Economic Goals and Measuring Economic Activity — Goals Simulation

Lesson Purpose:

As we move into macro-economics, the study of the operations of the economy as a whole, it is important to remember that scarcity extends beyond the decision-making of individuals in households and businesses. Government officials, citizens, and public workers also have limited resources to satisfy a burgeoning list of wants and needs, and the reality is that in public life, as in private life, choices have opportunity costs. Public choices, like private choices, are driven by goals. Through government, we establish economic goals and design policies to achieve them. Because we have multiple national economic goals and because individuals’ ranks and weightings of goals vary with time and circumstance, policy creation is an ongoing process of making trade-offs.

This lesson creates a framework for study of macro-economic topics by identifying national economic goals and then engaging students in a consensus-building exercise in which they must prioritize goals in a variety of policy contexts. In combination with lessons 7-12, it offers a model for organizing and tying together macroeconomic topics in the high school classroom.

Key Terms:

scarcity trade off opportunity cost macroeconomics marginal

Content Standards:

Standard 1: Students will understand that Productive resources are limited. Therefore, people cannot have all the goods and services they want; as a result, they must choose some things and give up others.

Benchmarks:

grade 8:

Like individuals, governments and societies experience scarcity . . .

Choices involve trading off the expected value of one opportunity against the expected value of its best alternative.

The choices people make have both present and future consequences.

The evaluation of choices and opportunity costs is subjective; such evaluations differ across individuals and societies.

Standard 2: Students will understand that Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something; few choices are all-or-nothing decisions.

Benchmarks:

grade 12:

To determine the optimal level of a public policy program, voters and government officials must compare the marginal benefits and marginal costs of providing a little more or a little less of the program’s services.

Standard 16: Students will understand that There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. . . .

Benchmarks:

grade 12:

Governments provide an alternative method to markets for supplying goods and services when it appears that the benefits to society of doing so outweigh the costs to society. Not all individuals will bear the same costs or share the same benefits of those policies.

Session Objectives:

Introduce and define the generally accepted list of national economic goals.

Discuss the compatibility/incompatibility of goals. Tie to scarcity, trade-off, marginal decision-making.

Differentiate between ‘market-driven’ and ‘non market-driven’ goals.

Participate in a consensus-building exercise to rank economic goals in order of importance.

Consider how command and traditional economies rank goals differently from market economies.

Discuss the relationship between goals and policy, and the implications of the lack of goal consensus for policy formation.

Repeat the consensus-building exercise in specific policy contexts.

Discuss the implications of changing goal priorities for policy formation and for consensus.

Key Content:

Review: “Governments” don’t make choices; people do.

National economic goals include: efficiency, equity, economic freedom, full employment, economic growth, security, and stability.

Economic goals are not always mutually compatible; the cost of addressing any particular goal or set of goals is having fewer resources to commit to the remaining goals.

Evaluation of the importance of relative importance of economic goals is subjective.

Perceptions of the relative importance of economic goals changes with time and circumstance.

Scarcity impacts our ability to translate national economic goals into policy.

Trade-offs in addressing national economic goals occur at the margin. Policy decisions are rarely all-or-nothing decisions.

Mythconceptions:

“Governments” make decisions.

Governments do not have economic goals.

All economic systems have the same goal priorities.

If politicians made better decisions, we could achieve all our economic goals.

When economic goals are achieved, everyone benefits.

The priority ranking of our nation’s economic goals is constant.

Frequently Asked Questions:

Who determines / sets economic goals, and how?

If economics teaches us that individuals make decisions, what do we mean when we say our “country” has economic goals?

Why is it so difficult to reach and maintain agreement on goal priorities?

Why are economic goals important? What role do they play in our economy?

What’s the difference between economic goals and other goals – social goals, for example?

Why can’t we achieve all of our economic goals?

What is the relationship between political and economic processes in determining the policies that will be adopted to address economic goals?

Does focusing on one goal mean giving up the others?

What cause individuals’ goal priorities to change? What causes change in a country’s goal priorities?

Why do countries rank goals differently?

