Pump PrimerIdentify the two

questions that help determine whether an economy is capitalistic or socialistic

Chapter 5: What Is the Economic Problem?

Chapter 6: Economic Systems

Identify the economic problem

List the four primary economic goals of most nations

List the three critical economic questions

Explain the command and market solutions to each of the three economic questions

Describe the egalitarian and libertarian concepts of fairness

Explain the biblical principles that apply to the distribution question

Describe mercantilism

Describe Adam Smith’s contribution to economics

Define laissez-faire liberalism

Identify the two questions that help determine whether an economy is capitalistic or socialistic

Describe each of the major forms of capitalism

Describe each of the major forms of socialism

Explain how free-market capitalism compares to scriptural principles

Explain how socialism compares to scriptural principles

God orchestrates every event in our live as believers for His purpose. We, therefore, need to trust God to work all things together for good for those who love Him. (Rom 8:28)

Three Economic QuestionsThe Output Question: What will

the nation produce?

The Input Question: How will the nation produce its goods?

The Distribution Question: Who will receive what the nation produces

Goods and services that are bought by individuals and used to provide personal enjoyment and contribute to a person’s standard of living.

Example: movies and soda

(Bade 34)

Goods that are bought by businesses to increase their productive resources.

Example: shopping malls and auto assembly lines

(Bade 34)

Goods and services produced in one country and sold in another country.

Example: airplanes produced by Boeing and purchased by Canada.

(Bade 34)

Goods and services bought by governments.

Example: missiles, weapons, police protection.

(Bade 34)

Federal GovernmentThe federal government’s major expenditures are to provide

1. Goods and services

2. Social Security and welfare benefits

3. Transfers to state and local governments

(Bade 44)

The federal government finances its expenditures by collecting taxes.

The main taxes are

1. Personal income taxes

2. Corporate (business) taxes

3. Social Security taxes

In 2005, the federal government spent $2.5 trillion—about 20 percent of the total value of all the goods and services produced in the United States in that year.

Taxes raised less than $2.5 trillion—the government had a deficit.

(Bade 44)

Resource Market Resource is anything that can be used to produce

something else.

List of the economy’s resources usually begin with land, labor (machinery, buildings, and other man-made productive assts), and human capital (the educational achievements and skills of workers).

How Do We Produce?

Factors of production are the productive resources used to produce goods and services.

Factors of production are grouped into four categories:

Land

Labor

Capital

Entrepreneurship(Bade 36)

Includes all the “gifts of nature” that we use to produce goods and services. All the things we call natural resources.

Land includes minerals, water, air, wild plants, animals, birds, and fish.

(Bade 36)

work time and work effort that people devote to producing goods and services.

The quality of labor depends on how skilled people are—what economists call human capital (the knowledge and skill that people obtain from education, on-the-job training, and work experience).

(Bade 37)

Tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services.

Capital includes hammers, office buildings, and computers.

(Bade 38)

Human resource that organizes labor, land, and capital.

Entrepreneurs come up with new ideas about what and how to produce, make business decisions, and bear the risks that arise from these decisions.

(Bade 39)

For Whom Do We Produce?

Factors of production are paid incomes:

Rent: Income paid for the use of land.

Wages: Income paid for the services of labor.

Interest: Income paid for the use of capital.

Profit (or loss): Income earned by an entrepreneur for running a business.

(Bade 39)

We divide governments into two broad levels:

Federal government

State and local government

(Bade 44)

A model of the economy that shows:

The circular flow of expenditures and incomes that result from decision makers’ choices and

The way those choices interact in markets to determine what, how, and for whom goods and services are produced.

(Bade 42)

Households are individuals or people living together as decision-making units.

Firms are institutions that organize production of goods and services.

(Bade 42)

A market is any arrangement that brings buyers and sellers together and enables them to get information and do business with each other.

Product markets (Goods) are markets in which goods and services are bought and sold.

Factor markets are markets in which factors of production are bought and sold.

(Bade 42)

In factor markets:

• Households supply factors of production

• Firms hire factors of production.

• Firms supply goods and services produced.

• Households buy goods and services.

In goods markets:

Real Flows and Money Flows

(Bade 43, 44)

Firms pay households incomes for the services of factors of production.

•Households pay firms for the goods and services they buy.

•These are the money flows.

