Economic Notes - Weebly

Economic Notes - Weebly

ECONOMIC NOTES What is Economics? The study of how people seek to satisfy their needs and wants by making choices Scarcity and The Factors of Production What is a need?

Something that is necessary for survival What is a want? An item that we desire but is not essential to survival Scarcity and The Factors of Production What is scarcity? Scarcity is the idea that quantities of resources are limited to meet the unlimited

wants of humans. Scarcity can be temporary or long term Scarcity is brought about by wars, famines, floods, fires, etc. Scarcity and The Factors of Production What is a shortage? A situation in which a good or service is unavailable

Scarcity and The Factors of Production What are the four factors of Production? Land the natural resources that are used to make goods and services Labor the effort that people devote to a task for which they are paid Capital any human made resource that is used to create other goods and services There is human and physical capital

Entrepreneurs ambitious leaders who combine the land, labor, and capital to create and market new goods and services Trade Offs and Opportunity Costs What is a trade-off? Trade offs are alternatives that we sacrifice when we make a decision.

What is an Opportunity cost? The most desirable alternative given up as the result of a decision is an opportunity cost. Example: If you buy a Big Mac Combo, you cannot go buy a Chicken McNugget Combo The Free Market What is a market?

A market is an arrangement that allows people to buy and sell items Why are markets important? No one is self-sufficient; as a result, people must exchange goods and services In our society, people specialize. As a result, everyone does their own thing in hopes of being more efficient with the resources available Free Market Economy

Free market economies are based on voluntary exchanges of goods and services Factors of production are owned by individuals and businesses Individuals answer the 3 basic economic questions Free Market Economy Who are the players in a free market

economy? Households a person or group of people living in the same residence Firms an organization that uses resources to produce a product which it then sells (firms transform resource/factors of production into products or good/service) Circular Flow The flow of payments in an economy is a circular flow. Individuals--people living in households--work for businesses, rent their property (or their capital) to businesses, and manage and own the businesses. All these activities generate incomes--flows of payments from businesses to households. But households then

spend their incomes--on consumption goods, in taxes paid to governments (that then spend the money on goods and services), and on assets like stock certificates and bank CDs that flow through the financial sector and are then used to buy investment and other goods. All these are expenditures The two flows--of incomes and of expenditures--are equal: all expenditures on products are ultimately someone's income, and every piece of total income is also expended in some way Circular Flow Free Market Economy

Self-Regulating nature of the Marketplace Self-Interest is key Adam Smith The Wealth of Nations because we all are looking out for our best interests, we are the motivating force of the free market Competition the regulating force to sell as much as a company can, they must have the best price or the best item to sell Free Market Economy

The Invisible Hand a term coined by Adam Smith term economists use to describe the self-regulating nature of the marketplace The self-interest of people combined with the competition from businesses causes the market to work without any outside help Advantages of a Free Market Economic Efficiency producers make

only what consumers want, when they want, and at prices willing to be paid Economic Freedom including freedom to work where you want, firms to produce what they want and consumers to buy what they want Advantages of a Free Market Economic Growth innovations and growth encouraged, entrepreneurs are trying to find new ways to do things

Additional Goals consumer sovereignty the power of consumers to decide what gets produced Wide variety of goods and services offered Free Market NO PURE MARKET EXISTS ON ANY MEANINGFUL SCALE Much of what makes a free market so attractive can also be a weakness Demand

Desire to want something and the ability to pay for it Law of Demand When the price of goods goes down, then demand goes up and if the price goes up, then demand goes down Graphing Demand Demand Schedule data table of demand and price

Demand Curve graph representation of demand schedule Demand Curve Shifts If all things are constant in the market, it is called ceteris paribus (Latin for all constant) What causes shift in demand? Income/Budget Consumer Expectations Consumer Tastes

Advertising Price of Related Goods Demand Elasticity Measurement of consumer reaction to price changes If continue to buy if price increases = inelastic demand If limited or stopped buying if price

increases = elastic demand Demand Elasticity Factors of Elasticity Available of Substitute goods Importance of goods Necessities v. Luxuries Change over Time Elasticity and Revenue

