidence when the actual result under ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center