Download The Role of Government in the Market

The Role of the Government in the
Market Place
BEC 30325
Managerial Economics
Sajitha Dishanka
Economic Rationale
NEEDS & WANTS
SCARCITY
ALTERNATIVES
OPPORTUNITY COST
MARGINALITY
CHOICE / DECISION
2
Rationale of the Market Economy
CHOICE /
DECISION
3
Activities in a Market Economy
(Circular Flow of Income & Expenditure)
GOVERNMENT
Factors of Production
Factor Payments
Exports (X)
Expense on Goods & Services
Imports (M)
Savings (S)
Goods & Services
FINANCIAL
SECTOR
Investment (I)
INTERNATIONAL
SECTOR
4
Composition of GDP
Production
Income
Demand
• When economists think about year-to-year
movements in economic activity;
– they focus on the interaction between production, income
and demand
5
Cyclical Effect
1. Changes in the demand for goods lead to
changes in production
2. Changes in production lead to changes in
income
3. Changes in income lead to changes in the
demand for goods
6
Demand for Goods
• Decision to go to a restaurant by a consumer
(C)
• Purchase of a machine by a firm (I)
• Purchase of combat airplanes by the central
government (G)
• Aggregate Demand  GDP
– Trade balance
– Inventory investment
7
Composition of GDP
% of GDP
($ billions)
1. Consumption (C)
7,064
69
2. Investment (I)
- