Warmup: On a piece of scratch paper, write 2 numbers. The first number is the annual salary at which you believe you can live comfortably (how you want to live) The second number is the amount of money you believe you need to have saved for retirement.

Wealth

Goals of the Economy What do we want? Why do some economic systems perform better than others?

Scarcity Unlimited wants, limited resources Nations face this just as individuals do! Important to differentiate between scarcity – something there is not much of And Economic Scarcity – there is not as much as we deisre What is scarce? Factors of production – resources, time, money

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

Broad Goals of an Economic System Economic Efficiency (max value, min waste) Economic Equity (fairness) Anti-discrimination laws Lemon laws Economic Freedom Fraser Economic Freedom of the World Index Heritage Inst & WSJ Freedom Index Taxation, property rights, business & trade regulations 2. Equity: Gini Index (higher #, less equality) – Income equality – Equality in outcome v equality in rights Japan more ~25, Germany 30; Chine 40’ US 41; Russia 48 3. EFW: 141 countries, 95% world pop, 42 govt policies; Econ Freedoms are a prerequisite for econ growth & devlpmt Size of government and taxation Private property and the rule of law Soundness of money Trade regulation and tariffs Regulation of business, labour and capital markets (Economic Freedom Increases prosperity for all,Reduces poverty ,Increases other freedoms,Improves quality of life)

Economic Freedom Index The Top 10 Source: The Fraser Institute.

Income per person of the Top 10 on the Economic Freedom Index Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

Economic Freedom Index The Bottom Ten Source: The Fraser Institute.

Income per person of the Bottom 10 on the Economic Freedom Index Missing Zimbabwe – no data? Sources: The Fraser Institute; The World Bank, World Development Indicators, 2008.

Broad Goals of an Economic System Economic Efficiency (max value, min waste) Economic Equity (fairness) Economic Freedom Full Employment 95% -- why? Natural rate of unemployment – 4-6% Economic Growth (GDP, health, literacy, . . .) Gross Domestic Product: Market price of all final goods and services produced in an economy. 4. Empl: utilization of labor & resources nat rate of unempl: incl frictional (free to change jobs) & structural high unempl – wasted resources 85% physical capacity util. –maint old equip. 5. Growth: GDP – real GDP, GDP/capita~stnd of living invest in capital resources & tech

Broad Goals of an Economic System Economic Efficiency (max value, min waste) Economic Equity (fairness) Economic Freedom Full Employment Economic Growth (GDP, health, literacy, . . .) Security (defense, safety net) Medicare Social security Price Stability Keeping prices from rising too quickly Goals are not necessarily mutually compatible! 6. nat’l defense & safety net (soc sec, medicare. . . .) 7. stable P level less risk to invest; infl (hurts those on fixed inc, lenders at set rate – infl>int!); defl

What is the most important economic goal, in your opinion? Why? Journal What is the most important economic goal, in your opinion? Why?

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 Collectivism: social order that calls for the ownership or control of means of production by state or groups rather than individuals Communism (Marxism-Leninism): A system of government or social theory . . . the state (collectively) plans and controls the economy.

Benefits of a Market Economy: more merit based Market information through price: Price signals buying and selling decisions resources directed to consumer’s perceived highest valued use Producer incentive to lower cost Important attributes: Private property Free enterprise Competition Price system Limited government Incentives of Ownership –take care of proerty, invest in property, enc efficient allocation of rsources, enc econ growth Enc entrepreneruship – owner recieves B/C of risk Resources used to prod what consumers desire at the lowest cost (competition) Govt to enforce PR & contracts, ltd production.

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 Those who earn more can’t keep it, therefore work less Those receiving income don’t have to work, therefore work less Alternative grading scale: