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 Chapter
1, 2
and 17-20
 Economics
and the New
Economy

Why is it important to study Economics?

How does Economics affect you everyday?

Economics is the study of how people try to
satisfy unlimited wants and needs through the
use of scarce resources.



There is no such thing as a free lunch.
This is the key to understanding economics
Nothing is free, someone must “pay” for free
items.
Scarcity
Society
may not have
enough resources to
produce all the things
people want
1. Land-gifts of nature, climate=rent
2. Labor-people=wages
3. Capital-tools, equipment=interest
capital increases production
4. Financial capital-money to purchase capital


Entrepreneurs-a person who takes a risk for
profit. Frequently considered a 4th factor of
production according to many Economists.
Technology is now added to the factors of
production. Technology includes any use of
land, labor or capital that produces goods
and services more efficiently.
 What
to
produce?
 How
to
produce?
 For
whom to
produce?

What to do?
 Failure
to make a
budget
 Not saving regularly
 Failing to
distinguish between
a want and a need
 Failing to adapt
your lifestyle to
changed economic
circumstances
 Description
of statistics
 Analysis of statistics
 Explanation of economic
theory
 Predict future trends
 Economic ethics

Primary-gather raw
materials

Change form of raw
materials

Business or
professional
services

Information
systems,
management,
research


All countries have some type of economic
activity.
As you go from primary to quandary your
country is more industrialized.




Trade-offs-exchanging one thing for use of
another
Opportunity cost-value of the next best
alternative
The PPF or Production Possibilities Frontier
illustrates opportunity cost. This diagram
represents the various combinations of
goods/services that an economy can produce
when all productive resources are fully employed.
Our mythical country of Alpha produces guns (
military good)and butter (consumer good).

Needs-item
necessary for
survival

Wants-a way of
satisfying a need.
Guns
2
4
6
8
10
Butter
10
8
6
4
2





*A
*B
*C

Points along the curve
represent maximum
output
Points inside the curve
represent idle
resources
Points outside the
curve represent
economic growth.
Frontier-maximum
combination of goods
/services that can be
produced.

They want goods
◦ Think of what we would do without if we didn’t
trade.

To make money.
The USA relies heavily on trade:
August 2009 numbers
Exports: $128.2 Billion
Imports: $158.9 Billion
Trade deficit=exports-imports


Ricardo argued that there
is mutual benefit from
trade even if one party
(e.g. resource-rich
country, highly-skilled
artisan) is more
productive in every
possible area than its
trading counterpart (e.g.
resource-poor country,
unskilled laborer).
As long as each
concentrates on the
activities where it has
relative productivity
advantage.
When a nation
finds it profitable
to produce and
export a limited
amount of
goods/services
for which it is
suited.


If I can produce more of a good or service
using all of my available resources than you
can, I have an absolute advantage in
producing that good or service.
If I can produce a good or service at a lower
opportuncomparative advantageity cost than
you then I have a.
A country should specialize in the good in
which it has comparative advantage.
 How does
This work?


Let's use our tropical island example to
identify who has absolute and comparative
advantage in the production of fish and
coconuts.


In one hour Tom can cut down 16 coconuts
or catch 8 fish.
In one hour Wilson the volleyball can cut
down 21 coconuts or catch 7 fish.
So who has the absolute and comparative
advantage in what product.
Tom
Wilson
Coconuts/hour
(A)
16
21
Fish/hour (B)
8
7
You can produce
more that the other
person/country.
Coconuts?
Fish?
Tom
Wilson
Coconuts
16
21
fish
8
7
Coconuts:
Tom 8/16= .5
Wilson 7/21=.66
Fish:
Tom 16/8= 2
Wilson 21/7= 3
Tom
Wilson
Coconuts
(A)
16
21
Fish (B)
8
7
The bottom line is that it is comparative
advantage (opportunity cost) and not
absolute advantage that yields an incentive
for specialization and trade.
Now—Can Tom and Wilson trade with each
other?
Tom
Wilson
Coconuts
25
5
Fish
21
7
Just because Tom is
am better than
Wilson at
everything, does
this mean Tom
should do
everything?
Who has the absolute
and comparative
advantage?
 Factor
Markets-productive
resources are bought and sold.
 Product Markets-producers sell
goods/services to consumers.
 Recently markets have evolved
into cyberspace, with buyers and
sellers interacting through
computers without leaving their
h0mes.