Classroom Activity Options

“Prioritizing Economic Goals”

Discuss the following analogy with students:

Suppose that your family sets a goal of going to Disney World for spring break next year. You would adopt a series of “policies” to enable you to accomplish that goal. For example:

When making commitments to other activities throughout the year, family members would remember to keep their calendars clear for that week.

Choosing to set aside a portion of monthly income, or to forego other spending in order to save spending money for Disney World;

Assigning family members to monitor Internet travel sites for transportation and hotel reservation deals.

The process of setting goals and adopting policies for the national economy is analogous to the process your family used. Like your family, our nation sets goals and priorities and then works toward them.

The similarities don’t end there, however. Is it likely that Disney World was everyone’s first choice in your family? What about the “policies” you adopted about spending? Did everyone agree on who should pay for what? Not likely, is it? Reaching agreement on goals and policies for the nation is often at least as difficult as getting a family consensus about spring break!

The exercise we’re going to complete in class today should help us to better understand how we prioritize our economic goals and policies.

Distribute the “Goals of Economic Policy” handout. Identify the list of national economic goals and review the definitions with students. Discuss with the students the compatibility of the various goals, pointing out, for example, that emphasizing freedom may necessitate giving up some security. (Relate the necessity of these trade-offs to the ubiquitous condition of scarcity.) Ask students to think about their own individual priorities. Direct them to rank order the economic goals by placing the numbers 1 – 7 in the column labeled “Priority Rank (Individual).” #1 is the highest priority and #7 the lowest.

Remind students (and provide examples) that the ranking means that they would be willing to sacrifice some of any or all of lower-ranked goals in order to have more of those ranked higher. (Arriving at a complete 1-7 ranking is not necessary. Generally, students tend to identify 3 top priorities and a 4th – and sometimes 5th – of marginal importance. The other 2 or 3 goals are either just dismissed, actively opposed, or already achieved through a prior goal. It is less important that they distinguish between priority 1 and 2 than that they identify their top 3 priorities. )

(Optional) Ask students to imagine themselves 20 years from now. Do they think they will rank the goals. With older students, ask them to imagine themselves as 20 year-olds when completing the second ranking.

After students have had a few minutes to complete their rankings individually, divide the class into small groups of 4-6 students and direct them to come to a group consensus on their rankings. (The appropriate analogy here is that of a governmental body – for example, a city council trying to adopt policies regarding public transit. The individual members’ goal rankings will shape their evaluations of alternative policies.) Debrief. Note the differing priorities. (Commonly, there is a strong split between those students who rank equity or security first and those who rank economic freedom first. The trade-offs among these goals are a constant theme running through our country’s history.)

Ask students to generate historical examples in which we traded some of our freedom for additional security, or for additional equality. Provide students examples of policies currently being debated on a national level (defense spending, health care programs, for example) and have them identify the trade-offs in terms of economic goals.

(Individual or small groups) Direct students’ to write “Minimum Wage Policies” at the head of the first of the 3 policy columns on the second grid on their handout. Direct them to mark a +, -, or ? in the boxes to indicate whether they think minimum wage legislation promotes (+) or undermines (-) each goal. When all have completed the task, direct students to refer back to their original goal priority rankings to see whether minimum wage policies are compatible with the goals that they’ve identified as being most important.

Discuss who benefits and who bears the cost of various minimum wage policies. Discuss how individuals’ goal priorities affect their perceptions of the costs and benefits. Divide the class into 2 groups: 16 year olds entering the work force and employers of minimum wage workers. How do their differing perspectives affect their goal priorities and their perception of minimum wage policies? Discuss whether their analysis of the goals promoted by minimum wage policies prompts them to reconsider their goal priorities.

Repeat the exercise, in small groups, with 2 current policy issues on which students have shown interest or strong feelings. (Examples: immigration, health care reform, defense spending, drug, alcohol, cigarette policies, etc.) Debrief.

Why can’t we accomplish all of our economic goals?

How do personal values, and perceptions of costs and benefits affect the way people prioritize national economic goals?

What might a lack of consensus on economic goals impact the creation of economic policy?

Why is understanding of marginal analysis important in efforts to achieve national economic goals?