Revenue firms total $$ made from selling goods and services Elastic demand as price decreases, revenue increases and as price increases, then revenue decreases Inelastic demand as price decreases, revenue decreases and as price increases, then revenue increases Supply Amount of goods available

Law of Supply When price is high, quantity supplies is high, and when price is low, quantity is low Quantity supplied the amount a supplier is willing and able to supply at a certain price Graphing Supply

Supply Schedule a chart that lists how much of a good a supplier will offer at different prices Supply Curve a graph of the quantity supplied of a good at different prices Supply Curve Shifts Input Costs any change in the cost of an input used to produce a good; such as raw materials, machinery, or labor will

affect supply How does input cost affect supply? A rise in the cost of an input will cause a fall in supply at all price levels because the good has become more expensive to produce Government Influence How does each of the following affect supply? Subsides a government payment that supports a business or market can either protect or harm supply

Taxes excise tax a tax on the production or sale of a good or service sin tax taxes that inhibit suppliers and make it more difficult to afford Alcohol, Tobacco, Gas Government Influence Regulation Government intervention in a market that affects the production of a good; hurts supply typically because it costs more to supply, because the government is trying to protect the public Supply Elasticity

Measurement of the way suppliers respond to change in price Elastic Supply the price is determined by the amount of supply Inelastic Supply increase or decrease in price has NO effect on supply Factors of Supply Elasticity

Time How does it affect supply? In the short term it is inelastic, but in the long term it becomes more elastic Supply and Demand Equilibrium Point the point at which Supply and Demand (quantity supplied and quantity demanded) are equal, a point of balance is reached

Point of balance = Equilibrium Price Disequilibrium when there is no point at which the amount supplied = the amount demanded; can have either a excess demand or excess supply Supply Production Labor and their Output How many workers needed to produce? Basic question business owners must

answer everywhere Marginal Product of Labor The change in output from hiring one additional unit of labor Supply Production Law of Increasing Marginal Returns

A level of production in which the marginal product of labor increases as the number of workers increases Law of Diminishing Marginal Returns A level of production in which the marginal product of labor decreases as the number of workers increases Production Costs The factors that contribute to the total

cost of creating a good or providing a service Production Costs Two major costs Fixed Costs a cost that does not change, no matter how much of a good is produced Ex. Rent, Machinery repairs, Property taxes, salaries

Variable Costs a cost that rises or falls depending on how much is produced Ex. Cost of raw materials, heating, electricity Production Costs Total Costs Fixed Costs + Variable Costs

The product will cost more or they will restrict supply because of cost Marginal Costs the cost of producing one more unit of a good suppliers will produce Suppliers will produce the most they can and still be profitable Production Costs Operational costs the cost of operating

a facility, such as a store or factory Setting Output Firms determine output to maximize profit Marginal revenue is additional income from selling one more unit of a good Output is determined by finding a level

where marginal revenue = marginal costs Firms reconsider marginal cost if prices change The Shutdown Decision Firms losing money decide whether to shut down Even if a factory is losing money, they

must compare revenue with operating costs Operating costs includes variable costs needed to keep factory running The decision must be mad based upon the amount of money the firm would lose if the factory closed or if it remained open while still losing money Shifts in Equilibrium Government Intervention Price Ceilings highest price allowed by law Price Floors lowest price allowed by law

Shifts in supply (either too much of an item or not enough) Shifts in demand (either too many consumers or not enough) Role of Price Tool for distribution of resources Move factors of production into suppliers

hands and goods and services in to demanding hands Types of Goods Normal Goods Goods in demand more when income increases Inferior Goods Goods in demand less when income increases

Substitution Goods Goods that replace other goods Complimentary Goods Goods that are used together with other goods Advantages of Prices Incentives to make a profit and grow markets Signals communication for buyers and sellers Low Price Red light to producers that a good is being

overproduced Green light to consumers to buy more of a good because of a low opportunity cost High Price Green light to producers that a good is in demand and resources should be used to produce more Red light to consumers to stop and think very carefully before buying Disadvantages of Price

