Management of Economies

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Economic Measurements

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Striving for A Mix of Goals

The goals of efficiency, equity, stability, and growth seem reasonable enough. However, their realization may involve certain sacrifices.

(From “Contemporary Microeconomics”by Milton Spencer)

Each society’s economic system reflects the country’s history, traditions, aspirations, and politics. What works for one culture might not work as well for another, and vice versa.

In measuring the success of different economic systems, the fairest approach would be to apply the standards that are valued by the people of that culture. Such goals as economic stability, job security, and equality of income and opportunity are given higher priority in some cultures than others.

One of the measures traditionally used for keeping economic score is gross national product (GNP) –the dollar value of all the final goods and services produced by an economy during a specified period (usually a year). GNP includes profits from foreign-owned businesses within a nation’s borders, and it includes receipts from overseas operations of U.S.-based companies.

The latest method used for tracking an economy is gross domestic product (GDP), which also measures the total output of goods and services. However, unlike GNP, the new GDP includes profits from foreign-owned businesses within anation’s borders, and it excludes receipts from overseas operations of U.S.-based companies. When GNP (or GDP) is compared over a number of years, a pattern appears. A rise in GNP (or GDP) is a sign of economic growth, indicating that the country has achieved at least one goal – a higher level of production, which can be distributed to the people.

GNP and GDP are also used to compare two or more economies. These measures can be adjusted for inflation and currency rates, but these figures may be misleading because of different population sizes. So economists often calculate per capita figures – a nation’s total GNP (or GDP) divided by its population.

(From “Contemporary Microeconomics”by Milton Spencer)

Scarcity: A Fact of Life

Every society faces a fundamental economic challenge. How can limited resources best be used to satisfy unlimited wants? This is the problem of scarcity.

For most people, scarcity is a fact of life. Most of the things they want and need are economic goods, in that they have a price. In this sense, they differ from free goods, for which the market price is zero. But even “free goods” may be scarce in some circumstances. Hawaiian sunshine and surf are free to residents of Hawaii, but not to tourists who must expend time, effort, and money to get there. The fish in a mountain lake may be free goods, but in a city they are economic goods. These considerations suggest an important law:

Law of Scarcity Economic resources are scarce. There are never enough at any given time to produce all the things that people want. Scarce resources can be increased, if at all, only through effort or sacrifice.

Scarcity of resources is what forces people in every economic activity to make choices. A decision to produce one thing frequently implies a decision to produce less of certain other things. All societies face the basic problem of deciding what they are willing to sacrifice to get the things they want. This is the central problem of economics.

Economics is fundamentally concerned with choices about the use of resources. Problems of choice arise when there are alternative ways of achieving a given objective. Economics develops criteria that define the conditions for making the best use of resources. These criteria can be used as guidelines for formulating and evaluating public policy.

(From “Contemporary Microeconomics”by Milton Spencer)

The word economy originally referred to household management. It comes from the Greek words oikos, meaning “household,” and nomos, meaning “rule” or “governance.” An important part of this definition is that an economy must be managed. For example, even in a household, people cannot keep buying new things if they do not have money coming in. The same is true of companies and societies.

People have to manage economies because the supply of resources is limited. The term resource applies to both natural resources (such as oil and wood) and artificial resources, which are created by people. If people allow a resource to be used up, there can be harmful effects on the economy and the society.

One important example of a limited resource is petroleum, or oil. Since the 1970s people have been increasingly aware that there is a limited supply of oil in the world. Oil is needed to power cars, heat homes, and run many different types of machines. As a result, the value of oil—its price—rises when its supply is not managed carefully. Managing the production and pricing of oil was vital to the economy of the entire world throughout much of the 20th century and remained so into the 21st. Many economists believe countries need to develop other energy sources because of the limited supply of oil.