CHAPTER 5

Pump Primer

List the four primary economic goals of most nations

CHAPTER 5

What Is the Economic Problem?

CHAPTER 5

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

CHAPTER 5

Biblical IntegrationChristians should use the whole Word of God as the standard by which to evaluate all economic issues(welfare, poverty, corrupt government, etc)

Scripture does give way to generate personal income. societies need to employ a variety of strategies to motivate its lazy members to become productive. (Prov. 10:4; 12:27; 22:29)

The Economic Problem of a Society

• how best to accomplish its economic goals

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National Economic Goals

1. A low level of unemployment• benefits society and individuals

2. A stable price level• less disruption in economies

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National Economic Goals

3. A healthy rate of economic growth• economic growth: an increase in the quantity

of goods and services a nation can produce

1. extensive growth: using more land, labor, and financial capital

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National Economic Goals

3. A healthy rate of economic growth• economic growth: an increase in the quantity

of goods and services a nation can produce

2. intensive growth: using existing factors of production with greater efficiency

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National Economic Goals

4. A fair distribution of income• continual problem• income distribution

• income equality: same returns for everyone• “safety net”: same limited benefits for

everyone

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National Economic Goals

4. A fair distribution of income• continual problem• income distribution

• market distribution: returns based on personal input

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Economic System

• imposes commands from some central authority

• allows the free market to work

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Three Economic Questions

1. The output question: What will the nation produce?

2. The input question: How will the nation produce its goods?

3. The distribution question: Who will receive what the nation produces?

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1. The Output Question

• What will the nation produce?• cannot produce everything that is wanted

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Types of Goods

• consumer goods: purchased for personal use

• capital goods: used to produce consumer goods

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1. The Output Question

• What will the nation produce?• cannot produce everything that is wanted• consumer goods/capital goods tradeoff

• combination production• spending vs. saving

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The Command Economy

• a powerful individual or a committee decides the proportion of consumer goods to capital goods and the specific items it will manufacture

• decisions = too important to be left to the whims of the market

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Critics of the Command Economy

1. If the market leads individuals to make wrong choices about spending and saving and if those choices produce undesirable results, would a central committee’s making similar wrong choices not equally cause similar negative consequences?

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Critics of the Command Economy

2. Is it morally justifiable to punish someone for saving or spending more of his own income than the government allows?

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Critics of the Command Economy

3. If a government encourages too much consumer spending, would it not risk having the nation’s factories and equipment falling into disrepair as spending on real capital declines?

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The Market Economy

• natural adjustment of capital and consumer spending

• based on economic laws designed by God

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2. The Input Question

• How will the nation produce its goods?• Should a business firm use a greater amount

of either human labor or capital goods in its production process?

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Types of Businesses

• labor intensive: mostly human labor• capital intensive: more automated

equipment

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Labor Intensive

• human labor is trainable and versatile• remain more flexible to meet changes in

demand• contributes to a lower unemployment rate

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Capital Intensive

• no large payrolls and pay smaller hidden costs

• not as significant a threat of union agitation or labor unrest

• assured of nearly constant rate of productivity

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2. The Input Question

• How will the nation produce its goods?• Should a business firm use a greater amount

of either human labor or capital goods in its production process?

• right combination

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The Command Economy

• proportion decided by central authority

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The Market Economy

• proportion decided by each business firm• considers production costs

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3. The Distribution Question

• Who will receive what the nation produces?• most debated question

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The Command Economy

• close the gap between rich and poor• egalitarian fairness: each person in a nation

has a right to a part of that nation’s wealth simply because he is part of the human race

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The Command Economy

• close the gap between rich and poor• economic leveling: equally distributing the

nation’s pool of wealth to all its citizens regardless of what any individual has contributed to the pool

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The Command Economy

• close the gap between rich and poor• “safety net”: protects the poor from the

devastating effects of economic hardships

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Winston Churchill

“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of

miseries.”

The Market Economy

• a nation should distribute its wealth solely to those who successfully satisfy the needs of others

• libertarian fairness: only economic right for citizens is to own and use property free of government interference

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Advantages to the Market Solutions

1. freedom

2. efficiency

3. stability

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The Biblical Perspective

• individual labor = primary means of income

• economic leveling = wrong• God’s people = responsible to help those

unable to care for themselves

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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

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

RICHEST TO POOREST COUNTRY

1. Country E Singapore

2. Country B Japan

3. Country A Argentina

4. Country D Russia

5. Country C Nigeria