HGov: Economic Systems


All societies must make choices about what to have and what to give up because resources are always scarce compared to people’s wants. How those choices get made depends on a society’s economic system. Every society is faced with three economic questions:  What goods and services should be produced? How should they be produced? Who should get what is produced? How a society answers those questions depends on its economic goals. These goals include economic freedom, efficiency, equity, growth, security, and stability. Societies have developed three economic systems to answer these questions.

In a traditional economy, decisions are dictated by custom, tradition, and the ways of ancestors. The goals are economic security and stability.

In a command economy, a powerful ruler or government makes decisions. The goals are equity and security.

In a market economy, decisions are made by the interactions of producers and consumers. The goals are economic freedom and efficiency.

Most countries today have a mixed economy, in which both the government and individuals have a voice in economic decisions.

One of the few advantages existing in a traditional economy is that the roles of individuals are clearly defined. Every member of the society knows exactly what they are to do and most don’t have any complaints about it. There are also many disadvantages to this type of society. These societies are often very slow to change and when new technologies are introduced, these ideas and techniques are discouraged.

Command economies focuses on equality and the government tries to eliminate all private property and distribute its good equally. If done correctly no one is in poverty and no one is wealthier than another. Social services are also emphasized in this type of economy. The government will provide equal health care, education opportunities, and make sure all people are fed. Another strength pf this type of economy is that it is capable of rapid change for major problems. The government owns the companies, so if production needs need to be shifted into a different area, the government is capable of doing it rather quickly. Finally, command economies are very stable. Command economies will never have sudden depressions. Command economies also have many weaknesses. In a command economy there is very little freedom. The individual usually doesn’t have the opportunity to decide what they want to do for a career, and they have no control over the goods they receive. Another major problem is that there is little reason for innovations, hard work, or quality of the work. Since no one makes more money than everyone else, the people feel like there is no reason to work hard. Another weakness is that there is little focus on consumer wants. Finally, when it comes to minor day-to-day changes, the government has a hard time coping with them.

A strength of a market economy is it can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government. People have the ability to make as much money as they can and do what is in their best interest. Another strength of a market economy is that the government tries to stay out of the way of businesses. Although the government sets certain standards businesses must follow, for the most part businesses can do as they please, allowing them to produce what they want, how they want. The market economy produces a great variety of goods and services for consumers. If there is a demand for a good or service, the demand will almost always be met in a market economy. A weakness of a market economy is that it doesn’t always provide the basic needs to everyone in the society. The weak, sick, disabled, and old sometimes have trouble providing for themselves and often slip into poverty. Another problem is that it becomes hard for a government with so many private businesses to provide adequate defense, education, and health care to its people. Another weakness to this type of economy is that there is uncertainty in the business world. One company could easily be forced out of business causing all of its employees to become unemployed and lose their means of income. Finally, there are market failures. This can cause some companies to become too powerful and become a monopoly. If the government doesn’t step in, the monopoly can take advantage of the consumers and charge higher prices.

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Econ: Investment Rates

Learning Target: You will learn about the important connections between living standards, investments, and governance.



The term investment is often used in a variety of ways. Investment represents actual materials, research and development purchased and used today to produce goods and services in the future. For our purposes here, we are referring to the part of investment that is reflected in GDP, specifically the spending on new equipment, software, and structures that add to a country’s stock or amount of capital. Gross Domestic Product can be separated into four components that include consumer spending, business investment spending, government spending, and net exports. (GDP = C + I + G + X) The “I” represents the amount spent on new equipment and factories, which adds to the total amount of the capital factor of production. Investment is a key factor in growing GDP.


Homework:
Players Guide Investment Rates and GDP pages 21-22
Players Guide Standard of Living Analysis page 23

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HGov: Economic Choice


In economics, choices are explained in terms of trade-offs, or alternatives that are available whenever a decision is made. Combining trade-offs and opportunity cost is essential in making smart economic decisions. A trade-off is exchanging one thing for another. The cost of a trade-off is what you give up in order to get or do something else. Opportunity cost is the value of the next best alternative use of money, time, or resources given up for the alternative that was chosen.

Economists use a model called the production possibilities frontier (PPF), which is a diagram representing various combinations of goods and services to show the maximum combinations that can be produced from a fixed amount of resources in a given period of time. This curve can help determine how much of each item to produce, thus revealing the trade-offs and opportunity costs involved in each decision.

A production possibilities curve (PPC) shows the different rates of production of two goods or services that an economy can produce efficiently during a specified period of time with a limited quantity of productive resources or factors of production. The PPC shows the maximum amount of one product that can be obtained for any specified production level of the other product given the technology and the amount of factors of production available.

