Download market economy

Unit 1 Seminar
Monday, May 23, 2011
Professor Joe Serres, J.D., M.B.A.
Unit 1 Planning for Economic Growth & Development
1. Class Introductions
2. Review Syllabus
3. Discuss and review key terms and Unit
lessons
4. Review Major Concepts
5. Looking forward…
Waterfall, Butte Fork Applegate River
Red Buttes Wilderness, Spring 2011
Course Syllabus
Let’s take some time and go through the course
syllabus. Please refer to your syllabus as we go
through the material.
Note:
ALTERNATIVE ASSIGNMENTS:
If you are unable to attend a seminar, you may
need to complete an alternative assignment.
Alternative assignments will be explained by
your professor at the beginning of the course,
referenced in the syllabus, and typically available
on your class discussion board. An example of an
alternative assignment would be a 200-word
essay about the seminar topic. It is important
that if you are unable to attend a seminar you
make sure that you clearly understand the
alternative assignment so you do not lose any
points. Please note: if you will be absent and
unable to post for an entire week or more, you
MUST communicate with your professor.
Rough & Ready Creek
Kalmiopsis Wilderness, Spring 2011
Unit 1 Planning for Economic Growth
eTextbook: Taylor and Weerapana
Chapter 1: The Central Idea
Chapter 2: Observing and Explaining the
Economy
Chapter 7: The Spending Allocation Model
Chapter 9: Productivity and Economic
Growth
Access eTextbook files in Doc Sharing.
Economic Growth is typically defined as
the increase (though it could be negative)
in a nation’s, regions or state’s productive
output, usually over one year.
Economic Development is usually defined
as the distribution of this output across
income classes, regions or some other
demographic distinction.
Economic growth carries with it
attendant fiscal, monetary and
regulatory policies aimed at
promoting economic gains overall,
while economic development
demands such policies aimed at the
promotion of more specific goals
designed to distribute the benefits
of growth according to the
preferences of prevailing governing
majorities.
Economics~ Central Idea
TIGER WOODS EXAMPLE
(Interesting how much that story has
changed since printed in your text! Do
you think they’ll use Tiger for reprint of
this text?!)
Economics is the study of how people deal
with scarcity.
Scarcity: the situation in which the quantity of
resources is insufficient to meet all wants.
Scarcity implies that people must make a
choice to forgo, or give up, one thing in favor
of another.
Economic interactions between people occur
every time they trade or exchange goods with
each other. Economic interactions typically
take place in a market.
Choosing one item means that you have to
give up other items. The opportunity cost of
a choice is the value of the next-best forgone
alternative that was not chosen.
There are gains from trade because the trade
reallocates goods between the two
individuals in a way that they both prefer.
Economic interaction allows for
specialization: people concentrating their
production efforts on what they are good at.
A division of labor occurs when some
workers specialize in one task while others
specialize in another task.
Comparative advantage: a situation in which
a person or group can produce one good at a
lower opportunity cost than another person
or group.
Economics~ Define Concepts
Production possibilities:
alternative combinations of
production of various goods that are
possible, given the economy’s
resources.
Increasing opportunity cost: a situation in
which producing more of one good requires
giving up an increasing amount of production
of another good.
Production possibilities curve: a curve
showing the maximum combinations of
production of two goods that are possible,
given the economy’s resources.
Figure(s) 2-4, p.10-11 Text
• The production possibilities curve is bowed out
because of increasing opportunity costs.
• Points inside the curve are inefficient. Points on
the curve are efficient. Points outside the curve are
impossible.
• The production possibilities curve shifts out as
resources increase.
• Outward shifts of the production possibilities
curve or moves from inefficient to efficient points
are the reasons why the economy is not a zero-sum
game, despite the existence of scarcity and choice.
MARKET ECONOMIES AND THE PRICE SYSTEM
What is to be produced?
How are these goods to be produced?
For whom are the goods to be produced?
Market & Command Economies
Broadly speaking, the market
economy and the command economy
are two the market economy and the
command economy are two alternative
approaches to answering these
questions. In a market economy, most
decisions about what, how, and for
whom to produce are made by
individual consumers, firms,
governments, and other organizations
interacting in markets. In a command,
or centrally planned, economy, most
decisions about what, how, and for
whom to produce are made by those
who control the government, which,
through a central plan, commands and
controls what people do.
Key Elements of a Market Economy
In a market economy, most prices are freely
determined by individuals and firms
interacting in markets. These freely
determined prices are an essential
characteristic of a market economy.
Property rights are another key element of
a market economy. Property rights give
individuals the legal authority to keep or sell
property, whether land or other resources.
Freedom to Trade at Home & Abroad
Government Role
Private Organizations Role
What do Economists do?
Economics is a way of thinking. It entails
accurately describing economic events,
explaining why the events occur, predicting
under what circumstances such events
might take place in the future, and
recommending appropriate courses of
action.
Relative price: the price of a particular good
compared to the price of other things.
Gas prices example
Economists have to think carefully about
the limitations of the data they use. For
example, when studying changes over time,
it is important to correct for changes in the
overall price level, which can otherwise lead
you to misleading conclusions.
Explaining Economics
An economic variable is any economic
measure that can vary over a range of
values.
Two variables are said to be correlated if
they tend to move up or down at the same
time. There is a positive correlation if the
two variables move in the same direction—
when one goes up, the other goes up.
There is a negative correlation if the two
variables move in opposite directions—
when one goes up, the other goes down.
There is a difference between causation
and correlation. Correlation means that one
event is usually observed to occur along
with another. Causation means that one
event brings about another event. But
correlation does not imply causation.
ECONOMIC MODELS
In order to explain economic facts and
observations, one needs an economic
theory, or a model. An economic
model is an explanation of how the
economy or a part of the economy
works. In practice, most economists
use the terms theory and model
interchangeably, although sometimes
the term theory suggests a general
explanation and the term model
suggests a more specific explanation.
The term law is also typically used
interchangeably with the terms model
and theory in economics.
Microeconomics studies the behavior
of individual firms and households or
specific markets.
Macroeconomics focuses on the whole
economy—the whole national economy
or even the whole world economy. The
most comprehensive measure of the size
of an economy is the gross domestic
product (GDP).
GDP is the total value of all goods and
services made in the country during a
specific period of time, such as a year.
Figure 5-6, p.33 Text
Positively related: a situation in
which an increase in one variable is
associated with an increase in
another variable; also called directly
related.
Negatively related: a situation in
which an increase in one variable is
associated with a decrease in another
variable; also called inversely related.
POLICIES
Capitalism: an economic system
based on a market economy in which
capital is individually owned, and
production and employment
decisions are decentralized.
Socialism: an economic system in
which the government owns and
controls all the capital and makes
decisions about prices and quantities
as part of a central plan.
Mixed economy: a market economy
in which the government plays a very
large role.
Positive economics: economic analysis
that explains what happens in the
economy and why, without making
recommendations about economic policy.
Normative economics: economic analysis
that makes recommendations about
economic policy.
Council of Economic Advisers: a threemember group of economists appointed by
the president of the United States to
analyze the economy and make
recommendations about economic policy.
The Spending Allocation Model
We know that GDP is divided into four
components: consumption,
investment, government purchases,
and net exports. Symbolically,
Y= C + I + G + X where Y equals GDP,
C equals consumption, I equals
investment, G equals government
purchases, and X equals net exports.
This equation is the starting point.
The consumption share of GDP is
the proportion of GDP that is used
for consumption- equals consumption
divided by GDP, or C/Y.
Investment share: the proportion of GDP
that is used for investment; equals
investment divided by GDP, or I/Y.
Sometimes called investment rate.
Net exports share: the proportion of GDP
that is equal to net exports; equals net
exports divided by GDP, or X/Y.
Government purchases share: the
proportion of GDP that is used for
government purchases; equals government
purchases divided by GDP, or G/Y.
Interest Rates & Spending Shares
The price of consumption today
relative to the price of consumption
tomorrow is the real interest rate.
The Consumption Share and the
Real Interest Rate
A higher real interest rate discourages
consumption and encourages saving.
Therefore, the share of GDP allocated
to consumption will decrease in the
long run.
See Figure 2, p.175 of your text
Investment:
A similar inverse, or negative, relationship
exists between investment and the real
interest rate. When businesses decide to
invest, by buying new machines and
equipment or by building a new factory,
they need funds for this purpose.
Typically, they acquire these funds by
borrowing. Higher real interest rates raise
the cost of borrowing—the firm would need
to produce enough additional output to pay
back the loan plus interest, which implies
that it would be willing to borrow only if it
were confident about the success of the
investment project.
Net Exports
Net exports are also negatively related
to the real interest rate. The story
behind this relationship is somewhat
more involved than that for investment
or for consumption. The exchange
rate—the rate at which one country’s
currency can be exchanged for
another—will play an integral role in this
relationship.
There is a downward-sloping
relationship between the real interest
rate and each of these three shares.
Changes in the real interest rate are
reflected as movements along these
curves. Other factors besides the
interest rate may also affect
consumption, investment, and net
exports. When one of these factors
changes, the relationship between the
interest rate and consumption,
investment, or net exports shifts.
Equilibrium interest rate: The interest rate
that equates the sum of the consumption,
investment, and net exports shares to the
share of GDP available for nongovernment
use.
The sum of the consumption, investment,
and net exports shares of GDP is called the
nongovernment share of GDP. It is
negatively related to the interest rate
because each of the individual components
is negatively related to the interest rate.
Once we find the equilibrium interest rate,
we can then find the shares of consumption,
investment, and net exports by looking at
the graphs of those relationships.
Saving & Investment Relationship
National saving rate: the proportion
of GDP that is saved, neither
consumed nor spent on government
purchases; equals national saving (S)
divided by GDP, or S/Y.
The national saving rate equals the
investment share plus the net exports
share.
Since national saving is defined as Y C - G, we can show that national
saving is equal to the sum of
investment and net exports.
Expressing this relationship as shares
of GDP in the long run, we can show
that the national saving rate equals
the sum of the investment share and
the net exports share of GDP.
Practically speaking, if the rising demands
of an aging society cause budget deficits as
a percentage of GDP in the United States to
increase (thus reducing the government
saving rate), then one or more of the
following outcomes will occur:
1. The private saving rate will have to
increase, meaning that consumers will most
likely have to cut back on spending.
2. The investment rate will decrease, which
means less capital accumulation and the
likelihood for slower economic growth in
the future.
3. The trade balance will worsen, and we will
buy more foreign goods while foreigners
will buy less of our goods.
Productivity & Economic Growth
Productivity: output per hour of work.
Diminishing returns: a situation in which
successive increases in the use of an input,
holding other inputs constant, will
eventually cause a decline in the
additional production derived from one
more unit of that input.
Capital: The total amount of capital in the
economy increases each year by the
amount of net investment during the year.
Technology- A broad definition of
technology is that it is anything that raises
the amount of output that can be produced
with a given amount of inputs (labor and
capital).
Diminishing returns imply that the
additional output obtained by
increasing these inputs becomes smaller
and smaller, eventually leading to no further
economic growth. In order for output to
grow over the very long run, we need
not just to increase inputs, but also to get
more output from existing inputs.
Technology is what enables us to get more
output from a given quantity of inputs.
Examples of Changes in Technology That
Increased Productivity
More on Technology…
Invention: a discovery of new
knowledge.
Innovation: application of new
knowledge in a way that creates new
products or significantly changes old
ones.
Diffusion: the spreading of an
innovation throughout the economy.
Laborsaving technological change means that
fewer workers are needed to produce the same
amount of output; capital-saving technological
change means that fewer machines are needed
to produce the same amount of output.
Human capital: a person’s accumulated
knowledge and skills.
Special Features of Technology
Nonrivalry- This means that one person’s
use of the technology does not reduce the
amount that another person can use.
Nonexcludability-This occurs when the
inventor or the owner of the technology
cannot exclude other people from using it.
Growth accounting formula: an equation
that states that the growth rate of
productivity equals capital’s share of income
times the growth rate of capital per hour of
work plus the growth rate of technology.
Key Terms
Unit 1 PP430: Planning for Economic Growth and
Development Key Terms | Unit 1
Capitalism: An economic system based largely on
private ownership of the means of production and
the use of free markets in economic interactions
Command Economy: An economy characterized
largely by the control of all economic actions by a
government
Comparative Advantage: An instance in which a
group or nation can produce a good at a lower
opportunity cost than another group or nation
Consumption share: The proportion of GDP derived
from consumers’ expenditures
Crowding Out: The decline in private investment
affected by increased government borrowing in the
capital markets
Diminishing Returns: Given a fixed amount of other
inputs, the likelihood that, with each additional unit
of a given input, the increase in the output derived
will slow, if not eventually decline
Division of Labor: The assignment of responsibilities
and inputs within an organization based on
specialized uses of labor, skills and talents aimed at
maximizing returns and minimizing costs
Economic Development: The methods by which
economic growth is distributed across income
classes, employed across production sectors and
used by government entities for public purposes
Economic Interactions: Exchanges of goods and
services between/among people
Gains from trade: Improvements in a person’s
economic welfare derived from economic interactions
Economic Growth: Typically, a Nation’s annual
percentage change in Gross Domestic Product (GDP,
see below)
Economic Infrastructure: Public infrastructure
required for day-to-day economic activity, such as
transportation and utilities
Government Failure: An instance in which government
solutions fail to correct, or even worsen, a market
failure
Government Share: The proportion of GDP derived
from governments’ expenditures
Gross Domestic Product (GDP): The annual value of all
final goods and services produced in a nation Unit 1
PP430: Planning for Economic Growth and
Development
Growth Accounting Formula: An equation that states
the growth rate of productivity equals capital’s share
