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Pump Primer


Title: Chapter 4: The Government as an Economic Entity Author: Cindy Last modified by: Cindy Created Date: 6/12/2009 4:21:49 AM Document presentation format – PowerPoint PPT presentation

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Title: Pump Primer

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

  • Identify the economic problem
  • List the four primary economic goals of most
  • 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

  • Describe mercantilism
  • Describe Adam Smiths 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

  • 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 828)

Three Economic Questions
  • The Output Question What will the nation
  • 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 persons 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)
  • Federal Government
  • The federal governments 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
    trillionabout 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 trillionthe
    government had a deficit.

(Bade 44)
Resource Market
  • Resource is anything that can be used to produce
    something else.
  • List of the economys resources usually begin
    with land, labor (machinery, buildings, and other
    man-made productive assts), and human capital
    (the educational achievements and skills of

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
  • Land
  • Labor
  • Capital
  • Entrepreneurship

(Bade 36)
  • 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)
  • work time and work effort that people devote to
    producing goods and services.
  • The quality of labor depends on how skilled
    people arewhat economists call human capital
    (the knowledge and skill that people obtain from
    education, on-the-job training, and work

(Bade 37)
  • Tools, instruments, machines, buildings, and
    other items that have been produced in the past
    and that businesses now use to produce goods and
  • Capital includes hammers, office buildings, and

(Bade 38)
  • Human resource that organizes labor, land, and
  • 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)
  • 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)
  • 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)
(No Transcript)
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 counter-

(Bade 43)
The Circular Flow of resources, Goods, services
and Money Payments
(4) Money Payments (sales dollars)
(3) Goods Services
(5) Taxes
(7) Taxes
(6) Goods Services
(8) Goods Services
(2) Productive Resources
(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,

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.
  • David buys a CD at the local store for 9.99.
  • Emily earns 6.50 per hour entering data at the
    music conservatory. ____
  • Marla pays her federal income tax. ____
  • Jagdish receives 15,000 in profits from his
    half-ownership of a coffee shop. ____
  • Keisha makes decorative pillows that she sells
    for 30.00. ____
  • Mammoth Toys Inc. hires 100 new employees. ____
  • The National Park Service opens two new
    campgrounds in Yellowstone National Park. ____.

Part BWrite T if the statement is true and F if
the statement is false.
  1. Money flows are clockwise. ____
  2. Goods and services flows are clockwise. ____
  3. The resource market determines the price per acre
    of farmland. ____
  4. The product market determines the price of
    computer. ____
  5. Firms sell resources in the resource markets.____
  6. Government buys resources and households sell
    resources. ____
  7. Government buys products, and firms sell
  8. The product market determines the salary of the
    C.E.O. of a firm. ____
  9. The resources market determines the price of
    soda. ____
  10. The resources market determines the price of
    soda-bottling equipment. ____

State and Local Government Expenditures and
  • 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 revenueto run a government budget
  • 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
Education is 30.2 of the budget. Health
Human Resource 28.2 Transportation 8.9
(Source CA 2009-2010 Purposed Budget )
State Revenue
(Source State of CA Estimated 2009-2010 Revenue)
The People
  • U.S. Population 311,937,013 (Jan. 22, 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

(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
  • 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

(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)
(No Transcript)
Energy Source in the World Economy
The location of oil, natural gas, and coal
determines the sources of the worlds energy.
Figure 2.9(a) shows the distribution of oil.
(Bade 51)
(No Transcript)
Energy Source in the World Economy
The location of oil, natural gas, and coal
determines the sources of the worlds energy.
Figure 2.9(b) shows the distribution of natural
(Bade 51)
Energy Source in the World Economy
The location of oil, natural gas, and coal
determines the sources of the worlds 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 nations 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
  • Intensive growth is an increase of goods and
    services produced when business firms use
    existing factors of production with greater
  • 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 persons income?

(Carter 87-88)
How will the Nations 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

(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 nations
    wealth simply because he is part of the human
  • Economic leveling equally distributing the
    nations income regardless of each persons
    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. 316)
  • Those who search Scripture to justify their
    libertarian or egalitarian economic philosophies
    run the risk of being side-tracked and missing
    the true lessons that God has in store.

(Carter 97)
Christian Viewpoint
  • Scripture does present some clear economic
    principles regarding income.
  • Through ones labor (Gen. 317-19 2 Thess. 310)
  • To care for family needs (I Tim. 58)
  • Caring for the poor (Lev. 2322)

(Carter 97)
Early Economic System
  • The 18th Century brought the rise of Adam Smith
    and the decline of the mercantilists and the
    physiocrats (fizzee ? 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.

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

(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.
  • 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
  • Because of his philosophy of limited government
    and personal responsibility, he became known as
    the father of laissez-faire or let alone

(Laissez-Faire Economy )
(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
Capitalistic System
Radical Capitalism
Classic Liberal
Worker Management Socialism
Centralized Socialism
(Carter 111-114)
Modern Economic System
Socialistic System
Capitalistic System
Less Personal Ownership Less Personal Decision
More Personal Ownership More Personal Decision
(Carter 111-114)
  • 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
    decision-making power to perform its
  • 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)
  • 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)
  • An economic system in which a central authority,
    committee, or the people in common generally own
    the factors of production and make economic
  • European Social Democracy
  • A transitional economic system between capitalism
    and socialism.
  • Characterized by states taking possession of
    those industries that are the cornerstones of the
  • 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 firms

(Carter 114)
  • 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 nations economy
    like one big company with the nations 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 nations 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
    crowdkick back, relax, keep your environment
    clean and dont worry so much about where your
    next meal is coming fromare 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
  • 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

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 countrys 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

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.
  • Laissez-faire economy." WordNet 3.0. Princeton
    University. 12 Jun. 2009. ltDictionary.com
    re economygt.
  • Overview of the Governors Budget Legislative
    Analysts Office. 8 Jan 2009. Web 22 Jan 2011. lt
  • Physiocrats." Dictionary.com Unabridged (v 1.1).
    Random House, Inc. 12 Jun. 2009. ltDictionary.com
  • U.S. World Population Clocks U.S. Census
    Bureau 22 Jan 2011 Web. 22 Jan 2011. lt
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