Rationing a system of allocating scarce goods and services using criteria other than price Shortages a situation in which a good or service is unavailable, or a situation in which the quantity demanded is greater than the quantity supplied Disadvantages of Price Both result in the formation of a Black Market

Black Market a market in which goods are sold illegally BANKING AND MONEY THE HISTORY OF BANKING 1791: The First Bank of the US was established to hold the governments $$, help the government to tax, regulate commerce, and issue a single currency 1861: The Second Bank of the US was established to restore stability and order to

the monetary system. 1907: The Panic of 1907 led Congress to create the National Monetary commission in 1908 1913: congress created the Federal Reserve System by passing the Federal Reserve Act. The Fed was the nations first true central bank; the notes it issued are the currency we use today. 1935: congress adjusted the

Federal Reserves structure so that the system could respond more effectively to future crises. 1837 1863: During the Wildcat Era there many state-chartered banks, it was common for bank runs to occur, and there was wide spread panics 1930 1933: congress forced the Fed to take action too late, meaning that recovery from the

recession took a long time. Federal Reserve Functions Serve as banker for the US government and maintains a checking account for the Treasury Department Regulates and stabilizes the nations money supply

Regulates and Supervises the banking system of the US Federal Reserve Functions Serves banks Nationwide: provides check-clearings services, safeguards banks reserves, and lends reserves to banks that need to borrow Serves as financial agent for the Treasury Department and Other Government Agencies

Federal Reserve Functions Issues currency and makes sure that fresh bills are always in circulation Money Commodity money objects that have value in themselves and that are also used as money. Cattle, salt, gems/rocks

Representative money objects that have value because the holder can exchange them for something else of value. IOU, paper receipts for gold/silver Money Fiat money money that has value because the government has ordered that it is an acceptable means to pay all debts. US currency, Australian dollar Stabilization of the Banking System

1861 US Treasury issued the Continental [demand note - greenback] Civil War brought about several changes National Banking Acts of 1863 & 1864 gave the fed. government 3 powers: 1. the power to charter banks 2. the power to require banks to hold adequate gold & silver reserves to cover their bank notes 3. the power to issue a single national currency this eliminated state individual

currencies and was one of the main stabilizers Stabilization of the Banking System 1870 national adoption of the gold standard which had 2 advantages 1. it set a definite value for the dollar, 1 oz. gold = $20, so people could get gold anytime they wanted which freed their minds to carry the lighter paper $$

2. The government could only issue currency if it had the gold necessary to back it, causing a more stable environment for banking. Stabilization of the Banking System 1907 Panic in the nations banking system spurred more reforms Stabilization of the Banking System

1913 - The Federal Reserve System was created (Fed) as our nations central bank It reorganized the federal banking system as follows: Member Banks 12 regional banks stored cash reserves Federal Reserve Board each regional supervised by a board Short-term Loans each regional allows member banks to borrow money to meet short term demands to prevent bank failures Federal Reserve Notes created the national currency Banking

The Great Depression: risky loans, crop failures, and the stock market crash shook the US for a decade. 1933: FDR bank holiday to shut down banks as a last resort to help restore calm later that same year FDIC [Federal Deposit and Insurance Corporation] was established by Congress. Banking Close regulations from 1930s to 1960s:

restrictions on interest rates banks could pay depositors and what they could charge customers Banking 1970s & 1980s deregulation wanted by the banks: caused problems for the Savings and Loans

1. Deregulation allowed for competition-- S & Ls were unprepared for competition 2. High Interest Rateslong term loans has low rates for return, yet S & Ls had to pay high rates to members who had $$ in their banks. 3. Bad Loans risky loans issued and many werent paid back 4. Fraud some banks made bad loans intentionally and hurt the FSLIC[1989: Financial Institutions Reform, Recovery, & Enforcement Act abolished the independence of S & Ls, and transferred the insurance responsibility to FDIC] Functions of Financial Institutions

Storing Money safe, convenient place for people to store money. Saving Money many ways to save money savings accounts, checking accounts, money market accounts, and certificates of deposit Loans provide loans to those with good ideas Functions of Financial Institutions

