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Economics 2.3,2.4,3.2 Macroeconomics Conceptual Lens: Global Economy 2.3 Explain the impact of government policies on international trade (e.g., tariffs, quotas, sanctions, subsidies, banking, embargos, etc.) 2.4 Analyze the role of NC and the US in the world economy (e.g., furniture industry, tourism, fishing, etc.). 3.2 Explain how fiscal policy and monetary policy influence overall levels of employment, interest rates, production, price level and economic growth (e.g., business cycle, standard of living, recession, depression, Consumer Price Index, etc.). Fiscal Policy • How the government spends its money and how it taxes households and businesses. • Taxation – money coming in – Income or Revenue • Expenditures– – Money going out – Government Spending Fiscal Policy • National debt – how much money the government owes • Budget Deficit– the government spends more money (revenue/income) than it takes in – In the RED – Also called deficit spending • Budget surplus – the government takes in more than it spends Monetary Policy • Regulated by The Fed – How much the government (The Fed) restricts or releases the flow of money into the economy – Interest rates – How the Fed controls the money supply – Tight and Easy Money Policy Monetary Policy **not in notes** Federal Reserve The Fed raises the discount rate – banks must pay a higher rate of interest to borrow money Banks Banks borrow money from the Fed at a high discount rate – they raise interest rates Consumers Consumers borrow money from banks – they charge a high interest rate due to the high discount rate Money Supply Consumers do not borrow as much money – therefore they cannot spend as much money – the money supply decreases Monetary Policy • Discount Rate – The interest rate charged to banks to borrow money from the Fed – “Bank for banks” • Open Market Operations – Sale or purchase of US Treasury bonds to control the money supply • Interest Rates – The higher the discount rate charged by the Fed to banks, the higher a consumer’s interest rate will be Progressive Tax • Tax that increases as your income increases – Income tax – tax on income – Personal Income tax • Tax on personal income (usually comes out of your paycheck) – Corporate Income tax • Tax on income made by corporations (big businesses – stock) Regressive Tax • Tax that takes a larger percent of income from those who earn less – Excise tax • Tax on specific items such as gas, cigarettes, and alcohol • Already in the price – Sales tax • Tax on purchases FDIC • Federal Deposit Insurance Commission – Created during the Great Depression by President Roosevelt – Designed to protect the money a customer has deposited in a bank – The government insures a depositor’s money up to $250,000 limit – Makes customer feel secure that their money will not be lost or stolen The Federal Reserve • Central bank • “Bank for Banks” – Also called the “Fed” • Purpose: Monetary Policy – Controls the money supply – Sets interest rates Reserve Requirement • Set by the Fed – monetary policy • The amount of money banks are required to keep on hand Tight-Money Policy • The Fed raises the reserve requirement • Banks must hold onto more money – can’t loan any out • Pumps less money into the economy • Reduces inflation • Interest rates increase Easy-Money Policy • The Fed lowers the reserve requirement • Banks are free to loan out more money • Pumps more money into the economy • Increases inflation • Interest rates decrease Outsourcing – Helps producers with cost – People are without jobs, especially if it is outsourced overseas Downsizing – Producers layoff employees – Helps producers with cost – People are without jobs North Carolina’s Economy Service Industry • A result of population shifts • Service industries thrive due to population increases • As the population increases, the demand for goods and services increases • Motels, Hotels, Amusement Parks, Movie Theaters, Restaurants, etc. North Carolina’s Tourism Industry • • • Tourism Industry Tourism plays an important role in North Carolina's economy, with nearly every sector of the state's economy benefiting from tourist activities. Tourism generates $2.2 billion in federal taxes and $2.1 billion in state and local taxes. Investment in Tourism – Despite the recession and resulting tightened budgets, North Carolina has made calculated investments in the tourism industry to keep the industry alive. North Carolina’s Furniture Industry • • • • Furniture Industry The traditional North Carolina furniture industry has been experiencing drastic changes in the past decade. Competition from countries like China and the rising imports of furniture into the United States have led many furniture manufacturers in the state to shut down plants and lay off workers. The industry's transformation into a global one raises many questions about government action and government policy. North Carolina’s Fishing Industry • Fishing Industry • North Carolina’s unique location and