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©2011 Cengage Learning
Chapter 3
GOVERNMENT’S ROLE IN THE ECONOMY
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Imperfect Markets
 When a group of buyers or sellers are able to directly
influence prices!
 An exclusive patent
 Ownership (a scarce commodity)
 Control (a transportation route)
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Government Intervention in the Economy
To help balance inequities created by imperfect markets :
 1890 - Sherman Antitrust Act - forbade combinations that restricted
competition.
 1897 - Interstate Commerce Commission - regulated monopolistic
sellers of interstate products.
 1890-1970s - general increase in regulations.
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Regulation Effects
 Business prices & volume flexibility
 Ease of new business start up
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Deregulation Moves
 Airlines
 Trucking
 Banking
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Summary of Government activities in regulating the
economy and private business
 Changes in spending on the federal, state and local
level.
 Regulatory agencies at the federal, state and local
level.
 Welfare programs
 Wetland protection
 Endangered species
 Planning/Zoning
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Private
Goals
Public
Goals
The Search for Balance
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Reasons for those who favor regulations:
 Capitalism tends to create imperfect markets.
 Need for protection and national defense require the consumption of
resources.
 Social goals require government programs.
 Segments in the population desire government to provide service that
are offered by private enterprise.
Reasons for those who favor less regulation:
 Private enterprise is more efficient at allocating resources.
 Government creates unnecessary cost.
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Land, labor, and capital
Resource Market
Demand
Factors of
Production
Supply
The Circular Flow of Economy
goods and services
Individuals and
Households
Product Market
Supply
Goods and
Services
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Demand
Receive goods and services
Sell goods and services
Business
$$ Expenses
Demand
Resource Market
Factors of
Production
The Circular Flow of Economy
Dollars
$$ Income
Supply
(rent, wages, interest)
(rent, wages, interest)
Individuals and
Households
Business
Revenue $$
Goods and
Services
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Demand
$$ Spend Income
$$ Expenditures
Supply
Product Market
Land, labor, and capital
$$ Expenses
Demand
$$ Income
Resource Market
Factors of
Production
Supply
The Circular Flow of Economy- Revisited
Individuals and
Households
Supply
Revenue $$
Goods and
Services
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Demand
$$ Spend Income
$$ Expenditures
Product Market
Receive goods and services
Business
Sell goods and services
(rent, wages, interest)
(rent, wages, interest)
Flow of the Economy
 People and companies pay taxes to or buy services
from governments.
 The money is used to buy goods & services from the
public.
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Local real estate markets are heavily influenced by changes in
the local and national economy
Measuring the Economy
 GDP- “gross domestic product”
 the total market value of all goods and services
produced domestically in US
 The national economy is growing
if the GDP is increasing
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GDP is acquired by consumers, business,
government, and foreign markets
 Customers: personal consumption expenditures
 Business: gross private domestic investment
 Government: includes federal, state, and local
agencies
 Exports: trade
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GDP and Inflation
 Inflation distorts comparison of GDP from different
time periods.
 GDP adjusted for inflation is called “real GDP”.
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Economic Indicators
 Personal income: individual income before taxes.
 Disposable personal income: take-home pay -
measures consumer purchasing power.
 Discretionary income: money remaining after paying
necessities.
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Changes in Economic Activity
 Seasonal Fluctuations
 Business Cycles- typically 3 to 6 years
 Long-term Secular Trends - occurs over an extended
period of time
(examples include: family size, shorter work week, increases in per
capita income, and changes in life span)
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The Four stages of the business cycle:
1. Prosperity
2. Recession
3. Depression
4. Recovery
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Business Cycle Causes
 War, natural disasters and international conflicts.
 The introduction of innovations including the
development of cereal, automobile, steam engine, & use
of steel in buildings.
 Erratic spending patterns of consumers, business, and
government.
 Changes in the amount of money and credit in
circulation.
 The psychological frame of mind of businesspeople and
consumers.
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Forecasting Changes in Economic Activity
 Economic forecasting is one way of reducing uncertainty
(reducing risk).
 Investors should define the investment requirements
and expectations.
 Forecasting the amount of money received each year and
the reversion during the holding period is considered a
cash flow analysis.
 Economic forecasting is an art, not a science.
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Long-run trends in real estate economics appear to be
influenced by gradual changes in population, age
distribution, marriage rates, income levels, construction
costs, taxes, and transportation patterns.
Short-run trends are heavily influenced by the availability
and cost of mortgage money and the current state of the
national and local economy.
(On average long real estate cycles are approximately 18 years of
prosperity, recession, depression, and recovery.)
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Fiscal and monetary policies are used to fight
inflation, unemployment, and recession
Government Tools to
Fight Economic Problems
 Fiscal policy includes taxing and spending power.
 Monetary policy is changes in the supply of money to
encourage or discourage consumer spending and business
investments.
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Fiscal and monetary policies are
tools the government uses to
fight inflation, unemployment,
and recession.
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Special Interest Topics
 GNP
 Stagflation
 Measurement Problems
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