Mortgages provide loans so people can purchase homes Credit Cards provide cards so goods will be paid for by bank, but card holder must pay the bank when due Simple and Compound Interest price paid for the use of money Types of Financial Institutions

Commercial Banks offer a wide variety of services Bank of America Savings and Loan Associations very similar to commercial banks Savings Banks for people who are depositing $$ but not enough for a CB Credit Unions cooperative lending associations for particular groups, usually employees of a specific firm

Types of Financial Institutions Finance Companies installment loans to customers [like when you buy a car] Electronic Banking ATMs very convenient for bank and customer since they are 24 hour operations, you can do many things at the ATM check balance, withdraw

money and sometimes deposit money Debit Cards very much like a credit card [but not as protected] to help protect customer, PIN numbers may be used this allows the bank to directly take $$ from your account and give it to the store where you purchased something Electronic Banking Home Banking many institutions allow

for people to use their computer to direct deposit, pay bills on-line, shift $$ from one account to another via computer Automatic Clearing Houses automatically transfer $$ from person to creditor via Fed. Reserve Banks Stored Value Cards used on college campuses and other locations that have a magnetic strip or a computer chip with the amount of $$ in an account. BUSINESS CYCLE The business cycle is a period of macroeconomic expansion followed by a period of contraction. During the

expansion phase, a period of economic growth as measured by a rise in real GDP occurs. Once a peak is reached, this is the height of the economic expansion, when the real GDP stops rising. Then a contraction occurs where there is a decline marked by falling real GDP. Which ends in an economic trough, which is the lowest point in an economic contraction, when the real GDP stops falling. Business Cycles An economic expansion is a period of economic

growth measured by a rise in real GDP. In the expansion phase, the economy enjoys plentiful jobs, a falling employment rate, and business prosperity The peak is the height of an economic expansion. This is the point when the real GDP stops

rising. If real GDP falls for two consecutive quarters, the economy is said to be in a recession. A recession is a prolonged economic contraction. Contraction is a period of economic decline

marked by the falling real GDP. Unemployme nt rises in this period. When a recession is especially long and severe, it can be called a depression. During a depression there is high unemployment and low factory output.

In the trough period the economy bottoms out. This is the lowest point in an economic contraction, when the real GDP stops falling. Stagflation occurs when there is a decline in real GDP combined with a rise in the price level.

MARKET STRUCTURES Perfect Competition Perfect competition is also called pure competition, few examples of perfect competition exist today. Examples include the markets for farm products and stocks traded on the NYSE. Four Conditions to Perfect Competition

1. Many buyers and sellers participate in the market. 2. Sellers offer IDENTICAL products. 3. Buyers and sellers are will informed about products. 4. Sellers are able to enter and exit the market freely. Why are there so few perfectly competitive markets?

There are many barriers to entry, or factors that make it difficult for a new firm to enter the market. 1. Start Up Costs: the expenses a firm must pay before it can begin to produce and sell goods 2. Barriers of technology and knowhow can keep a market from being perfectly competitive Why are commodities usually perfectly competitive?

Commodities are termed as identical products, and in a perfectly competitive market, all products are identical Monopoly What is a monopoly? a market dominated by a single seller What are some characteristics of monopolies?

All monopolies have a single seller in the market. It is VERY difficult to enter a market, cost prohibitive. All monopolies have economies of scale [factors that cause a producers average cost per unit to fall as output rises] What are some characteristics of monopolies?

Hydroelectric dams are examples of monopolies. Natural Monopolies a market that runs most efficiently when one large firm provides all of the output public water is an example of natural monopoly Technology can change natural monopolies telephones were once a natural monopoly, because think copper wire was needed to provide service, when this was no longer the case, many companies were

able to enter the market Government Monopolies Government Monopolies a monopoly created by the government LABOR Occupational Trends A labor union is an organization of

workers that tries to improve working conditions, wages, and benefits for its members. Less than 14% of US workers belong to a labor union. Labor Force Trends The union movement took shape over the course of more than a century. The 1935 National Labor Relations Act, also known as the Wagner Act, gave workers the right to organize and

required the companies to bargain in good faith with the Unions. Key Events in US Labor Movement Year Event 1869 Knights of Labor founded 1911 Fire in the Triangle Shirtwaist Factory in New York kills 146, spurring

action on workplace safety Key Events in US Labor Movement Year Event 1932 Norris-La Guardia Act outlaws yellow dog contracts, gives other

protection to unions 1935 Wagner Act gives workers rights to organize Key Events in US Labor Movement Year Event 1938 AFL splinter group becomes the independent Congress Industrial Organizations

headed by John L. Lewis 1955 AFL and CIO merge to create AFL-CIO of Key Events in US Labor Movement Year Event 1970s