This diagram illustrates the flow of
goods/services and money in a market
system.
In a market economy-consumers and
businesses answer the what, how and for
whom to produce questions. Other terms
include, capitalism and mixed or free market
economy.
Individuals
Product
Markets
Factor
Markets
Industry


Consumer Sovereignty-the idea that
consumer s decide what will be produced
An economic system is an organized way of
providing for the wants and needs of society.



Strong family ties
Each know their role
and what is expected
of them


Change is discouraged,
sometimes punished.
Few consumer goods
Examples:
Advantages
Disadvantages




No career choices
Few consumer goods
All economic questions
answered by the
government
Economy can change
direction quickly




No career choices
Few consumer goods
All economic questions
answered by the
government.
Shortages may arise
Examples
Advantages
Disadvantages



Individual freedom
Competition
Many consumer goods




Young, old excluded
from economic
decisions.
Prices change
Economy slow to
change
Examples:
Advantages
Disadvantages



The Constitution does not outline our
economic system.
It does provide a framework.
What is their role in the Economy as outlined
in the Constitution?
◦ President
◦ Congress
◦ Supreme Court







Economic Freedom- to buy and sell most
products
Economic Efficiency –use resources wisely,
conserve
Economic Equity-policies benefit everyone fairly
Economic Security-protection against layoffs
Full Employment-everyone who wants a job has
one.
Price Stability-little fluctuation, changes over
time
Economic growth-economy grows over time.
Trade offs among goals
Sometimes the goals are in conflict.
Example:
New MPG guidelines.
Economic
Freedom
• Choose job
• Choose where
to live
Private
Property Rights
• Own and
control
property
Voluntary
Exchange
• Buyers and
sellers act
freely
Profit Motive
• Work to make
money
• Not forced to
work


Sellers compete with one another to attract
customers while lowering prices
Consumers compete with one another to find
the best products at the lowest prices.
 The
role of the consumer is
to reject products or prices
they don’t like.
 Be a smart consumer
Protector of consumers
 Provider of goods and services
 The government is also a consumer
 Regulator of competition in
Marketplace.
 Promoter of National goals.
 The role of the government can change
over time or in an economic crisis.



Businesses have been accused of being
greedy.
Charging too much and making huge profits,
cheating workers and customers.
Adam Smith argued a market economy
is largely self regulating and did not
require government involvement.
 Laissez-faire-role of government is
limited.
 Based on : prices, profit and private
property.
 Individuals answer all economic
questions.

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
Wealth
Consumer satisfaction
Freedom to choose
Producers supply what
consumer s want.

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
Pros
Ignores public goods
Produce only for those
who demand.
Allows for businesses
to fail
Unemployment
Less productive
resources exist.
Cons
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Arose from dissatisfaction with living and
working conditions during the Industrial
Revolution.
The state owns most factors of production
Very little private property
Prices are set by the state
Democratic Socialism-works in an elected
framework
Authoritarian Socialism-central government
controls the economy



People use “election”
power
Address for whom
directly
Government
guaranteed benefits for
all.
Pros



Government guarantee
of jobs and benefits
leads to very high
taxes
Little labor mobility
Prices can reflect high
taxes.
Cons




Karl Marx”Communist Manifesto” (Das Kapital) a
series of class struggles would eventually
result in collective owner ship of all capital
Proletariat=workers
Marx actually envisioned Socialism as the
stepping stone to Communism.


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All workers are equal
No job uncertainty, no
unemployment
Centralized control and
planning.
No surpluses or
shortages






Pros
No individual freedom
No incentive to work
Little consumer
satisfaction
Few day to day
changes.
No safety net benefits
for individuals.
Paid to work, not
based on skill level
Cons


Everyone has their opinion as to how the
economy should operate.
We will look at three theories;
◦ Classical
◦ Keynesian
◦ Monetarist

Key premise: Competition is best for the
market.
◦ Competition creates better, cheaper products, more
choices.
◦ Supply creates wealth.
◦ Smith’s “invisible hand”
◦ Encourage trade
◦ Oppose excessive taxation
◦ Stop monopolies, collusion and unions as they
block competition.


Smith, Say, Ricardo, Marshall, Hayek,
Friedman
Additionally: Ron Paul, Conservatives,
Libertarians, Tea Partiers, Rush, Hoover

Key Premise: Competitive markets are flawed
and cannot stay in balance.
Say’s Law is a myth
Prices go up quickly but do not fall quickly
Full employment and production will not last
Gov’t must repair constant recessions.
Slow inflation with tax increases and cut
government spending.
◦ Create demand during a recession by tax cuts and
increased government spending.
◦ Safety nets-social security, unemployment,
minimum wage programs
◦
◦
◦
◦
◦


Keynes, Krugman
Government, CNN, FDR, Obama, George W.,
Democrats, Liberals, Cheney

Key Premise: Non-political fine tuning is best
for the economy.
◦
◦
◦
◦
Politicians won’t raise taxes but they will cut them.
Central banks think long run, not next election.
Use interest rates to encourage spending or saving.
Provide stable currencies


Volker, Greenspan, Bernacke—who are they?
Former and current Chairmen of the Federal
Reserve.
Now you have seen all three? Which are you?
In finance, the exchange rates (also known as
the foreign-exchange rate, ForEx rate or FX
rate)
It is the value of a foreign nation’s currency in
terms of the home nation’s currency.
The foreign exchange market is where
currencies are bought and sold.


The supply and demand for USA dollars or
other currency on the world market.
I can’t pay for my Italian car with American
Dollars.
We sell exports and buy imports.
 Invest in other countries stocks and bonds.
 Build factories and stores in other countries.
 Hold currencies in bank accounts for future
exports, imports and loans.
 Speculate in currency rate.

If the value of the dollar is low on the world
market-increased exports
If the value of the dollar is high on the world
market-less exports
What kind of dollar do we have today?

A fixed exchange rate,
wherein a currency's
value is matched to the
value of another single
currency or to a basket
of other currencies, or
to another measure of
value, such as gold.
Fixed



It is used as a means
to control inflation.
And used to stabilize
the value of a currency.
Illegal to trade
currency at any other
rate.
Good/bad points
Supply and demand set
the value of currencies
on the foreign
exchange market.
This enables a country to
dampen the impact of
shocks and foreign
business cycles
The exchange rate
regimes of floating
currencies may more
technically be known
as a managed float.
Floating
Good/bad points
Devaluation-In
common modern
usage, it specifically
implies an official
lowering of the
value of a country's
currency within a
fixed exchange rate
system.
Depreciation
An decrease in the
value of one
currency relative to
another currency. A
unit of one currency
buys less units of
another currency

Appreciation
An increase in the
value of one
currency relative to
another currency. A
unit of one currency
buys more units of
another currency.

Balance of trade is
the difference
between the value
of a nation’s
exports and
imports.
Trade surplus-more
exports.
Trade deficit-more
imports.

Trade surplus-exports exceed imports.

Trade deficit-imports exceed exports.

The USA has a deficit.
How large is it?


We get products
They get money to use
for investment.
Imports


They get products.
We get money to use
for investment.
Exports
Protectionists:
Want trade
restrictions to the
point they want
trade eliminated.





National defense at
risk
Infant industriesprotect new businesses
Protect domestic jobs.
Keep money at homebuy American.
Help balance of
payments-export
more, import less.
Free traders:
Believe all trade
should be allowed
with no restrictions.
 Trade=jobs
 Tariffs
hurt
consumers
 Protecting
industries helps
bad businesses.
 Trade provides a
great variety of
goods.
 Trade=economic
growth

Tariffs-a tax on goods
◦ Protective-raise the price of imported goods, limit
amounts
◦ Revenue-tax added to price, no limit on amount.
Import quotas-limit the number of the item
allowed into the country.
Health inspections-free of disease or insects,
used for animals and plants.

Embargo-no trade of a product (ivory) or no
trade with the country (Cuba).



