Transcript Broad Social Goals of Economic Systems

Broad Social Goals of Economic
Systems
Introduction
• Same basic problem confronts different
economic systems.
• Handling of scarce resources & unlimited
wants is determined by economic system.
Broad Social Goals
• All economic systems strive to achieve set of
broad social goals:
1. Economic Freedom
2. Efficiency
3. Equity
4. Growth
5. Stability
Improvement of Quality of Life
• Is dependant on how wisely goals are chosen
& assigned priorities, and how successful an
economy is achieving these goals through
laws, public policies, and incentives.
• Some nations value some goals more than
others.
• In 21st Century more nations are moving away
from command economics to market
economics to allocate resources.
Activity 1 - Handout
• Total Economic Freedom – not possible.
• Some individual freedoms must be restricted to
benefit general welfare of society.
• Ex. – illegal to buy or sell some kinds of
goods/services (heroin/votes), and legal
obligation to pay taxes restrict ability to decide
how much to spend. Sale of other products is
partially restricted (sale of alcohol and tobacco to
minors). All societies establish laws that
sometimes enhance and sometimes restrict
economic freedom.
Economic Growth
• Measured by increase in real GDP (Gross Domestic Product) – real
means it has been adjusted for inflation (decreased buying power
of money).
• Real GDP per capita – GDP divided by nation’s population.
• Real GDP is a measure of a country’s standard of living. Increasing
GDP per capita while its population is growing or stable, a country
must increase the number of goods/services produced each year.
Target annual growth rate of 3-4 percent in real GDP is reasonable
and sustainable goals.
• Economic growth is closely related to other broad social goals. (Ex.
Can lead to more jobs and lower levels of unemployment, greater
economic efficiency, and provide additional resources to assist lowincome families to reduce poverty and promote greater economic
efficiency, and provide additional resources to assist low-income
families to reduce poverty ad proper greater equity.
Unemployment
• Goods/services not produced by workers
unemployed for month or year are lost forever.
• Countries with high unemployment rates are
wasting important scarce resources.
• In market economy not all unemployment is bad
– frictional unemployment (workers just between
jobs, etc.)
• Frictional unemployment 4-5% -- acceptable.
• Unemployment rates over 4-5% indicate a serious
problem in the economy!
Inflation/Deflation
• Increases and decreases (respectively) in average
level of prices for goods and services produced in
an economy.
• Unexpected changes in price level hurts some
groups and helps other groups.
– Helps people who borrowed money at fixed interest
rate.
– Hurts those on fixed incomes & who have loaned out
money at fixed interest rates.
• Price stability improves both economic security &
overall climate for investment.
Economic Equity
• Issues of equity (fairness).
• No economic or science procedures to prove
that something is fair or not.
• People’s beliefs about what is right and wrong
about public policies are extremely important.
– Example: Level & type of income-assistance
programs for low-income families & rate at which
people who earn different levels of income should
be taxed to pay for government programs.
Economic Efficiency
• Means an economy is producing as much as
possible to satisfy people’s wants.
• General rule: decide whether it is efficient to
make more of any kind of output is to
compare the value of the additional benefits
and costs entailed.
• If benefits exceed costs, it’s efficient to do it.
If not, don’t do it.
You can crate a utopian society.
• You have 100 points to allocate to different
social goals.
• Write the number of points you would
allocate to each goal in the space provided on
Activity 1.
• Why do your numbers differ?
• Do members of different political parties and
even same political parties differ?
Economic Systems Differ, too
• Activity 2 – Read descriptions of 2 different
types of economic systems.
Broad Social Goal of Freedom
Market
• Individual freedom is high
valued; reflected by private
ownership of most
resources.
Command
• Government restricts
individual freedom, with
many decisions made by
central planners and
government ownership of
most natural and capital
resources.
. . . Growth
Market
Command
• Efficient use of resources
results from individual and
business incentives to produce
more and avoid waste.
• Specialization and trade
encourage higher levels of
output.
• Investments in capital and
workers’ education and
training promote future
growth in productive capacity
& output.
• Central planners set growth
targets and assign output quotas
for different industries and firms.
• Production of consumer
goods/services may be curtailed if
planners want to focus on other
sections (military, etc.)
• Incentives to reduce waste are
weak.
• Plan & equipment maintenance
are often significant problems.
. . . Stability
Market
• Federal government
conducts monetary policies
(through Federal Reserve
System in US).
• Fiscal policies promote full
employment (the 4-5 %
unemployment rates in the
US reflect frictional
unemployment).
Command
• Planners set prices thus
controlling official measures
of inflation – shortage3s can
make effective prices
significantly higher than the
prices set by planners.
• If high unemployment is a
key goal, virtually no
unemployment – even
frictional – will be accepted.
. . . Equity
Market
• Evaluation of equity based on
voluntary exchange & equality
of opportunity rather than
equality of outcomes.
• Income depends on value of
labor and other resources an
individual has to sell.
• Some redistribution of
income, but less than in other
western market countries.
Command
• Wages set by government
to provide greater equality
of income (some view as
more equitable.
• Substantial income equality.
• Better housing & other
services make real incomes
higher for these groups.
. . .Efficiency
Market
Command
• Most allocation decisions are
made by consumers and
private firms.
• Extensive specialization and
international trade increase
productivity and competition.
• Firms & consumers promote
their self-interest by taking
actions whenever additional
benefits exceed additional
costs.
• Allocation decisions are made
by central planners.
• Few or no effective market
signals and incentives.
• Focus on eliminating
unemployment can lease to
inefficient mixes of labor and
capital resources.
• State-owned enterprises that
are inefficient are rarely, if
ever, allowed to fail.
Activity 3
• Rate each country’s economic system in
achieving each broad social goal.
• Rate 1-5 (1 poor to 5 excellent).
• Which social goals receive greatest emphasis
in a command economy?
• Which goals are most important in a market
economy?
Activity 4
• GNP (Gross National Product)– Total final
goods and services produced by a country
(inside and outside of country’s borders) in a
year.
• GNP per PPP (purchasing power parity)
• PPP exchange rates determine the equivalent
values for two currencies by co9nsidering
prices for all goods & services in the two
nations.
• GNP Implicit deflator – measures average annual
rate of price changes in a nation’s economy.
• Gini Index – measure degree of income equality
for distribution of income (consumption
expenditures) in an economy. A 0 indicates
perfect equality; everyone has the same income.
A 100 indicates perfect inequality – means richest
person or household in the country received all of
the income, and all other people received
nothing.
• Index of Economic Freedom –
– Rates world’s economics on broad categories:
banking, capital flows & foreign investment,
monetary policy, fiscal burden of government,
wages and prices, etc. Lower the index score, the
higher the degree of economic freedom in a
country.
• Which country has the most economic
freedom? The least?