Broad Social Goals of Economic Systems

1
Broad Social Goals of Economic Systems
2
Introduction

• Same basic problem confronts different economic
  systems.
• Handling of scarce resources unlimited wants is
  determined by economic system.

3
Broad Social Goals

• All economic systems strive to achieve set of
  broad social goals
• Economic Freedom
• Efficiency
• Equity
• Growth
• Stability

4
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.

5
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.

6
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 nations
  population.
• Real GDP is a measure of a countrys 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 low-income 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.

7
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!

8
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.

9
Economic Equity

• Issues of equity (fairness).
• No economic or science procedures to prove that
  something is fair or not.
• Peoples 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.

10
Economic Efficiency

• Means an economy is producing as much as possible
  to satisfy peoples 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, its efficient to do
  it. If not, dont do it.

11
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?

12
Economic Systems Differ, too

• Activity 2 Read descriptions of 2 different
  types of economic systems.

13
Broad Social Goal of Freedom

• Market

• Command

• Individual freedom is high valued reflected by
  private ownership of most resources.

• Government restricts individual freedom, with
  many decisions made by central planners and
  government ownership of most natural and capital
  resources.

14
. . . 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.

15
. . . Stability

• Market

• Command

• 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).

• 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.

16
. . . Equity

• Market

• Command

• 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.

• 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.

17
. . .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.

18
Activity 3

• Rate each countrys 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?

19
Activity 4

• GNP (Gross National Product) Total final goods
  and services produced by a country (inside and
  outside of countrys 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.

20

• GNP Implicit deflator measures average annual
  rate of price changes in a nations 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.

21

• Index of Economic Freedom
• Rates worlds 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.

22

• Which country has the most economic freedom? The
  least?