I will be teaching first year economics this fall for the first time in quite a number of years and I want to provide a more gripping visual presentation of what an economy is. I have the standard set of graphs illustrating the circular flow and the production possibilities frontier in order to provide the basic concepts of the economy as a system, scarcity and opportunity cost but I want something simpler to start with on the first day of class. I want a more abstract representation of what an economy is and what changes over time can mean. Here is what I have been experimenting with as I put together the slides for my first lecture.
I think it might be useful to set up this diagram on the very first day of class to provide a very visual depiction of what the economy is. This circle of potential output encompasses all of the possible activity that an economy is capable of. The size of the areas within the circle is a function of the degree of efficiency, the types of institutions, the size of the informal economy and how accurately we can quantify and measure market activity.
Growth in economic activity can first be thought of as becoming more efficient – that is, better using the resources you have so that the circle of measured actual output expands outwards and eventually coincides with the circle of potential output. Once efficiency has been achieved, then increases in capital, labor, natural resources and technological or institutional change expand the size of the circle over time (See Figure 2). Of course, the process can also work in reverse if there is a reduction in capital, labor, resources, a decline in institutional quality or technological regress.
I suppose a sequence of increasing and decreasing circles (bubbles?) can be used to depict the business cycle, while the circular nature of the economy natural leads into distributional questions of how the “pie” is divided. If the economy converges to a single point, I suppose we could possibly also start discussing when does an economy exist. Is an economy simply a “big bang” in output space? I digress. Anyway, this is a work in progress.