of income times the growth rate of capital per hour of
work plus the growth rate of technology
Key Terms
Innovation: An application of new knowledge to
existing products or services or even leads to new
ones
National Saving rate: The proportion of a nation’s
income not used as expenditures by individuals,
corporations or governments in a given year
Invention: An improvement to an existing concept,
technique or technology, or an entirely new one
Productivity: The quantity of output per hour of labor
supplied in its creation
Investment Share: The proportion of GDP derived
from individuals’ and corporations’ investments
Property Rights: The respect for and enforcement of
the rights of owners of property (physical, intellectual,
etc.) to use and sell it, and to keep the proceeds from
such sales
Market: An arrangement, formal or informal, in
which people engage in commerce
Market economy: An economy characterized largely
by the use of the free exchange of goods and
services in markets
Market failure: An instance in which the use of free
markets fails to yield a sufficiently efficient
economic outcome, thereby affording the
opportunity for government-based solutions
Mixed Economy: An economy in which both private
individuals, organizations and governments play
substantial roles
Public goods: Those goods which, once produced and
offered in a market, cannot be limited to certain users
Socialism: An economic system based largely on
government ownership of the means of production
and usually controls economic decisions and
interactions
Technological Change: Improvements in technology
and their related techniques over time
Discussion Board
Topic: Defining Economic Growth and
Development
Our Discussion this week will focus on properly
defining Economic Growth and Development
so that we are all on the same page. It is
essential, especially when working in groups
that we all agree on the most basic, but
important concepts.
After completing this week’s readings, answer
the following questions.
What experiences from your own life can you
relate to the course material so far? Think
about things that you may have done or
observed that you can apply the concepts just
learned and interpret them in terms of
Economic Growth and Development.
What are your initial reactions to the
description of the concepts covered and how
they are measured and used to formulate
public policies? What stands out as their most
important facets and values? Describe how the
concepts you learned in earlier classes are now
applied to these concepts and real-life
examples.
Darlingtonia Californica
Near Rough & Ready Creek
Kalmiopsis Wilderness
FINAL PROJECT
In a 6-8 page paper, assess President Obama and the
Congressional Majority Democrats’ stimulus, budgetary, and
health care initiatives in the context of promoting Economic
Growth and Development. In your view, are the Democrats’
policy initiatives aimed more at encouraging Economic Growth
or Economic Development? Or are they aimed at both? Defend
your assessment accordingly. In doing so address these
questions:
What were the challenges that these policy makers perceived at
the time in terms of both the Business Cycle and broader social
policy?
What theories did the Democrats use to justify their policies,
both enacted and proposed, regarding taxes, spending, and the
historic health care reform bill? Can one theory account for all of
these policies?
Perhaps it was more than academic theories and immediate
macroeconomic conditions. What ideological legacies may have
been motivating the Democrats in their choice of eventual
policy initiatives when they finally returned to power in 2009?
As such, maybe the related planks in their 2008 National
Platform offer some useful insights. Along these lines, briefly
explain why Republicans were almost unanimous in their
opposition to these initiatives. In your assessment, do not get
caught up in the minute details of the bills, just their broader
economic and political significance when taken together and
their role in encouraging Economic Growth and/or
Development. Since it remains an open question as to just how
effective these policy initiatives have been or will be, do not feel
that you must offer definitive data in some form here. Just
present your best arguments and supporting data as concisely
and clearly as possible.
The length of the paper is 6-8 pages. Disciplined writing
demands respect for such guidelines. However, you are
welcome to include graphics, tables, and any other
complementary materials and these will not be counted against
the page limit. In addition to the course materials, you are free
to incorporate any outside sources that you deem appropriate
as long as they are cited properly.
Below are three internet-based stories/essays that can help to place
the economic and political aspects of the Democrats’ initiatives in a
working context.
Sources:
A relatively non-partisan analysis from Time Magazine
An essay from the Conservative Washington Examiner
A story from the Liberal New York Times
In addition to fulfilling the specifics of the assignment, a successful
paper must also meet the following criteria:
Length should be 6-8 pages, excluding cover page and references.
Assignment should follow the conventions of Standard American
English (correct grammar, punctuation, etc.).
Writing should be well ordered, logical and unified, as well as original
and insightful.
Your work should display superior content, organization, style, and
mechanics.
You should also make sure to:
Include a title page with full name, class name, section number, and
date
Include an introductory and concluding paragraph and demonstrate
college-level communication through the composition of original
materials in Standard American English
Use double-space and Arial or Times New Roman in 12 point font size
Use examples to support your discussion
The assignment is due at the end of Unit 9.