Economic Problem and Systems

• The content discusses:
  • Economic change in the long term
  • Basic concepts for historical-economic analysis

The Economic Problem and Economic Systems

• The basic economic problem involves satisfying unlimited human needs with limited resources that have alternative uses
• Resources need to be allocated to fulfill needs, which leads to choices
• The economic problem is present in all human societies
• Societies must decide what, how much, how, and for whom to produce with regards to production and distribution
• Production processes of goods and services require a social and economic organization to coordinate individual actions
• Distribution processes need rules that allow for the survival and reproduction of society

Economic Systems

• Economic systems are ways to solve the economic problem by organizing production and distribution, with systems varying greatly
• Different economic systems arise from various coordination mechanisms that specify who makes economic decisions and on what basis
• Coordination is necessary to avert social chaos and productive inefficiency

Three Major Types of Economic Systems

• Consuetudinary or traditional systems
• Command or authority-based systems
• Market systems

Consuetudinary or Traditional Systems

• Traditional systems are based on inherited customs and repeat hereditary patterns
• Their goal is the survival of the group
• They involve small, egalitarian social groups, mainly family-based
• They have capacity for adaptation, but not for change

Authority (Command) Systems

• These systems impose authority by a minority who makes decisions that the rest execute
• Social and political inequality characterizes these systems, along with the rise of the State
• The system involves organizing a distributive process that transfers surplus production to the authority
• It innovates only when the authority decides

Market Systems

• They are based on free interaction of agents exchanging goods and services, with the market as the fundamental institution
• Private property is important for their function
• Prices coordinate individual decisions in the market
• The aim is maximum profit and the profit motive
• Capitalism is relatively a new system starting in the Modern Age and consolidating in the 19th century
• Different forms of capitalism exist in the following
  • Liberal capitalism: limited state intervention in markets
  • Coordinated capitalism: active state intervention and influence from large corporations
• A distinction is made between market societies governed by the market, and societies with a market that may not resolve the economic problem

Socioeconomic Systems

• They include a technological framework with organic and inorganic energy sources, and technological revolutions
• They include social organizations that coordinate through tradition, authorities such as the state and companies, and through the market
• They include a territorial scale with different geographic levels and international connections via trade, investment, and migration

Production Process, Factors of Production, and Productivity

• Producing involves transformation by combining productive factors to obtain goods and services
• Classic productive factors include land or natural resources (N), labor (L), and capital (K)
• The production function involves different possible combinations of inputs
• What is produced (output) is a function of combining the factors used (inputs)
• Productivity relates product (Y) to employed factors
• It is measured by the output/input quotient, aiming to produce more with less or to economize factors
• Factor productivity is measured, e.g., labor productivity, which gauges hourly production
• Total factor productivity (TFP) measures the relationship between the value of output and all resources used

Economic Growth and Economic Development

• Economic growth and economic development are imperfect synonyms
• Economic growth is the continuous change of aggregate production over time
• Economic development is the consistent increase in the well-being of a population

GDP (Gross Domestic Product)

• GDP serves as a macroeconomic variable used within national accounting to indicate economic growth
• The IMF defines GDP as the monetary value of final goods and services bought by the end-user and produced in a country during a specific period
• It is a flow that accounts for produced goods and services during a specific period
• The expenditure approach to GDP is GDPpm = C + G + I + (X-M)
• GDP evolution is measured by calculating the percentage change in GDP from one period to the next
• Nominal GDP refers to GDP at current prices, while real GDP is adjusted for inflation
• GDP can also be distinguished as being either GDP or Gross National Product (GNP)
• GDP per capita is calculated by dividing GDP by the population (N)
• International comparisons of GDP use purchasing power parity (PPP)
• PPP adjusts a country's GDP based on a standard basket of goods, usually referenced to prices in the U.S.
• Lower values indicate higher purchasing power; higher values indicate lower purchasing power
• Time series data in monetary terms can be reported as
  • Current: the value for each year without inflation adjustment
  • Constant: adjusted for inflation, referenced to a base year such as "pesetas of 1913"
  • International: standardized currencies that account for economic differences

Origin of GDP

• GDP measurement began in the 18th century with William Petty in Great Britain
• Simon Kuznets in the U.S. developed it further in the 1930s
• An official report on national income was presented to the U.S. Congress in 1934 covering 1929-1932

Correlations and Problems with GDP

• Correlations exist between GDP per capita and measures of well-being, such as life expectancy
• Some factors might be overlooked or insufficiently considered when solely relying on GDP
• GDP has issues as a welfare indicator as it does not account for the following
  • Self-production
  • The underground economy
  • A country's assets and externalities
  • Public expenditure
  • Price surges
  • Natural disasters
  • The nature of production