Rise in anti-union measures by employers 1990s Increase in public sector unions, including teaching assistants at some universities Labor Terms Collective Bargaining

Collective bargaining is the process in which union and company representatives meet to negotiate a new labor contract. Wages and Benefits The Union negotiates on behalf of all members for wage rate, overtime rates, planned raises, and benefits. Labor Terms

Working Conditions Safety, comfort, worker responsibilities, and other workplace issues are negotiated and written into the final contract. Job Security One of the unions primary goals is to secure its members jobs. The contract spells out the conditions under which a worker may be fired. Labor Strikes and Settlements

Strikes If no agreement is met between the union and the company, the union may ask its members to vote on a strike. A strike is organized work stoppage intended to force an employer to address union demands. Strikes can be harmful to both the union and the firm. Labor Strikes and Settlements Mediation To avoid the economic losses of a strike,

a third party is sometimes called in to settle the dispute. Mediation is a settlement technique in which a neutral mediator meets with each side to try and find an acceptable solution that both sides will accept. Labor Strikes and Settlements Arbitration If mediation fails, talks may go into arbitration, a settlement technique in which a third party reviews the case and

imposes a decision that is legally binding for both sides. Declines in Union Membership Several factors have led to declines in union membership since the 1950s: Right to work Laws The Taft-Hartley Act (1947) allowed states to pass right to work laws. These laws ban mandatory union membership at the workplace.

Declines in Union Membership Economic Trends Unions have traditionally been strongest in the manufacturing sector, representing blue-collar workers, or workers who have industrial jobs. Blue collar jobs have been declining in number as the American economy becomes more service oriented. Declines in Union Membership

Fulfillment of Union Goals With the government setting standards for workplace safety, and with more benefits being provided by both private and government sources, some claim that the union membership has decreased simply because their goals have been fulfilled by other organizations. FISCAL POLICY Debt and Deficit Deficit

-The amount of money the government borrows for one budget, representing one fiscal year -Can rise or fall because of forces beyond the governments control -Borrowing money affects both debt and deficit -Budget deficits add to debt

-Debt and deficit contribute to unbalanced budgets Debt -The sum of all the government borrowing up to that time, minus the borrowings that have been repaid -The total of all deficits and surpluses

BUSINESS ORGANIZATIONS Business Organizations Sole Proprietorship A business owned and managed by a single individual. According to the IRD 75% of all businesses in the IS are sole proprietorships but these generate only about 6% of US sales Advantages

Disadvantages Easy start-up Unlimited person liability *liability is a legally bound obligation to pay debts. Sole proprietors are bound to all of their debts Sole receiver of profit Limited access to resources Full control of business

Limited life business lack permanence beyond the life of the sole proprietor Easy to discontinue Not subject to special business taxes Business Organizations Partnership A business organization owned by tow or more persons who agree on a specific division of responsibilities and

profits Advantages Disadvantages Easy Start-up Unlimited liability *Each general partner is bound to debt incurred and responsible for paying his debt Shared Decision making General partners do not have

absolute control over their business Specialization each partner can bring his or her talents Potential for conflict Larger pool of assets helpful when the business needs to borrow money Not subject to special business taxes Business Organizations Corporations A legal entity owned by individual

stockholders Stockholders own shares of stock Shares a certificate of ownership in a corporation Stockholders are part owners of the corporation Business Organizations Corporations

Advantages Disadvantages Limited liability for owners Expensive and difficult to start up Transferable ownership owners can sell stock and get money in return Double taxes *Corporation pay taxes on income

