Economics is concerned with humanity’s well being or welfare. It encompasses the social organization and the relationship involved in using scarce resources and available technology to satisfy seemingly unlimited human wants and in allocating those resources among diverse alternative wants.
The key elements of economic activity are (1) human wants (2) resources, and (3) technology.
Price theory (microeconomic theory) and the theory of the economy as a whole (macroeconomic theory) constitute the basic analytical tool kit of the discipline of economics.
Microeconomics is concerned primarily with the market activities of individual economic units such as consumers, resource owners, and business firms. It is concerned with the flow of goods and services from business firms to consumers, the composition of flow, and the process for establishing the relative prices of the component part of the flow.
Macroeconomics treats the economic system as a whole rather than treating the individual economic units of which it is composed. The value of the overall flow of goods (net national product) and the value of overall flow of resources (national income) are the focus of attention.
Through this paper we will illustrate the importance of three concepts which are considered to be very important in determining and achieving economic prosperity. The three concepts are:
1- Government size.
2- National income accounting.
3- Market System Economy.
It is a fact that no society throughout history has ever obtained a high level of economic affluence without a government. Where government did not exist, anarchy reined and little wealth was accumulated by productive economic activity. After governments took hold, the rule of law and the establishment of private property rights often contributed importantly to the economic development of civilizations. However, government is a necessary, though by no means sufficient condition for prosperity.
In a world without government, there is no rule of law, and no protection of property rights. Bullies and strong people can steal the assets of weaker persons with impunity. There is little incentive to save or invest because the threat of expropriation is real and constant. Moreover, without some collective action, there is no protection from bigger bullies, namely foreign nations. Collective action also facilitates the creation of roads that improve transportation and lower trading costs.
It is also a fact, however, that where governments have monopolized the allocation of resources and other economic decisions, societies have not been successful in attaining relatively high levels of economic affluence. Economic progress is limited when government is zero percent of the economy, but also when it is at or near 100 percent
The establishment and early growth of government is associated with rising levels of income and positive rates of economic growth. As governments grow, the law of diminishing returns begins operating. While the construction of roads initially assists output expansion, the construction of secondary roads and upgrading primary roads start to have less added positive impact per dollar spent. Moreover, the taxes and/or borrowing levied to finance government impose increasing burdens. Low tax rates become higher. New taxes, such as income taxes, are added to low consumption levies, with increasingly adverse effects on human economic behaviour. Tariffs are raised, thwarting trade. New government spending no longer enhances economic growth.
When government is small, political actions at income redistribution via tax policy or...