Interdisciplinary Activities:

Assign students to choose an event/era in U.S. history (Great Depression, Viet Nam War, Constitutional Convention) and to create a ranking of goals prior to, during, and after that time period. Assign students to research 2 or more countries (from World History studies or contemporary) and create an economic goal ranking for each nation. Compare/contrast and explain the countries’ rankings. Survey (email, phone, or mail) the economic goal rankings of one of the following groups:

Local government (city council, county commissioners, homeowners association, school board, etc.)

State senator(s)/representative(s) in your local area

Your state’s political party officials

Your state’s Congressional delegation

Analyze your findings. What are the implications of the rankings in terms of policy decisions these people will make that might affect your life?

Handouts and Supplemental Materials

Handouts:

“Goals of National Economic Policy” (pdf)

“National Economic Goals in Policy Contexts” (pdf)

What is economic activity? Definition and examples

Economic activity is the activity of making, providing, purchasing, or selling goods or services. Any action that involves producing, distributing, or consuming products or services is an economic activity.

Economic activities exist at all levels within a society. Additionally, any activities involving money or the exchange of products or services are economic activities. For instance, running a small business is a great example of economic activity and one you can learn more about at

Employees working in a factory and receiving wages, for example, are performing economic activities. Their employers are also economically active because they pay the workers and make and sell goods.

The term contrasts with non-economic activities. When somebody goes to a temple to pray or meditate, for example, they are performing a non-economic activity. So is helping a friend study if you receive no money for that help.

Economic activity – two definitions

There are many ways to define the term.

The University of Toronto’s Department of Economics has the following definition:

“Economic activity is the process by which the stock of resources or stock of capital produces a flow of output of goods and services that people utilize in partial satisfaction of their unlimited wants.”

“This process involves not only the production of goods and services but their distribution among the various members of the community.”

If Toronto University’s explanation is too complicated, perhaps you’d prefer Cambridge Dictionary’s simpler definition:

“The activity of producing, buying, or selling products or services.”

Economic activity – main aim

One of the main aims of economic activity is to produce goods and services to make them available to consumers.

All activities which we perform in exchange for money or things of value are economic activities.

Put simply; economic activities are those which we undertake to earn income, money, or wealth.

Unlimited wants vs. scarcity

With these activities, we secure the greatest satisfaction of unlimited wants with scarce and limited means.

‘Unlimited wants’ is an economic term. It refers to human’s insatiable appetite for things. Humans never get enough because there is always something else that we want or need.

However, even though we have unlimited wants, the resources we have available to get them is limited. In other words, the things we want are scarce.

Scarcity, which has plagued us ever since we first set foot on this Earth, has two halves:

Limited resources. Unlimited wants.

GDP

GDP is the sum of every economic activity in a country. GDP stands for gross domestic product.

It is the most important economic measure of the state of a country’s economy. With one simple figure, we can tell whether an economy has grown, shrunk, or remained the same since one year ago.

In other words, GDP tells us whether economic activity has increased, declined, or remained flat.

Economic activity – classifications

Economists say there are four basic types of economic activities:

How is Economic Inequality Defined?

The Equality Trust’s Focus on Economic Inequality

Economic inequalities are most obviously shown by people’s different positions within the economic distribution - income, pay, wealth. However, people’s economic positions are also related to other characteristics, such as whether or not they have a disability, their ethnic background, or whether they are a man or a woman. While The Equality Trust recognises the importance of these measures, the focus of our work is specifically the gap between the well-off and the less well-off in the overall economic distribution. This is reflected in the choice of terms and statistics in this section.

There are three main types of economic inequality:

1. Income Inequality

Income inequality is the extent to which income is distributed unevenly in a group of people.

Income

Income is not just the money received through pay, but all the money received from employment (wages, salaries, bonuses etc.), investments, such as interest on savings accounts and dividends from shares of stock, savings, state benefits, pensions (state, personal, company) and rent.

Measurement of income can be on an individual or household basis – the incomes of all the people sharing a particular household. Household income before tax that includes money received from the social security system is known as gross income. Household income including all taxes and benefits is known as net income[1].

