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 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 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. • 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.

10. 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.

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 Government restricts individual freedom, with many decisions made by central planners and government ownership of most natural and capital resources. • Individual freedom is high valued; reflected by private ownership of most resources.

14. . . . Growth Market Command 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. • 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.

15. . . . Stability Market 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. • 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).

16. . . . Equity Market 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. • 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.

17. . . .Efficiency Market Command 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. • 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.

18. 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?

19. 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.

20. 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.

21. 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.

22. Which country has the most economic freedom? The least?