Transcript Chapter 4: “The Government as an Economic Entity”

Pump Primer
Identify the two questions
that help determine
whether an economy is
capitalistic or socialistic
Unit II: Economics of
the Nation
Chapter 5: What Is the Economic Problem?
Chapter 6: Economic Systems
Objectives
 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
Objectives
 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
BIBLICAL INTEGRATION:
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 Questions
The 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
Consumption Goods & Services
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)
Capital Goods
Goods that are bought by businesses
to increase their productive
resources.
 Example: shopping malls and auto
assembly lines
(Bade 34)
Export Goods & Services
Goods and services produced in one
country and sold in another
country.
 Example: airplanes produced by
Boeing and purchased by Canada.
(Bade 34)
Government goods and services
Goods and services bought by
governments.
 Example: missiles, weapons,
police protection.
(Bade 34)
Governments
Federal Government
The 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)
Federal Government
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).
Factors of Production
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)
Land
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)
Labor
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)
Capital
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)
Entrepreneurship
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)
Factors of Production
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)
Governments
We divide governments into two broad
levels:
Federal government
State and local government
(Bade 44)
Circular Flow Models
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 & Firms
Households are individuals or
people living together as
decision-making units.
Firms are institutions that
organize production of goods
and services.
(Bade 42)
Markets
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)
Circular Flow Model
Real Flows and Money Flows
 In factor markets:
•
Households supply factors
of production
•
Firms hire factors of
production.
In goods markets:
•
Firms supply goods and
services produced.
•
Households buy goods and
services.
(Bade 43, 44)
Real Flows & Money Flows
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 counterclockwise)
(Bade 43)
The Circular Flow of resources, Goods, services and Money
Payments
(4) Money Payments (sales dollars)
THE PRODUCT MARKET
(3) Goods & Services
HOUSEHOLDS
(RESOURCE
OWNERS)
(5) Taxes
(7) Taxes
GOVERNMENT
(6) Goods & Services
(8) Goods & Services
BUSINESS
FIRMS
(2) Productive Resources
THE FACTOR MARKET
(1) Money-Income Payments (wages, rents, interest, profit)
Figure 10.1
Understanding the Circular Flow
Activity 10
Break into groups of three to
four and complete the
following circular flow
activity.
National Council on Economic Education, New York, N.Y
Understanding the circular Flow
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.
4
David buys a CD at the local store for $9.99. ____
2.
Emily earns $6.50 per hour entering data at the music
conservatory. ____
1
3.
Marla pays her federal income tax. ____
5
4.
Jagdish receives $15,000 in profits from his half-ownership of
a coffee shop. ____
1
5.
3
Keisha makes decorative pillows that she sells for $30.00. ____
6.
2
Mammoth Toys Inc. hires 100 new employees. ____
7.
The National Park Service opens two new campgrounds in
Yellowstone National Park. ____.
6
Part B
Write T if the statement is true and F if the statement is false.
8.
T
Money flows are clockwise. ____
9.
F
Goods and services flows are clockwise. ____
10. The resource market determines the price per acre of
farmland. ____
T
T
11. The product market determines the price of computer. ____
F
12. Firms sell resources in the resource markets.____
13. Government buys resources and households sell
resources. ____
T
T
14. Government buys products, and firms sell products.____
15. The product market determines the salary of the C.E.O. of
F
a firm. ____
F
16. The resources market determines the price of soda. ____
17. The resources market determines the price of soda-bottling
equipment. ____
T
State and Local Government
Expenditures and Revenue
The largest part of the state and
local governments expenditures
are on
 Education
 Highways
 Public welfare benefits
(Bade 44)
Federal Government Expenditures and
Revenue
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
2009-2010 Purposed Budget
$45,000,000
Education is
30.2% of the
budget.
$40,000,000
$35,000,000
$30,000,000
Health &
Human Resource
= 28.2%
$25,000,000
$20,000,000
$15,000,000
Transportation =
8.9%
$10,000,000
$5,000,000
$0
K-12 Education
Health & Human Higher Education
Resources
(Source: CA 2009-2010 Purposed Budget )
Transportion
State Revenue
CA Estimated Revenue
Other
5%
Sales & Use Tax
35%
Personal Income
Tax
49%
Corporate Tax
11%
(Source: State of CA Estimated 2009-2010 Revenue)
The People
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 and Developing Economies
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.
(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)
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(b) shows the
distribution of natural gas.
(Bade 51)
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(c) shows the
distribution of coal.
(Bade 51)
National Economic Goals
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)
National Economic Goals
 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)
National Economic Goals
 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)
How will the Nation’s Goods Be
Produced?
 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)
Who Will Receive What is
Produced?
 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)
Christian Viewpoint
 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 sidetracked and missing the true lessons that
God has in store.
(Carter 97)
Christian Viewpoint
 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)
Early Economic System
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)
Adam Smith
 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)
Adam Smith
 Laissez-Faire Economy “an economy that relies
chiefly on market forces to allocate goods and
resources and to determine prices.”
 French for “let alone.”
(“Laissez-Faire Economy “)
 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.
(Carter 108)
Modern Economic System
 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
Communism Centralized
Worker
Socialism Management
Socialism
Capitalistic System
Classic
Liberal
Radical
Capitalism
(Carter 111-114)
Modern Economic System
Socialistic System
Less Personal Ownership
Less Personal Decision
Making
Capitalistic System
More Personal Ownership
More Personal Decision
Making
(Carter 111-114)
Capitalism
 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 decisionmaking 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)
Capitalism
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)
Socialism
 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)
Socialism
 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)
Activity:
Why Are Some Nations Wealthy?
 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.
Rich Nation/Poor Nation
 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.
Mystery Nations
Singapore
Per capita GDP: $26,500
Population: 4,300,419
Russia
Per capita GDP: $7700
Population: 145,471,197
Japan
Per capita GDP: $24,900
Population: 126,771,6662
Nigeria
Per capita GDP: $ 950
Population: 126,635,626
Argentina
Per capita GDP: $ 12,900
Population: 37,384,816
Richest to Poorest Country
1. Country E
Singapore
2. Country B
Japan
3. Country A
Argentina
4. Country D
Russia
5. Country C
Nigeria
Works Cited
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/0910_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>