*Stockholders receive dividends (profits paid out to stockholders) Long Life business does not end with the death of the owners Potential loss of control by the founders *Board of Directors usually run corporations More potential for growth More legal requirements and

regulations Business Organizations Horizontal Merger Joining of two or more firms competing in the same market with the same good or service Examples: Verizon and Alltel Wells Fargo and Wachovia

Vertical Merger Joining of two or more firms involved in different stages of producing the same good or service Examples: KFC buys a Chicken Farm Business Organizations Conglomerate Merging of more than three businesses that make

unrelated products Example: General Electric Multinational Corporation A large corporation that produces and sells its goods and services throughout the world Advantages Disadvantages Provides jobs and products around the world Low wages Efforts to spread new technology around

the world Poor working conditions Increased standard of living in many poor countries KEYNESIAN ECONOMICS Keynesian economics Keynesian Economics

Demand-side Economics A form of demand-side economics that encourages government action to increase and decrease demand and output The idea that government spending and tax cuts help an economy by raising demand John Maynard Keynes

Developed this theory after the Great Depression. His ultimate goal was to tell economists and politicians how to get out of and avoid economic crisis Keynesian economics Keynes believe that 2 things needed to happen to end the Great Depression 1. Consumers need to spend more money Keynes thought that the spender should be the government. According to his theory, the

government should buy goods and services. This would encourage production and increase employment. 2. Businesses need to increase output As a result of this theory, people go back to work and then spend the money they make on goods and services this increases production. Fiscal Policy

Fiscal Policy The use of government spending to influence the economy Fiscal policy can be used to fight two macroeconomic problems, according to Keynes Fiscal Policy Expansionary Policy 1. Recession (decline in economic prosperity)/

Depression (long recession) Government should increase spending OR government should decrease taxes Contractionary Policy 2. Inflation (general increase in prices) Government should decrease spending OR government should increase taxes Supply Side Economics

Supply-side Economics A school of economics that believes that tax cuts can help an economy by raising supply Those that agree with supply-side economics believe that taxes have strong negative influences on economic output Trickle down effect Investing money in companies and giving

them tax breaks will benefit the economy. Eventually individuals (consumers) will experience the effects thus trickle down to the households KARL MARX Karl Marx Marx was born in Germany in 1818 and died in London in 1883. He was a philosopher and political economist but was known best as a revolutionary communist. Marx along with Friedrich Engels wrote the Communist Manifesto

Karl Marx Communist Manifesto History should be described as social classes struggling with one another 19th Century social classes

Proletariat those that own very little and therefore must sell labor to the capitalists Bourgeois (capitalists) the person that owns the factories and buys labor The conflict between these two classes will eventually lead to revolution by the working class (proletariat). With this revolution there would cease to be a struggle Workers of all lands, unite the final words of the Communist Manifesto This document lays out the foundations of communism Karl Marx

Since the collapse of the Soviet Union, few countries would describe themselves as having a Marxist government. Political parties throughout the world still maintain Marxist ideologies. Despite Marxs predictions, capitalism is still thriving! We still see the existence of a working class and entrepreneurs. MOVEMENT OF RESOURCE IN THE US ECONOMY Movement of Resource in the US Economy

Human Resource Migrant Worker move around to follow work Example: agricultural workers move throughout the country to pick fruits and vegetables as various crops come in season Immigrants come to the US to find work. Many immigrants work in low paying jobs that are unwanted by Americans Movement of Resource in the

US Economy Capital Resource Business locate their companies where their can maximize profit Example: cheap labor, high demand for product Many companies have found it profitable to locate their headquarters in a central location Example: Research Triangle Park, Silicon Valley Research Triangle Park an industrial park near

Raleigh, Durham, and Chapel Hill, in the Research Triangle region of NC Silicon Valley a region in California south of San Francisco that is noted for its concentration of hightechnology industries Terms to know Department of Homeland Security: A federal agency whose primary mission is to help prevent, protect against, and respond to acts of terrorism on US soil Created by Bush after Sept 11th Responsible for providing immigration-related services and benefits