•Blue flows are incomes (flows clockwise)• Red flows are expenditures

• Goods and services (flows counter- clockwise)

(Bade 43)

(4) Money Payments (sales dollars)

(3) Goods & Services

THE PRODUCT MARKET

GOVERNMENTHOUSEHOLDS

(RESOURCE OWNERS)

BUSINESS

FIRMS

(5) Taxes

(6) Goods & Services

(7) Taxes

(8) Goods & Services

(2) Productive Resources

THE FACTOR MARKET

(1) Money-Income Payments (wages, rents, interest, profit)

The Circular Flow of resources, Goods, services and Money Payments

Figure 10.1

Break into groups of three to four and complete the following circular flow activity.

National Council on Economic Education, New York, N.Y

Part A

Each of the flows in the circular flow diagram in Figure 10.1 is numbered. Identify which number matches the transaction described in the following statements. Consider only the first transaction – not the return flow.

1. David buys a CD at the local store for $9.99. ____

2. Emily earns $6.50 per hour entering data at the music conservatory. ____

3. Marla pays her federal income tax. ____

4. Jagdish receives $15,000 in profits from his half-ownership of a coffee shop. ____

5. Keisha makes decorative pillows that she sells for $30.00. ____

6. Mammoth Toys Inc. hires 100 new employees. ____

7. The National Park Service opens two new campgrounds in Yellowstone National Park. ____.

4

1

5

1

3

2

6

8. Money flows are clockwise. ____

9. Goods and services flows are clockwise. ____

10. The resource market determines the price per acre of farmland. ____

11. The product market determines the price of computer. ____

12. Firms sell resources in the resource markets.____

13. Government buys resources and households sell resources. ____

14. Government buys products, and firms sell products.____

15. The product market determines the salary of the C.E.O. of a firm. ____

16. The resources market determines the price of soda. ____

17. The resources market determines the price of soda-bottling equipment. ____

T

F

T

T

F

T

T

F

T

F

The largest part of the state and local governments expenditures are on

Education

Highways

Public welfare benefits

(Bade 44)

National debt is the total amount that the government has borrowed to make expenditures that exceed tax revenue—to run a government budget deficit.The national debt is a bit like a large credit card balance.

Paying the interest on the national debt is like paying the minimum required monthly payment.

In 2008, we paid $252,757billion in interest on the national debt.

(Bade 44)

State of California Proposed Budget Expenditure for 2009-2010

(Source: CA 2009-2010 Purposed Budget )

Education is 30.2% of the budget.

Health & Human Resource = 28.2%

Transportation = 8.9%

(Source: State of CA Estimated 2009-2010 Revenue)

U.S. Population: 311,937,013 (Jan. 22, 2011)

COMPONENT SETTINGS FOR JANUARY 2011

One birth every................................................ 8 seconds

One death every............................................. 11 seconds

One international migrant (net) every............. 45 seconds

Net gain of one person every........................... 15 seconds

World population: 6,895,200,639 (Jan. 22, 2011)

Births per second...........4.2 Deaths per hour.............1.8

(Source: U.S. Census Bureau: US and World Population Clock)

Emerging market economies - 28 countries of Central and Eastern European and Asia that were until the 1990s part of the Soviet Union.

Almost 500 million people live in these countries.

Developing economies -118 countries in Africa, Asia, the Middle East, Europe, and Central and South America that have not yet achieved high average incomes for their people.

More than 5 billion people live in these countries.

Emerging Market and Developing Economies

(Bade 49)

What in the Global Economy?

In 2008, the global economy was estimated to produce $70 trillion in goods and services.

Figure 2.8 shows the shares of global production.

(Bade 50)

Energy Source in the World Economy

The location of oil, natural gas, and coal determines the sources of the world’s energy.

Figure 2.9(a) shows the distribution of oil.

(Bade 51)

The location of oil, natural gas, and coal determines the sources of the world’s energy.

Figure 2.9(b) shows the distribution of natural gas.

Energy Source in the World Economy

(Bade 51)

The location of oil, natural gas, and coal determines the sources of the world’s energy.

Figure 2.9(c) shows the distribution of coal.

Energy Source in the World Economy

(Bade 51)

The economic problem of a society is how it may best achieve its economic goals. Most societies have identified four primary economic goals:

A Low Level of Unemployment

A Stable Price Level

A Healthy Rate of Economic Growth

A Fair Distribution of Income

(Carter 87-88)

A Low Level of Unemployment: High unemployment is usually accompanied by poverty, crime, despair, and a waste of human intelligence and labor.