Historical GDP Examples

• The presentation provides data on the evolution of GDP in the U.S. and Germany during the 1930s, set against a base index of 100 in 1929

Data and Calculations

• Quantitative and graphical representation of GDP include
  • Index numbers, with a base of 100
  • Percentage representation
  • Cumulative annual growth rate (CAGR)

Factors Influencing Long-Term Economic Change

• Factors include the technological framework, with energy sources and technological revolutions
• Social organization, coordinating through tradition, authority, and the market
• Territorial scope encompassing geographical scales and international connections

Production Process

• Production is the transformation of inputs into goods and services, influenced by classical production factors
• Land(N), Labor(L), and Capital(K) along with the production function formula influence process

Productivity Measures

• Productivity quantifies the efficiency of production relative to input
• It is measured by the quotient of output over input
• Total Factor Productivity (TFP) relates the value of output to the cost of all resources used

Economic Concepts

• Economic Growth represents the continuous modification of aggregate production over time
• Economic Development indicates the long term increase in the prosperity of wellbeing in a population

Limitations of GDP

• GDP is a macroeconomic variable that is used as a general marker of health of a nation's economy
• However it has the following draw backs as indicator of well being
  • It cannot account for self-production, submerged economy, a countries assets and externalities
  • GDP is biased with public expenditure, increase of prices, natural disasters, and the nature of production

Economic Development

• Economic Development is an imperfect synonym of Economic Growth
• It is defined a continuous overall improvement of a populations citizens

Origin Of Economic Factors

• Economic factors can be traced to the 18th century from William Petty in Great Britain
• The 1930s saw Simon Kuznets take measurements to another level

Correlations with GDP

• There are strong correlations between wealth and average life expectancy of a population
• It is argued that this does not paint a complete picture due to ignored factors

Types and Factors of Economic Growth

• Extensive Growth occurs due to increase of factor productivity
• Intensive Growth occurs due to process efficiency increasing the means of production
• Technological change uses innovation to improve capital
• Organizational change improves the way factors are combined

Market Influences

• Offer improvements of means of production
• Demands influence patterns of transformation of energy consumption

Factors to Growth

• Demography
  • Population size/quality
• Human Capital
  • Sum/value of abilities of individual workforce
• Technology
  • Knowledge/application to economic activities
• Institutions
  • Standard of living for a society

Demographic Factors of Growth

• Malthusian theory indicates population is important as an offering of labor and a consuming group
• Malthus identifies a potential conflict of population outpacing the availability of resources, affecting mortality and adjusting factors of growth
• Malthus points out that food growth arithmetically is slower than the population which expands geometrically

Factors of demography

• The effects that controls and brakes can be put on a population for economic gain

Population and Demogrpahics

• Population affects market size/value due to distribution of labor
• Adam Smith argued distribution of a workforce determines economic progress

Modern Economic Growth

• The WEF (World Economic Forum) releases an annual Global Human Index of countries
• In 2017 they ranked Norway, Finland, Switzerland, and USA the highest
• In 2017 they ranked Ethiopia, Senegal, Mauritania, and Yemen the lowest

Influence of Technology

• Technology is defined as the application of scientific means/processes to improve production
• It can be said technology is a catalyst for the growth of economies and increased economic output

Technological Growth Phases (Schumpeter)

• Invention occurs
• Innovation is achieved once viable
• Then subsequent broad diffusion

Types of Technological Growth

• Product focused technologies to improve existing products
• Process Focused techniques to find better means of production

Technological Development

• New Macroinventions from radical technologies improve modern production in the long term

Role of Institutions

• Defined as the rules of conduct a social body places on its citizens

Economic Institutions

• Economic enforcers for government/companies, and markets
• They determine the rights of individuals with assigned merit
• Institutions help with the change in how a populace works, often in a necessary capacity to evolve the economy

Economic Structures

• Economic structures are the stable relationships between elements in an economic setting
• Structural change involves shifting relationships between these elements
• Analytical criteria include
  • production, sectional organization, cost/benefit analysis, and outreach to foreign groups

Economic Stability

• Economic movement, value, and stability leads to economic cycles
• Cycle phases include decline, point of inflection, recession, recovery and expansion

Modern Growth Factors

• Economic depression is a natural downturn effect of an economy

Global Economic Downturn

• Financial crisis and market speculation/hoarding is the source point of global recessions

Change of Modern Economies (Kuznets)

• GDP increase, population size, and GDP contributions lead to generalized economics
• It is driven by
• the makeup of goods, area of contribution, and relative value