2. Pay Inequality

A person’s pay is different to their income. Pay refers to payment from employment only. This can be on an hourly, monthly or annual basis, is typically paid weekly or monthly and may also include bonuses. Pay inequality therefore describes the difference between people’s pay and this may be within one company or across all pay received in the UK.

3. Wealth Inequality

Wealth refers to the total amount of assets of an individual or household. This may include financial assets, such as bonds and stocks, property and private pension rights. Wealth inequality therefore refers to the unequal distribution of assets in a group of people.

How is Economic Inequality Measured?

There are various ways of measuring economic inequality. The choice of measure does not change what inequality looks like dramatically[2]. However, changes in inequality over time within individual countries can look different if different measures are used[3][4].

Commonly used measures of economic inequality:

1. Gini Coefficient

The Gini coefficient measures inequality across the whole of society rather than simply comparing different income groups.

The UK's Gini is 0.35.

If all the income went to a single person (maximum inequality) and everyone else got nothing, the Gini coefficient would be equal to 1. If income was shared equally, and everyone got exactly the same, the Gini would equal 0. The lower the Gini value, the more equal a society.

Most OECD countries have a coefficient lower than 0.32 with the lowest being 0.24. The UK, a fairly unequal society, scores 0.35 and the US, an even more unequal society, 0.38. In contrast, Denmark, a much more equal society, scores 0.25[5].

The Gini coefficient can measure inequality before or after tax and before or after housing costs. The Gini will change depending on what is measured.

2. Ratio Measures

Ratio measures compare how much people at one level of the income distribution have compared to people at another. For instance, the 20:20 ratio compares how much richer the top 20% of people are, compared to the bottom 20%.

Common examples:

50/10 ratio – describes inequality between the middle and the bottom of the income distribution

90/10 – describes inequality between the top and the bottom

90/50 – describes inequality between the top and the middle

99/90 – describes inequality between the very top and the top

3. Palma Ratio

The Palma ratio is the ratio of the income share of the top 10% to that of the bottom 40%. In more equal societies this ratio will be one or below, meaning that the top 10% does not receive a larger share of national income than the bottom 40%. In very unequal societies, the ratio may be as large as 7.

The Palma ratio addresses the Gini index's over-sensitivity to changes in the middle of the distribution and insensitivity to changes at the top and bottom[6].

The UK Palma ratio is 1.40.

The Palma ratio is commonly used in international development discourse. The ratio for Brazil, for example, is 2.23[7].

What is Poverty and How is it Different to Inequality?

People in poverty are those who are considerably worse-off than the majority of the population. Their level of deprivation means they are unable to access goods and services that most people consider necessary to an acceptable standard of living[8].

It can be an absolute term, referring to a level of deprivation that does not change over time, or a relative term in which the definition fluctuates in line with changes in the general living standard.

The most commonly used definition of poverty in the UK is a relative measure: poverty is defined as having a household income (adjusted for family size) which is less than 60% of median income. This is one of the agreed international measures used throughout the European Union.

Inequality, by contrast, is always a relative term: it refers to the difference between levels of living standards, income etc. across the whole economic distribution. In practice, poverty and inequality often rise and fall together but this need not necessarily be the case. Inequality can be high in a society without high levels of poverty due to a large difference between the top and the middle of the income spectrum.

[1] This section mainly shows differences in household incomes. The section mainly uses gross household income. Where tax has been taken into account the graph will specifically state that it is looking at net income rather than gross. Gross is mainly used as this is the predominant focus in the economic inequality literature which is discussed elsewhere on the The Equality Trust guide to inequality.

[2] (JRF 2012)

[3] (National Equality Panel 2010)

[4] (The Equality Trust 2011)

[5] Income inequality is measured as household disposable income in a particular year. It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. The income of the household is attributed to each of its members, with an adjustment to reflect differences in needs for households of different sizes. Results refer to income in 2008 in the UK and US and 2007 in Denmark. (OECD Factbook 2011)

[6] (Atkinson 1970)

[7] Income refers to ‘final income’, including the effects of indirect subsidies and indirect taxes. Latin American data are for 2008 and 2009, UK data for 2010-11. (Cobham and Sumner 2013)

[8] http://www.lboro.ac.uk/research/crsp/mis/