A Stable Price Level: If prices start rising rapidly, people will decrease savings and spend greater portions of their incomes in an effort to beat the next price increase.

Inflation: The situation in which over-expansion of the nation’s money supply leads to a sustained rise in the average price level.

Deflation: A situation in which the general price level is declining; usually caused by reduction in the growth rate of the money supply.

(Carter 87)

A Healthy Rate of Economic Growth: Economic growth is an increase in the quantity of goods and services a nation can produce.

Extensive growth is an increase of goods and services produced by business firms that are using more land, labor, or financial capital than previously.

Intensive growth is an increase of goods and services produced when business firms use existing factors of production with greater efficiency.

A Fair Distribution of Income:

Should everyone be guaranteed equality of income, should a “safety net” of economic benefits be provided, or should the government let the market determine each person’s income?

(Carter 87-88)

A business firm that uses a great deal of human labor relative to real capital is referred to as being labor intensive.

A business that uses relatively more automated equipment is said to be capital intensive.

By using a great deal of human labor, a business firm is contributing to a low unemployment rate, which has the effect of reducing crime and poverty.

(Carter 93)

Democratic fairness maintains that each person in the nation has a right to a part of the nation’s wealth simply because he is part of the human race.

Economic leveling – equally distributing the nation’s income regardless of each person’s ability to contribute to its pool of wealth.

Libertarian fairness (or Economic Darwinism) argues that the only economic right to which citizens are entitled is the right to own and use property free of government interference. (Survival of the fittest.)

(Carter 95)

Christians sometimes need to be reminded that economic issues take a distant second to the true mission of the Word of God. (2 Tim. 3:16)

Those who search Scripture to justify their libertarian or egalitarian economic philosophies run the risk of being side-tracked and missing the true lessons that God has in store.

(Carter 97)

Scripture does present some clear economic principles regarding income.

Through one’s labor (Gen. 3:17-19; 2 Thess. 3:10)

To care for family needs (I Tim. 5:8)

Caring for the poor (Lev. 23:22)

(Carter 97)

The 18th Century brought the rise of Adam Smith and the decline of the mercantilists and the physiocrats (fizzee ә kráts) .

Mercantilism was an economic philosophy commonly held in Europe from the 16th to the 18th centuries that advocated the accumulation of gold and silver in order to build a wealthy and powerful state.

“ADAM SMITH coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports.”

“The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment.”

(LaHaye)

Smith devoted ten years of his life to write An Inquiry into the Nature and Causes of the Wealth of Nations.

Adam asked, “Why are some nations wealthy while others are poor?” He answer by emphasizing the role of the division of labor and free markets.

Adam argued that a nation is not made wealthy by the childish accumulation of shiny metals, but is enriched by the economic prosperity of its people.

(Carter 108)

Laissez-Faire Economy “an economy that relies chiefly on market forces to allocate goods and resources and to determine prices.”

French for “let alone.”

Smith argued that the monarch of a nation who wished his country to prosper should leave his subjects alone and allow them to seek their own profit.

Because of his philosophy of limited government and personal responsibility, he became known as the father of laissez-faire or “let alone” economics.

(“Laissez-Faire Economy “)

(Carter 108)

The debate still continues between those who favor economic freedom and those who believe that the state should control economic events, but today the two sides of the argument are capitalism and socialism.

Socialistic System

Radical Capitalism

Capitalistic System

(Carter 111-114)

Classic Liberal

Worker Management Socialism

Centralized Socialism

Communism

Socialistic System Capitalistic System

Less Personal OwnershipLess Personal Decision

Making

More Personal OwnershipMore Personal Decision

Making

(Carter 111-114)

An economic system in which private individuals own most of the factors of production and make most economic decisions.

Radical Capitalism

Private citizens own all factors of production and make all decisions regarding what will be produced, how it will be produced, and who will receive the production.

No government exists and the market is free to work unencumbered.

Classic Liberal Capitalism

Type of capitalism envisioned by Adam Smith. It accepts that government must exist but allows it only minimal ownership of resources and decision-making power to perform its responsibilities.

Government s/b limited to three duties:

Protect its citizens from foreign aggression (maintaining a national defense system).

Protect rights of its citizens from infringements by others

Provide public goods and services that are impossible for private firms to create at a profit (highways, national parks, monetary system , etc.)

(Carter 111)

State Capitalism

Majority of natural resources, financial capital, and labor is owned by private citizens, but the government intervenes widely in the decision-making process to ensure that its egalitarian goals are carried out.