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•
•
•
•
•
•
•
•
•
•
Anchovies
Brooms
Ethyl alcohol
Milk and cream
Olives
Satsumas (mandarins
Tuna
Upland cotton
Wheat gluten
Wire Rod & Line Pipe
Goods subject to the EAR (Export Administration Regulations)
including, but not limited to; chemicals, microorganisms,
electronics, computers, telecommunication and information
security devices, lasers and sensors, navigation and avionics,
propulsion systems, materials and equipment using nuclear
technology, software.



Wild animals or birds or their eggs (alive or dead) captured or
killed contrary to law
Articles containing dog or cat fur
Human corpses, human organs or body parts, human and animal
embryos, or cremated or disinterred human remains.
Dumping is the
selling of excess
goods on foreign
markets below cost.
Dumping abroad
drives out
competition and
creates a monopoly
of power and
profits.

Smoot-Hawley Tariff (1930)
The US wanted to reduce imports by
increasing tariffs, other countries retaliated
and raised tariffs against the US.

This contributed to the depression.

1947-GATT-General Agreement on Tariffs and
Trade
Free trade, lower tariffs and eliminate import
quotas.
To help stimulate trade and economic growth
after WWII.
1993-European Union (EU)
Trade bloc to abolish tariffs and quotas for
members.
Common import rules
Euro is the common currency.
England will not join, as other countries are
added incrementally.
The receiving nation will be
granted all trade advantages
— such as low tariffs — that
any other nation also receives.
In effect, a nation with MFN
status will not be treated
worse than any other nation
with MFN status.
In the United States, MFN is
called permanent normal
trade relations.
African Union (AU)
Among the
objectives of the
AU's leading
institutions are to
accelerate the
political and socioeconomic
integration of the
continent


The AU is an
intergovernmental
organization
consisting of
52 African states.
Established on July
9, 2002
The United Nations (UN)
is an organization
whose stated aims are
facilitating cooperation
in international law,
international security,
economic
development, social
progress, human
rights, and the
achieving of world
peace.



UN was founded in
1945 after World War
II.
There are currently
192 member states,
including nearly every
sovereign state in the
world.
3 of the 195 are not
members—
Kosovo,Taiwan and
Vatican City
The United Nations (UN) is an
international organization
whose stated aims are
facilitating cooperation in
international law,
international security,
economic development,
social progress, human
rights, and the achieving of


world peace.

UN was founded in
1945 after World War
II.
There are currently
192 member states,
including nearly
every sovereign state
in the world.
3 of the 195 are not
members—
Kosovo,Taiwan and
Vatican City
Leadership or predominant influence exercised
by one nation over others, as in a
confederation.
Who has the power?
Take the G7 and
add
Russia.

You now have the
G8.






Low GDP-low industrial production
Most people are subsistance famers
Weak property rights-few people control land
and property.
Poor health conditions-few doctors, shortage
of hospitals, high infant mortality.
Low literacy rates
Raid population growth


The international transfer of capital, goods,
or services from a country or international
organization for the benefit of the recipient
country or its population.
Aid can be economic, military, or emergency
humanitarian (e.g., aid given following
natural disasters).

In its classic form is defined as a company
from one country making a physical
investment into building a factory in another
country

investments in
education, health,
public
administration,
infrastructure,
financial and private
sector development,
agriculture, and
environmental and
natural resource
management.

Provide low or no
interest loans
(credits) and grants
to countries that
have unfavorable or
no access to
international credit
markets.


working to foster global monetary
cooperation, secure financial stability,
facilitate international trade, promote high
employment and sustainable economic
growth, and reduce poverty.”
Countries contributed to a pool which could
be borrowed from, on a temporary basis.


China, Japan and Germany are leading world
exporters.
Emerging world markets in the near future:
◦
◦
◦
◦
◦
Vietnam
Argentina
Panama
Indonesia
Brazil

The concept of
sending work
outside of the USA
to lower labor and
production costs.


Process of transferring ownership of a
business, enterprise, agency or public service
from the public sector (the state or
government)
Two examples:
◦ A company who currently has stock, buys all them
back.
◦ The City of Alvin has Nike take over control of all
public parks.


Business over the internet. The business
world is ever changing.
Now you need an app.