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Goals of the Economy

What do we want? Why do some economic systems perform better than others?

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.

TEACHING Economics
MCEE Economic Learning Modules E L M s

Economics: the Study of Choices


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Scarcity
The Desire for Things is Greater than is Freely Available from Nature

4 ELM 1: Scarcity

Economic Systems Determine

What will be produced? How will it be produced? For whom will it be produced?

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

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


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Benefits of a Market Economy: more merit based

Market information through price:


Price signals buying and selling decisions


resources directed to consumers 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 8 ELM 16: Role of Business

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

Broad Goals of an Economic System


1.

Economic Efficiency

(max value, min waste)

ELM 4: Comparative Advantage 10 ELM 9: Equilibrium

Broad Goals of an Economic System


1.

2.
3.

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

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Economic Freedom Index The Top 10


Hong Kong Singapore New Zealand Average of top 10 Switzerland United Kingdom Chile Canada Australia United States Ireland

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Score (out of 10)


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Source: The Fraser Institute.

Income per person

of the Top 10 on the Economic Freedom Index


Singapore United States Ireland Hong Kong Switzerland Canada Australia United Kingdom New Zealand Chile
$0 $10,000 $20,000 $30,000 $40,000 $50,000

GDP per Capita, 2006 (ppp)


Sources: The Fraser Institute; The World Bank, World Development Indicators, 13 2008.

Economic Freedom Index The Bottom Ten


Chad Central Afr. Rep. Guinea-Bissau Congo, Dem. R. Venezuela Niger Congo, Rep. Of Myanmar Angola Zimbabwe 0 2 4 6 8 10
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Source: The Fraser Institute.

Score (out of 10)

Income per person


of the Bottom 10 on the Economic Freedom Index
Venezuela Angola Congo, Rep. Of Chad Myanmar Central Afr. Rep. Niger Guinea-Bissau Congo, Dem. R.
0 10,000 20,000 30,000 40,000 50,000

GDP per Capita, 2006 (ppp)


Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.
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Broad Goals of an Economic System


1.

2.
3. 4. 5.

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.

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Broad Goals of an Economic System


1.

2.
3. 4. 5. 6. 7.

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!


17 ELM 2: Opportunity Cost

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Economic Freedom and Civil Liberties


Higher ratings indicate higher levels of civil liberties
10.0
Civil Liberties (out of 10)

8.0 6.0 4.0 2.0 0.0


Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile

Least Free Most Free


Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2006, available at http://www.freedomhouse.org/.
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Human Development Index and Economic Freedom Quartiles


Higher ratings indicate higher levels of development
1.0 0.8 0.6 0.4 0.2 0.0
Least Free Quartile 3rd Quartile 2nd Quartile Most Free Quartile

United Nations Human Development Index

Least Free . Most Free


Sources: The Fraser Institute; United Nations Development Programmme, Human Development Indicators 2008, available at http://hdr.undp.org/.
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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 NEWSWEEK Published Feb 7, 2009
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Economic Freedom Over Time


10
Economic Freedom Score

8 6 6.1 4 2 0
1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 23

5.5 5.4 5.5 5.7

6.0

6.4 6.4 6.4 6.4 6.4 6.6 6.6

Source: The Fraser Institute.

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