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Goals of the Economy

Goals of the Economy. What do we want? Why do some economic systems perform better than others?. Objectives.    1. Define the three basic economic systems: capitalism, socialism and communism.    2. Compare and contrast the three basic economic systems.

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Goals of the Economy

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  1. Goals of the Economy What do we want? Why do some economic systems perform better than others?

  2. Objectives •    1. Define the three basic economic systems: capitalism, socialism and communism. •    2. Compare and contrast the three basic economic systems. •    3. Evaluate (and form an opinion) on the three basic economic systems. Which do you prefer? Why?

  3. Bovine Governmental Philosophies • Socialism: You have 2 cows. Give one to a neighbor. • Communism: you have 2 cows. Give both cows to government and they may give you some milk. • Nazism: You have 2 cows. The government shoots you and takes both cows • Anarchism: You have 2 cows. Shoot the government agent and steal another cow. • Capitalism: You have 2 cows. Sell 1 cow and buy a bull.

  4. TEACHING Economics MCEE Economic Learning Modules E L M s Economics: the Study of Choices

  5. Scarcity The Desire for Things is Greater than is Freely Available from Nature ELM 1: Scarcity

  6. Economic Systems Determine • What will be produced? • How will it be produced? • For whom will it be produced?

  7. Market Economic Systems Capitalism: means of production and distribution are privately owned. • Voluntary exchange • Market determined price • Consumers determine what • Producers determine how • Market determines for whom

  8. Command Economic Systems(centrally planned) Socialism: means of production and distribution are collectively owned. • Centralized government plans and controls the economy • What • How • For whom

  9. Benefits of a Market Economy: more merit based • Market information through price:Price signals buying and selling decisions • resources directed to consumer’s perceived highest valued use • Producer incentive to lower cost • Important attributes: • Private property • Free enterprise • Competition • Price system • Limited government ELM 6: Prices ELM 13: Property Rights ELM 16: Role of Business

  10. Benefits of a Command Economy: more egalitarian • Intention: greater equality • no unemployment • resources intentionally directed to expand growth • Unintended consequences: • Income transfer from rich to poor • Less efficiency ELM 3: Incentives Matter

  11. Broad Goals of an Economic System • Economic Efficiency(max value, min waste) ELM 4: Comparative Advantage ELM 9: Equilibrium

  12. Broad Goals of an Economic System • Economic Efficiency (max value, min waste) • Economic Equity(fairness) • Economic Freedom • Fraser Economic Freedom of the World Index • Heritage Inst & WSJ Freedom Index • Taxation, property rights, business & trade regulations

  13. Economic Freedom Index The Top 10 Source: The Fraser Institute.

  14. Income per personof the Top 10on the Economic Freedom Index Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

  15. Economic Freedom Index The Bottom Ten Source: The Fraser Institute.

  16. Income per personof the Bottom 10on the Economic Freedom Index Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

  17. Broad Goals of an Economic System • Economic Efficiency (max value, min waste) • Economic Equity (fairness) • Economic Freedom • Full Employment • Economic Growth(GDP, health, literacy, . . .) • Gross Domestic Product: Market price of all final goods and services produced in an economy.

  18. Broad Goals of an Economic System • Economic Efficiency (max value, min waste) • Economic Equity (fairness) • Economic Freedom • Full Employment • Economic Growth (GDP, health, literacy, . . .) • Security(defense, safety net) • Price Stability Goals are not necessarily mutually compatible! ELM 2: Opportunity Cost

  19. Economic Freedom and Civil LibertiesHigher ratings indicate higher levels of civil liberties Least Free …………………… Most Free Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2006, available at http://www.freedomhouse.org/.

  20. Human Development Index and Economic Freedom QuartilesHigher ratings indicate higher levels of development Least Free ……………. Most Free Sources: The Fraser Institute; United Nations Development Programmme, Human Development Indicators 2008, available at http://hdr.undp.org/.

  21. What is Our Economic System? “In many ways our economy already resembles a European one. As boomers age and spending grows, we will become even more French.” By Jon Meacham and Evan Thomas NEWSWEEKPublished Feb 7, 2009

  22. Economic Freedom Over Time Source: The Fraser Institute.

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