Economic literacy is the ability to understand choices and make decisions regarding limited resources. Those decisions affect what an individual produces or consumes, saves or invests. In a broader sense, the economic literacy of a nation’s citizenry affects its productive capacity and standard of living. Personal finances, national policies, and issues of globalization are all subject to the same economic principles. The knowledge and application of those principles foster more efficient use of personal, national, and global resources.
What Does It Mean to Be Economically Literate?
Economically literate individuals understand that they cannot have everything they want and that they have to make choices because resources are scarce. These decisions require an analysis and comparison of the costs and benefits of various alternatives. Each decision will incur an opportunity cost; that is, something of value will be given up. Not all decisions are between two different items; some decisions are intertemporal or between two different time periods as when money is placed in a bank account or used to purchase a bond.
Why Is Economic Literacy Important?
Although few people choose to become economists, most people have to make economic decisions every day. Rapid technological and communications advances have provided ordinary people with more information with which to make decisions and more varied goods and services about which to make them. At the same time, globalization has made sound economic decision making crucial if we are to compete effectively in the marketplace. Furthermore, articulate, well-informed citizens are critical to the functioning of a democratic market economy. In terms of social policy, economics can help assess the costs of problems such as crime, teen pregnancy, pollution, and terrorism as well as assess the costs and benefits of policies designed to deal with them.
What Are the Dangers of Economic Illiteracy?
Without an understanding of economics, individuals are more likely to fall prey to fraud and credit abuse and exercise poor judgment on such important decisions as home buying, college savings, car financing, and retirement planning. Misunderstanding of the nature of markets may lead to such ill-conceived responses to price increases as price controls that have the opposite of the intended effect, creating shortages and exacerbating price pressures. Failure to understand the nature of competition and the need to build a strong human and physical capital base may lead to measures to protect a few jobs while denying the broad-based benefits of trade.
When Does an Individual Need to Become Economically Literate?
Certainly the earlier these economic literacy skills can be learned, the better. Good habits are best formed before bad behaviors can take root. In a world where credit cards are easily obtained and credit card debt is rampant, it is never too early to learn. In addition, the economic way of thinking is a multipurpose tool with not only a wealth of practical, real-world applications but benefits as well, even for the very young child, in terms of augmenting critical thinking skills. Furthermore, the earlier an individual learns such principles as the time value of money, the sooner he or she can take advantage of compounding his or her savings and building assets for the future.
How Do Science, Technology, and Economic Literacy Interact?
Science, technology, and economics are complements. While science and innovation determine what is technically possible, economics determines what is feasible and efficient—or what the best use of the resources consumed by competing technologies will be. This efficient use of technology drives productivity, and productivity helps drive growth and improve living standards.
How Else Does Economic Literacy Improve Living Standards?
A well-functioning economy demands an educated workforce capable of making sound decisions. To absorb the inevitable shocks, an economy also requires smoothly functioning markets, both for goods and for the financial instruments that facilitate their production. Pools of saving and sound investment decisions are necessary to direct financial resources to support the most productive innovations. On an individual basis, the informed person is better able to plan, budget, and weather his or her own financial uncertainties. The individual is also more likely to save and invest and less liable to fall victim to financial fraud and abuse.
Today’s complex issues require the use of sophisticated tools. Economic literacy has a toolset that empowers users to take back control over their lives.
- National Council on Economic Education. 1997. Voluntary National Content Standards in Economics. New York: National Council on Economic Education.
- National Council on Economic Education. 2006. What Economics Is About: Understanding the Basics of Our Economic System. New York: National Council on Economic Education.
- Saunders, Phillip and June Gilliard, eds. 1995. A Framework for Teaching Basic Economic Concepts: With Scope and Sequence Guidelines, K-12. New York: National Council on Economic Education.
- Watts, Michael. 2006. What Works: A Review of Research on Outcomes and Effective Program Delivery in Precollege Economic Education. New York: National Council on Economic Education.
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