USA Patriot Act: Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 Formed in response to Sept 11th Dramatically expanded the authority of American law enforcement for the purpose of fighting terrorism in the US and abroad Terms to know Outsourcing Goods and services are provided by someone outside of the company

Outsourcing is done to save money, improve quality, or free company resources for other activities Critics argue that outsourcing decreases the quality of a good or service Downsizing The selling off, closure of some plants, combination of business operation that perform the same functions, and/or cost cutting of an enterprise, usually deals with a

ECONOMIC INDICATORS Leading Economic Indicators GDP Gross Domestic Product Personal Income

Measures the output of the entire economy Measures the total income of families in one year, higher the income the more money they have to spend Stock Market, Averages (S & P 500, The Dow) Reflects investor attitudes and movement of interest rates Leading Economic Indicators

Unemployment Rate Building Permits Indicates construction activity Manufacturer new orders

Reflects layoffs of workers; how many unemployed at one time Predicts actual production change Consumer Price Index and CPI Market Basket Measures the rate of change in the price of 400 consumer goods THE FEDERAL RESERVE AND GOVERNMENT ECONOMIC

POLICY The Federal reserve and government economic policy Monetary Policy The Feds power over interest rates and amount of $ in reserve Fiscal Policy

The Government power over taxes and spending The Federal reserve and government economic policy Contractionary Policy (Tight $$) during inflation 1. Increase interest rates 2. Increase reserve requirement ($$ banks must have in reserve) 3. Increase taxes 4. Decrease government spending

The Federal reserve and government economic policy Expansionary Policy (Easy or Loose $$) during recession/depression 1. decrease interest rate (easy to buy) 2. decrease taxes 3. decrease reserve requirements (banks have more $$ to loan) 4. increase government spending Review Taxes

Progressive Tax Regressive Tax The higher ones income the higher the percentage of tax (ex. Income tax) Tax imposed at a flat rate (ex. Sales tax) Excise tax on manufacture, sale, and

consumption of goods; often called hidden tax (ex. Tax on fuel, alcohol, tobacco) MEASURING THE ECONOMY Measuring the Economy GDP: Gross Domestic Product The dollar value of all final goods and service produced within a country borders in a given year Nominal GDP GDP measured in current prices

Real GDP GDP measured in constant unchanging prices GDP = Consumption + Investment + Government Spending + Net Exports (exports imports) Measuring the Economy Consumption and investment = expenditure on final goods and services

Government Spending: government expenditures on final goods and services Net Exports: imports are subtracted because they are included in C, I and G GDP: C + I + G + NX Measuring the Economy

Per Capita GDP: a countrys GDP divided by population 2005 US GDP: $12.77 Trillion Population - 295,734,134 Per Capita GDP - $41,800 2005 China GDP: $8.158 Trillion Population 1,306,313,812 Per Capita GDP - $6,200

Per capita GDP can often be used to compare countries and their standard of living (economic prosperity) Measuring the Economy GNP: Gross National Product Value of goods and service produced within a country in one year, plus income earned by citizens abroad, minus income earned by foreigners in the country GNP goods and services produced + money earned by citizens abroad income earned by foreigners in the US

CPI: Consumer Price Index An average of a specified set of goods and services Measures the purchasing power of the dollar The Business Cycle Business Cycle

A period of macroeconomic expansion followed by a period of macroeconomic contraction 4 Phases 1. Expansion: a period of economic growth, real GDP rises 2. Peak: When GDP stops rising 3. Contraction: a period of economic decline, real GDP falling 4. Trough: When GDP stops falling The Business Cycle

During the Contraction Phase Recession: prolonged economic contraction, real GDP decreases and unemployment increases Depression: long and severe recession Business Regulation The government regulates business in several ways Antitrust laws (FTC) Environmental Protection Agency (EPA)

Workplace Safety (OSHA) Consumer Protection (CPSC, FDA) Communication (FCC) Transportation (FAA) Employment (EEOC) Labor disputes Affirmative action Business Regulation Deregulation is the removal of some government controls over the market. This supports the ideas of laissez faire

