Article: Key Economic Questions

Copyright 2009 Money Instructor www.moneyinstructor.com 

In this lesson from moneyinstructor.com, we have a discussion of some of the basic questions asked in the field of economics. As you study this material, ask yourself, "Where do these questions arise in the pursuit of ministry?” How does our faith in God as the ultimate owner of everything affect our views of economics and how we ought to behave? (When I use that word "ought” I am implying that there is a standard of behavior that a Christian needs to follow!) Whenever I ask myself these questions in ministry, I always recall a man from a church where I had preached a sermon addressing economic issues. He was furious that I thought God had anything to say about how he gained his wealth and made a categorical statement to me, "You people who are pastors are parasites on the economic growth of society.” I could only shake my head and walk away when I heard that line! 

Goods and Services: 

The Key Economic Questions 

In economics there 3 questions that all societies must answer: 

1. What goods and services should be produced? 

2. How should goods and services be produced? 

3. Who gets to consume the goods and services? 

Each society answers these questions in a different way based upon the resources available. 

Resources are Land, Labor, and Capital 

Land- this refers to all natural resources used to produce goods and services. This includes crops that are grown on a land, minerals that are mined from land and rent that is paid to an owner of land for its use. 

Goods and services are the things that we buy like mp3 players or hair cuts. Copyright 2009 Money Instructor www.moneyinstructor.com 

A good is a physical thing you can hold, a service is some thing that gets used up right after it is purchased. 

Labor- this is the effort that an individual person puts into making a good or service. Then for this effort the person is paid a wage. Labor includes factory workers, medical personal, and teachers. They all provide their labor for a wage. 

Capital- this is anything that is used to produce other goods and services. If you make cars, you need machines to make the metal that is used in the cars. It is also the truck that drives the cars to the dealer who sells them, and it is the building that the cars are made in. All of these are the resource known as capital. 

To begin to answer the question of what is to be produced a society must identify the wants and needs of its citizens. Do they want a strong defense? Do they want a good health care system? Is education important? Additionally, what  consumer goods are needed in the society? Since all resources are limited they need to know how are the available resources going to be allocated? 

Next, the question of how the resources are going to be allocated needs to be answered by the society. The questions of how can refer to the production of energy. Do we use solar energy, oil, coal, water power, or nuclear energy for production? Should we use a lot of labor for production or can should we use capital resources? Do we create large scale corporate farms or should we encourage smaller family farms for the production of food? 

This question is answered when the resources of a country are identified. Not all countries have all factors of production that are usable. Some countries have land and labor available but little or no capital to use in the production process. 

As a result their output will be less than countries that have a good supply of all the factors of production. 

Finally, the question of who gets the goods and services that are produced needs to be answered. Fifty years ago, an average department store carried about  3000 items for sale. By the end of the last decade the top producers of goods and services were bringing to market about 90 new products every week. In 2004 the United States produced 345.6 million metric tons of grain, according to the federal government. Additionally, farmers in the United States maintain about 200 million head of livestock. Given these numbers on farming output, it has to be said that quantities are not unlimited. 

How do we answer the question of who gets what, or the distribution of goods and services is answered by how a society divides up its income or factor payments. 

Factor payments are the income that is received for supplying the factors of production. If you are a land owner you can get a rent for your land, or grow crops on it, each will give you an income from your resource. Workers will receive wages for their labor, and if you lend money to a business to purchase capital then you receive interest on your loan. 

The question that each society must answer is how much is each factor of production worth? Is the labor of a doctor more valuable than that of a janitor? How much is land worth? How much interest do we charge on a loan? These questions can only be answered when a society decides what kind of economic system they will have. The society must look at its goals and decide what is important. 

The goals of every economy are the same. They are: 

1. Economic Efficiency 

2. Economic Growth 

3. Economic Security and Stability 

4. Economic Equity 

5. Economic Freedom 

According to Amos Web economic glossary, economic efficiency is "obtaining the most consumer satisfaction from available resources. This is what most economists mean when the term efficiency arises. Economic efficiency means our economy is doing the best job possible of satisfying unlimited wants and needs with limited resources--that is, of addressing the problem of scarcity”. 

Economic growth: "The long-run expansion of the economy's ability to produce output. Economic growth is made possible by increasing the quantity or quality of the economy's resources (labor, capital, land, and entrepreneurship)” (Amos Web). 

Security and stability: Limiting fluctuations in prices, employment, and production. One primary focus of this stability goal is to keep inflation in check. High or unpredictable inflation rates can cause uncertainty and irregularly redistribute income and wealth. This redistribution can cause problems. 

If I go to the gas station and one day the price of gas is 3.00/gal and the next day it is 2.00/gal and this keeps up for several days I will wait to purchase gas when the price is down. What if it takes three days to come back down? Will I wait, or will I find an alternative until the price drops? The uncertainty causes problems in the market and people want stability. 

Equity: This has two, not totally unrelated, uses in economics. The first is the use as it relates to the "fairness" of our income or wealth distributions. The second use of the term equity means ownership, especially the ownership of a business or corporation. 

To achieve equity in the United States we have created a variety of social welfare programs. There are programs that help people when they are injured on the job and can no longer work, programs to help the elderly with living and medical expenses, and aid to families that have dependent children and the family lives in poverty. These programs are designed to provide some equity in our economy. 

However, the money to pay for these programs must come from somewhere. It comes in the form of tax payments from other workers in our society. People in the United States pay a variety of taxes to the federal government and that money will get redistributed to others in the form of social welfare programs. The level of equity is minimal, but it does exist.

Economic freedom exists when individuals have the right to engage in voluntary exchanges of goods and services, or what we make from the factors of production. Economic freedom is a foundation for market economies and pure capitalism. 

Our economy in the United States is market based. We are a mixed economy. We have some aspects of all the types of economies. We have some traditional, market and central planning in our economy. 

A Traditional economy is one based on custom, "and is often the passing down of elements of a culture from generation to generation. Feudal European monarchies, for example, operated largely on tradition. The caste system in India still operates this way. In society today, women and members of minority groups continue to experience low-paying jobs because traditions restricted their access to better positions. Tradition that serves efficiency is often reflected in laws. The convention of driving on the right hand side of the road in the United States is an example” (Economicae 2005). 

Market economies are systems that rely on market interaction of supplies and demands to resolve the economic problem; the price system is used to coordinate the diverse plans of consumers and producers (Economicae 2005). A market system is the easiest to run because it takes no government interaction to operate. This is what Adam Smith called the "invisible hand”. The self-interest of the buyers and the motive of profit of the seller regulate prices. 

"When central planning (or centralized decision-making) is the dominant allocative mechanism in a country, major economic decisions are made by government bureaucrats employed at some central authority, as in the Soviet Union from 1927 until it dissolved in 1989. Even the most capitalistic of nations may temporarily rely heavily on central planning during major wars, as happened in the United States, for example, during World War II” (Economicae 2005). 

Central planning has proved very inefficient in allocating the goods and services of an economy. In contrast to markets, central planning uses people to forecast the wants and needs of each citizen of the society. This method of allocation of allocation of goods and services has fallen out of favor with most countries because of its level of inefficiency, even China is moving to a more market based system after years of centrally planning their economy. 

Finally, all economies are mixed. There is a sliding scale with varying degrees of the mix of planning, markets, and tradition. The levels of mixed economies can be characterized by the amount of government intervention. In the United States we are mostly a market economy. There is very little of government intervention in our choices. In contrast, China is a mixed economy that leans toward central planning. There is some choice in their society, but not as much as the United States.