04 PPC full employ points
The necessity and consequences of choices can best be understood through a production possibilities model. each point on the production possibilities frontier represents some maximum output of two products. The curve is the frontier because it shows the limit of attainable outputs. To obtain the various combinations of the two products, society must achieve both full employment and productive efficiency.

05 PPC inefficient point
Points lying inside or to the left of the curve are also attainable, but they reflect inefficiency and therefore not as desirable as points on the curve. Points inside the curve imply that the economy could have more of both products if it achieved full employment and productive efficiency.

06 PPC unattainable point
Points lying outside or to the right of the production possibilities curve, would represent a greater output than the output of any point on the curve. Such points are unattainable with the current supplies of resources and technology.

Econ: IES Human Development Index

Learning Target: You will learn about several important tools that will assist you in the goal of improving the standard of living for your country.



The United Nations developed what is known as the Human Development Index, The HDI covers three areas: life expectancy, education, and GDP per capita and offers a broader measure of the standard of living than GDP per capita alone. The Human Development Index was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. The Human Development Index is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The HDI does not reflect on inequalities, poverty, human security, empowerment, etc.


Homework:
Players Guide page 20 Human Development Index #2-3

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HGov: Scarcity



Economics is a social science that deals with the fundamental economic problem of scarcity, a condition caused by the combination of seemingly unlimited wants and limited resources. Because of this, people are forced to make choices and decisions about how they will use their resources. There is a significant difference between needs and wants. Individuals have basic essential needs to survive: food, clothing, shelter. Everything else is considered a want, which means not essential to survive. Throughout history, scarcity has prevented people from satisfying all their needs and wants. Scarcity means that people do not and cannot have enough income and time to satisfy their every want; therefore, people are forced to make choices about how they will use their resources. The notion of TINSTAAFL, which stands for There Is No Such Thing As A Free Lunch, is often used to remind us that resources are scarce and that we must make careful economic decisions regarding what, how, and for whom to produce.

Resources are divided into four general categories needed in the production of all goods and services: land, labor, capital, and entrepreneurship. Scarcity means that people do not and cannot have enough income and time to satisfy their every want; therefore, people are forced to make choices about how they will use their resources. By combining trade-offs and opportunity cost is essential in making smart economic decisions. A trade-off is exchanging one thing for another. The cost of a trade-off is what you give up in order to get or do something else. Opportunity cost is the value of the next best alternative given up for the alternative that was chosen.

Econ: IES Research Project

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Learning Target:  Analyze and evaluate economic data, then explain how the condition of your country’s economy impacts the people living there.


As an economic advisor, you will learn about important tools that will assist you in the goal of improving the living standard for your country. You will utilize basic concepts in economic development and international trade that include gross domestic product, balance of payments, imports, exports, currency, rates of exchange, and barriers to trade.

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Homework:
Each advisor team member will complete in their Player’s Guide:
IES Research Project on page 13 #7, 8, 9 and page 14 #10 & 12

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HGov: Economic Function of Government



Although private enterprise is the main force in the American economic system, the federal government plays a significant role through its policies to regulate, promote, and stimulate the economy.

Regulatory policy is designed to achieve efficiency and equity, which require the government to intervene, for example, to maintain competitive trade practices, an efficiency goal, and to protect vulnerable parties in economic transactions, an equity goal.

The general purpose and function of government is to protect individual rights, to promote a stable legal environment for economic activity, and to promote policies that support the well-being of citizens. Government tries to accomplish its purpose in four ways: providing public goods, redistributing income, regulating economic activity, and ensuring economic stability. Public goods are a special type of goods and services that government supplies to all citizens. Government can promote the well being of citizens by redistributing income with social insurance and public assistance programs. Other functions of government involve regulating economic activity. Many people criticize government involvement in the economy and think that market solutions are better than government involvement.

Some of the major disputes over macro theory and policy is the disagreement on three questions. What causes instability? Is the economy self-correcting? Should government adhere to rules or use discretion in setting economic policy?

The classical theory of economics, which dominated in the 18th and early 19th centuries, laid the foundation for much of modern economics. Sometimes referred to as laissez faire economics, classical theory emphasized growth, free trade, and competition, as free from government regulation as possible. Classical theory argues for the self-regulating market. Under this viewpoint, the concern for profit ensures that society’s resources are used in the most beneficial manner, without direction by government.

Keynesian theory believes it is the government’s job to smooth out the bumps in business cycles. This theory asserts that free markets have no self-balancing mechanisms that lead to full employment. Therefore, intervention would come in the form of government spending and tax breaks in order to stimulate the economy and government spending cuts and tax hikes in good times, in order to curb inflation.

Monetarist theory focuses on the macroeconomic effects of the supply of money and central banking and contends that changes in the money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle.