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Unit 7-8 Seminar Monday, July 11th, 2011 Professor Joe Serres, J.D., M.B.A. Unit 7 Assessing Policies’ Effects on Improving Economic Conditions Unit Outcomes: •National- and state-level Gini coefficients and what they tell us about the distribution of income •How Poverty Rates help explain Economic Development •The Phillips Curve relation to Economic Growth and Conditions •Absolute and Relative Tax Burdens •Actual and Natural Unemployment Rates Unemployment Each month, the U.S. Census Bureau surveys a sample of about 60,000 households in the United States. This survey is called the Current Population Survey. By asking the people in the survey a number of questions, the Census Bureau determines To be counted as unemployed, a person must be looking for work, but not have a job. A person is counted as employed in the Current Population Survey if he or she has worked at all during the week of the survey. Thus, part-time workers are counted as employed. The official definition of a parttime worker is one who works between 1 and 34 hours per week. THREE KEY INDICATORS OF LABOR MARKET 1. The unemployment rate, the percentage of the labor force that is unemployed. 2. The labor force participation rate, the ratio of people in the labor force to the working-age population. 3. The employment-to-population ratio, the ratio of employed workers to the working-age population. Natural unemployment rate: the unemployment rate that exists when there is neither a recession nor a boom and real GDP is equal to potential GDP. Unemployment & LaborTerms Cyclical unemployment: Unemployment due to a recession, when the rate of unemployment is above the natural rate of unemployment. Frictional unemployment: Unemployment arising from normal turnover in the labor market, such as when people change occupations or locations, or are new entrants. Structural unemployment: Unemployment due to structural problems such as poor skills, longer-term changes in demand, or insufficient work incentives. Labor demand curve: A downward-sloping relationship showing the quantity of labor firms are willing to hire at each wage. Labor supply curve: Upward sloping relationship showing the quantity of labor workers are willing to supply at each wage. Real wage: The wage or price of labor adjusted for inflation; in contrast, the nominal wage has not been adjusted for inflation. Job rationing: A reason for unemployment in which the quantity of labor supplied is greater than the quantity demanded because the real wage is too high. Job search: A reason for unemployment in which uncertainty in the labor market and workers’ limited information require people to spend time searching for a job. Critical Questions-Poverty, Inequality & Development 1. What is the extent of relative inequality in developing countries, and how is this related to the extent of absolute poverty? 2. Who are the poor, and what are their economic characteristics? 3. What determines the nature of economic growth—that is, who benefits from economic growth, and why? 4. Are rapid economic growth and more equitable distributions of income compatible or conflicting objectives for low-income countries? To put it another way, is rapid growth achievable only at the cost of greater inequalities in the distribution of income, or can a lessening of income disparities contribute to higher growth rates? 5. Do the poor benefit from growth, and does this depend on the type of growth a developing country experiences? What could be done to help the poor benefit (even more)? 6. What is so bad about high levels of inequality? 7. What kinds of policies are required to reduce the magnitude and extent of absolute poverty? Measuring Inequality Economists usually distinguish between two principal measures of income distribution for both analytical and quantitative purposes: the personal or size distribution of income and the functional or distributive factor share distribution of income. Poverty, Inequality & Development~ “Package” Approach 1. A policy or set of policies designed to correct factor price distortions (underpricing capital or overpricing modern-sector skilled wages) so as to ensure that market or institutionally established prices provide accurate (i.e., socially correct) signals and incentives to both producers and resource suppliers. Correcting distorted prices should contribute to greater productive efficiency, more employment, and less poverty. The promotion of indigenous technological research and development of efficient, laborintensive methods of production may also be valuable. 2. A policy or set of policies designed to bring about far-reaching structural changes in the distribution of assets, power, and access to education and associated income-earning (employment) opportunities. Such policies go beyond the realm of economics and touch on the whole social, institutional, cultural, and political fabric of the developing world. But such fundamental structural changes and substantive asset redistributions, whether immediately achieved (e.g., through publicsector interventions) or gradually introduced over time (through redistribution from growth), will increase the chances of improving significantly the living conditions of the masses of rural and urban poor. Poverty, Inequality & Development~ “Package” Approach 3. A policy or set of policies designed to modify the size distribution of income at the upper levels through the enforcement of legislated progressive taxation on incomes and wealth and at the lower levels through direct transfer payments and the expanded provision of publicly provided consumption goods and services, including workfare programs. The net effect is to create a social “safety net” for people who may be bypassed by the development process. 4. A set of targeted policies to directly improve the well-being of the poor and their communities, particularly those caught in poverty traps, that goes beyond safety net schemes, to offer programs that build capabilities and human and social capital of the poor, such as microfinance, health, education, agricultural development, environmental sustainability, and community development and empowerment programs, as described throughout this text. These can be carried out either by government or by nongovernmental organizations through local and international support. Health & Education Human capital is the term economists often use for education, health, and other human capacities that can raise productivity when increased. Typically in developing countries, the social costs of education (the opportunity cost to society as a whole resulting from the need to finance costly educational expansion at higher levels when these limited funds might be more productively used in other sectors of the economy) increase rapidly as students climb the educational ladder. The private costs of education (those borne by students themselves) increase more slowly or may even decline. Closing Education Gender Gap in Developing Countries 1. The rate of return on women’s education is higher than that on men’s in most developing countries. 2. Increasing women’s education not only increases their productivity on the farm and in the factory but also results in greater labor force participation, later marriage, lower fertility, and greatly improved child health and nutrition. 3. Improved child health and nutrition and more educated mothers lead to multiplier effects on the quality of a nation’s human resources for many generations to come. 4. Because women carry a disproportionate burden of the poverty and landlessness that permeates developing societies, any significant improvements in their role and status via education can have an important impact on breaking the vicious circle of poverty and inadequate schooling. Key Unit 7Terms & Concepts Absolute Tax Burden: Whether for a nation, state, class, or individual, this is the actual cost of engaging in commerce in the taxable economy. Bond rating: A state, nation, or corporation’s bond status as assessed by official rating agencies; it reflects investors’ confidence in its ability to meet debt payments on time, in full. Phillips Curve: A largely academic concept holding that a nation’s economy typically can suffer from either high inflation or unemployment, but not both at the same time; politicians have come to argue that Republicans tend to engineer higher unemployment to combat inflation, while Democrats sacrifice higher inflation in order to pursue lower unemployment. Relative Tax Burden: This is the burden of a given individual, class, or industry at the state or national level compared to those of others. Unit 8-International Agencies and Policies OUTCOMES • The roles of institutions such as the World Trade Organization and the International Monetary Fund • The influence of the Commerce Clause on U.S. trade policy • The “big picture” of America’s Economic Growth and Development within the international political economy Tariffs & Quotas Ad valorem tariff: a tax on imports evaluated as a percentage of the value of the import. Specific tariff: a tax on imports that is proportional to the number of units or items imported. Another method of government restriction of international trade is the quota. A quota sets a limit, a maximum, on the amount of a given good that can be imported. Trade war: a conflict among nations over trade policies caused by imposition of protectionist policies on the part of one country and subsequent retaliatory actions by other countries. World Trade Organization (WTO): an international organization that can mediate trade disputes. Antidumping duty: a tariff imposed on a country as a penalty for dumping goods. Transition costs, environmental and labor standards, national security, infant industry, and retaliation are some of the arguments in favor of trade restrictions. Each has the possibility of being used by protectionists. FreeTradeTerminology Trade Diversion: the shifting of trade away from the low-cost producer toward a highercost producer because of a reduction in trade barriers with the country of the higher-cost producer. Trade creation: the increase in trade due to a decrease in trade barriers. Tree trade area (FTA): an area that has no trade barriers between the countries in the area. Customs union: a free trade area with a common external tariff. Globalization Globalization is a process by which the economies of the world become increasingly integrated, leading to a global economy and, increasingly, global economic policymaking, for example, through international agencies such as the World Trade Organization (WTO). -- Elasticity of Demand Trade Theory and Development: The Traditional Arguments 1. Trade is an important stimulator of economic growth. It enlarges a country’s consumption capacities, increases world output, and provides access to scarce resources and worldwide markets for products without which poor countries would be unable to grow. 2. Trade tends to promote greater international and domestic equality by equalizing factor prices, raising real incomes of trading countries, and making efficient use of each nation’s and the world’s resource endowments. 3. Trade helps countries achieve development by promoting and rewarding the sectors of the economy where individual countries possess a comparative advantage, whether in terms of labor efficiency or factor endowments. It also lets them take advantage of economies of scale. 4. In a world of free trade, international prices and costs of production determine how much a country should trade in order to maximize its national welfare. Countries should follow the principle of comparative advantage and not try to interfere with the free workings of the market. 5. Finally, to promote growth and development, an outward-looking international policy is required. In all cases, self-reliance based on partial or complete isolation is asserted to be economically inferior to participation in a world of unlimited free trade. KeyTerms Unit 8 Advanced Economies: Those nations considered relatively wealthy, democratic, and technologically cutting edge Capital Accounts: Much like the trade deficit, only now addressing financial flows rather than goods, this measures the change in foreign ownership of U.S. goods minus the change in U.S. ownership of foreign assets Catch-up Line: The relationship (downwardsloping) between a nation’s productivity and its predicted growth in productivity Commerce Clause: In Article 1, Section 8 of the U.S. Constitution, the clause that gives all power to regulate interstate and international commerce to the U.S. Congress Customs Union: The adoption of tariffs at the same rate across participating nations Developing Country: A nation that is considered “poor,” or at least not “wealthy,” according to some real GDP-based measure Developing Economies: Those nations considered relatively poor, likely not democratic, and technologically backward . Fast Track Authority: The power delegated to the President from Congress to negotiate trade treaties with other nations and be protected from amendments in the U.S. Senate Foreign Direct Investment: The direct ownership of a U.S. firm, usually at least 10%, by a foreign entity Free Trade Area: The practice of Free Trade within a specific collection of nations Informal Economy: Also known as the black market economy, this is the portion of a nation’s economy characterized by barter and undisclosed transactions due to avoidance/evasion of taxes or criminal behavior International Monetary Fund (IMF): International agency designed to help fix trade- and currencyrelated problems across nations, thereby encouraging Economic Growth and Development KeyTerms Unit 8 Portfolio Investment: The direct ownership of a U.S. firm, usually less than 10%, by a foreign entity. U.S. Treaty Passage: After the President and/or his representatives negotiate a treaty with another nation, the U.S. Senate must pass it by a 2/3’s super majority World Bank: The international lender of last resort, using funds from the Advanced nations to promote Economic Growth and Development in Developing countries World Trade Organization (WTO): The official international organization charged with mediating trade disputes among nations Discussion Board National Government Uses Fiscal Policy Consider how the national government uses fiscal policy to keep the economy growing, or get it growing. What are the best fiscal policies for doing so? Do spending increases or tax cuts make the most sense in this case? Which forms of spending or tax cuts do you think work best? Unit 8 Assignment Debate the proposition, “International agencies and policies that promote free trade are good for economic growth and development in the United States.” For this assignment, in a 1-2 page position paper, debate your “side” of the above proposition. The purpose of a debate is to argue the “pros” and “cons” about an issue and persuade the audience that your position is more valid than the other side’s position. To ensure the validity of your position, it must be supported by evidence. Also, you should anticipate the counterarguments that the other side may make to show you are well informed about both sides of the issue. This will help you develop stronger arguments. Your position paper should include the following information. An Introduction: Brief introduction of your position and viewpoint of the issue (either pro or con). 3-4 Arguments: Assert the arguments/points that you take on the issue and provide support for each point. For each point, include evidence from research. What international institutions, policies, theories, and real world examples, whether historical or contemporary, support your argument? Use “big picture” and specific, industry-level examples as you see fit. Rebuttal: Defense of your position against possible opposing arguments and why they should not be considered valid. Conclusion: Summarize your argument. Reference page: List of all the works cited in your position paper. Length 2 pages