1970s and 1980s period of deregulation Deregulation encourages competition Deregulation can lead to businesses cutting corners Examples: Airlines relaxing security measure before 9-11 ECONOMIC DEVELOPMENT Economic Development

Historically, economists divided the worlds nations into 3 categories: 1st World Countries: The wealthiest countries (industrialized) 2nd World Countries: Communist countries 3rd World Countries: The poorest countries (primarily agricultural) Economic Development Now, economists just use 2 categories Developed Countries the wealthiest countries (US, Canada, western European Countries, Australian, New Zealand, Japan,

etc.) Less Developed Countries (LDCs) or Developing Countries poorer countries (this includes the poorest countries in the world and other countries like Mexico, Saudi Arabia, and former Soviet countries that havent reached a high standard of living for most citizens) Economic Development The primary measure is per capita GDP (nations GDP/population). Other measures include:

Energy Consumption more energy consumption, more developed (b/c more industrial) Labor Force more industrial jobs (vs. agricultural), more developed Consumer Goods more consumer goods produced per capita, more developed Literacy higher literacy rates, more developed Infant mortality rate lower infant mortality rate, more developed

Infrastructure more infrastructure , more developed Economic Development Several countries have made dramatic recent economic improvement including: Mexico, Brazil, Malaysia, and the four Asian tigers, Singapore, Hong Kong, South Korea, and Taiwan Economic Development

The World Bank is an international organization devoted to assisting development. Uses per capita GNP to categorize countries The International Monetary Fund (IMF) is an international organization (almost all UN nations belong) that monitors exchange rates and balance of payments, and provides technical and financial assistance as needed Economic Development

As our economy has become more global, several issues are of recent concern: Out-sourcing transferring work to another country (esp. of concern in the computer industry and customer service) Child Labor, Human Rights and Environmental Violations many developing nations do not protect the rights of workers or the environment. Some feel it is morally wrong to support these nations by buying their products or using their labor and hope that economic pressure may bring about needed reforms. Some products boast a fair trade label which means that the product has been produced according to minimum standards for labor,

Economic Conditions and Policy Decisions A companys profit motive often leads to conflicts. These include: Environmental Concerns The government must set regulations so that the environment is protected. (Primarily the EPA) Ex. Clean Air and Water Act limits the amount of pollution companies are allowed to generate Toxic materials are also highly regulated (ex.

Radioactive materials) This can lead to the NIMBY debate (Not In My BackYard) no one wants toxic waste dumped in their state Economic Conditions and Policy Decisions Political Concerns The US and other nations use economic measures to put pressure on other countries for a variety of reasons. (Countries that violate human rights, deny democracy, engage in nuclear weapon

proliferation) Examples Cuban Economic Embargo OPEC Oil Embargo Possible economic sanctions with Iran Concerns that Protect the Public Examples Zoning Laws Building Codes INTERNATIONAL TRADE International Trade

Why do countries trade? Comparative Advantage International trade allows nations to produce a limited number of good based on their resources while consuming a variety of goods The ability to produce a product most

efficiently given all the other products it could produce Law of Comparative Advantage A nation is better off producing goods and services for which it has a comparative International Trade Terms

Export A good sent to another country Import A good brought in from another country Trade Balance The relationship between a nations imports and its exports Favorable Balance of Trade A country with a trade surplus Trade Deficit Nation imports more than it exports

International Trade Tariff A tax on imported goods Import Quota

A trade barrier that limits the amount of a good that can be imported Embargo Complete barrier to trade with a country NO Trade (ex. Cuba) Exchange Rates Allow one to convert prices in one currency to prices in another currency International Free Trade Agreements WTO (World Trade Organization):

founded in 1995 to ensure countries were reducing tariffs and expanding world trade, also to negotiate new trade agreements and resolve trade disputes. European Union (EU): formed in 1993 a union of countries that agreed to abolish tariffs and trade restrictions among members and adopt uniform tariffs for non-members. Uniform monetary unit: The Euro International Free Trade Agreements NAFTA (North American Free Trade

Agreement); a trade region that will eliminate tariffs and trade barriers between Canada, Mexico and the US by 2009 creating the worlds largest free trade zone.

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