(Carter 114)

An economic system in which a central authority, committee, or the people in common generally own the factors of production and make economic decisions.

European Social Democracy

A transitional economic system between capitalism and socialism.

Characterized by state’s taking possession of those industries that are the cornerstones of the economy

Worker Management Socialism

Government owns all business firms to prevent workers from being “enslaved” by private owners, but it realistically recognizes that it cannot operate all of the business firs from afar.

Workers collectively decide what will be produced, in what quantities, styles, and so forth. They also decide how the goods will be produced. Workers are paid a base wage that increases as their individual productivity increases and paid a percentage of the firm’s profits.

(Carter 114)

Centralized Socialism

Maintains that government should be both the central owner and the decision maker in all economic affairs of the state.

It is the brand of socialism that Karl Marx envisioned for the world. He believed it was the nature of all mankind to oppress one another, most notably the rich against the poor. He believed that being an employer in a capitalistic system was nothing more than being a slave.

Since the state owns all factories and equipment, centralized socialism treats the nation’s economy like one big company with the nation’s leaders acting like a board of directors.

Marx believed centralized socialism was a stepping stone to communism.

Communism

Socialism in the extreme. Everyone in the society would selflessly concern themselves with the welfare of all other members. Each person would voluntarily contribute as much as he possibly could and would demand of society only that which he absolutely needed.

Marx believed that that after socialism has been eliminated, the communist nation would automatically govern itself.

(Carter 114-116)

The contentious debate on globalization often centers on why some nations are rich and others remain in poverty.

A nation’s wealth affects the standard of living of its citizens.

(Capestone: Exemplary Lessons for High School Economics. National Council on Economic Education. New York, NY: Unit 7 Lesson 43.)

The key to economic prosperity is long-term economic growth.

What explains the difference among nations in long-term economic growth?

Economists have identified keys to economic growth; they include technological innovation, investment in physical and human capital, low inflation, political stability, and a decentralized market economy.

The anti-globalization movement is a major threat to world prosperity.

According to Steven Landsburg – “the particular responses endorsed by the anti-globalization crowd—kick back, relax, keep your environment clean and don’t worry so much about where your next meal is coming from—are responses that have never worked well for poor people in the U.S. or anywhere else.”

The way to achieve economic growth is to create incentives to save, invest, and innovate.

Every year the Heritage Foundation and The Wall Street Journal publish the “Index of Economic Freedom.”

Every year the findings are similar. Countries with most economic freedom (low taxes, less government regulations, sound monetary policy, protection of property rights, decentralized markets) also have the highest rates of economic growth.

Part 1: You are secret agents assigned to find out if a county is rich or poor. From the information provided, identify each of he five countries listed.

Write down the country’s name opposite each bold-face heading.

Then, rank them from the richest country to the poorest country in Part 2.

Singapore

Per capita GDP: $26,500

Population: 4,300,419

Japan

Per capita GDP: $24,900

Population: 126,771,6662

Nigeria

Per capita GDP: $ 950

Population: 126,635,626

Russia

Per capita GDP: $7700

Population: 145,471,197

Argentina

Per capita GDP: $ 12,900

Population: 37,384,816

1. Country E Singapore

2. Country B Japan

3. Country A Argentina

4. Country D Russia

5. Country C Nigeria

Bade, Robin and Michael Parkin. Foundations of Economics. Boston: Pearson Education, Inc. 2007.

Carper, Alan. Economics for Christian Schools. Greenville: Bob Jones University Press, 1998.

LaHaye, Laura. "Mercantilism." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 13 June 2009. <http://www.econlib.org/library/Enc/Mercantilism.html>.

Laissez-faire economy." WordNet® 3.0. Princeton University. 12 Jun. 2009. <Dictionary.com http://dictionary.reference.com/browse/laissez-faire economy>.

“Overview of the Governor’s Budget” Legislative Analyst’s Office. 8 Jan 2009. Web 22 Jan 2011. < http://www.lao.ca.gov/2009/budget_overview/09-10_budget_ov.aspx>

“Physiocrats." Dictionary.com Unabridged (v 1.1). Random House, Inc. 12 Jun. 2009. <Dictionary.com http://dictionary.reference.com/browse/physiocrats>.

“U.S. & World Population Clocks” U.S. Census Bureau 22 Jan 2011 Web. 22 Jan 2011. < http://www.census.gov/main/www/popclock.html>