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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