geography bring a wealth of marine fisheries to our coastline – The result? North Carolina’s commercial fishing industry valued in the billions. • Access to working waterfronts is a major issue facing the commercial fishing industry in North Carolina. • Many areas once reserved for commercial boats are being sold and developed into private waterfronts, making it increasingly difficult for watermen to earn a living. • Cheaper imports, inexpensive foreign labor and consumers looking for a deal are taking a toll on the industry. Globalization • The worldwide movement toward economic, financial, trade, and communications connections. Free Trade • International trade without restrictions • Why trade?? – Greater choice of consumer goods – Specialization – more efficient production of goods – Beneficial to both countries that are trading with one another NAFTA • North American Free Trade Agreement – Eliminated trade barriers between the US, Canada and Mexico – No tariffs!! – Opened new markets, created jobs, and encouraged growth in member economies – NAFTA remains controversial due to high poverty rates in Mexico and lax environmental protection policies in Mexico Foreign Trade • Exports – goods and services the US sells to other countries • Imports – goods and services that the US buys from other countries • The United States competes with other nations in producing and selling goods • Foreign trade is voluntary – it benefits both nations Global Interdependence • Nations depend on one another for trade – Imports, Exports Comparative Advantage • The ability of one country to specialize and produce a good at a lower opportunity cost than another country can • Nations or businesses that do not have a comparative advantage may be driven out of business • Comparative advantage gives people an incentive to specialize and trade • Explanation of Comparative Advantage Exchange Rate • How much is a given amount of money in one nation worth in another nation Foreign Aid • Government programs that provide economic or military assistance to another country • Example: – US giving foreign aid to the Allied powers during WWII. – Humanitarian aid efforts (pledges of money to needy nations such as Haiti or the tsunami in the Indian Ocean) Developed Country • Nations that are wealthy • Citizens have a high standard of living Undeveloped Countries Developing countries – Poor nations – Depend on foreign aid – US helps developing nations – Why??? International Monetary Fund • IMF • Monitors exchange rates and payment balances between nations • Who owes who? World Trade Organization • WTO • Deals with the global rules of trade between nations European Union • EU • An alliance of 25 European countries • Goals: – Free movement of goods, workers, and capital among member countries. – Launched a single currency – the Euro World Bank • International financial institution that provides loans to developing countries for capital programs • Goals: – Reduction of poverty around the world – Promote foreign investment, international trade, capital investment Trade Barriers and Political Actions that Affect Trade • Protective Tariffs • Taxes placed on products imported from another country. • Purpose? – To raise the price of foreign goods so that people will buy American made goods Embargoes • Sanctions against another country that prevents another country from trading with it. – Examples: – OPEC Oil Embargo OPEC Oil Embargo • OPEC imposed an oil embargo on the US in 1973. There was a shortage of oil in the US. • Supply? • Demand? • Price? Economic Sanctions • A tool used by countries or international organizations to persuade a particular government or group of governments to change their policy by restricting trade, investment, or other commercial activity. • Part of US foreign policy • Economic sanctions: – – – – Embargoes Boycotts Freezing of assets Bans on travel, technology • Examples in which sanctions may be applied: – – – – Development of WMD (Weapons of mass destruction) Violation of human rights Unfair trade North Korea, Cuba, Iran, Iraq Infrastructure • Capital investment of a country that underlies and makes possible economic activity – Examples: • • • • Telecommunications Transportation (highways, bridges) Utilities (electricity, water) Waste Removal • Underdeveloped nations experience a low level of trade due to underdeveloped infrastructure Treaties • Formal agreements between nations • Ensure peace and prevent the outbreak of war • Often include economic agreements • Why are these important? • Human rights – Rights every human possesses – Some nations violate human rights prompting the UN to impose economic sanctions on these nations – Examples: Iraq under Saddam Hussein • Child labor – Countries who require children to work may have limited trade with other countries Zoning Laws • Laws and codes that regulate where commercial facilities and residential housing can be built – Leads to NIMBY (Not in my back yard………citizens don’t want certain businesses in their community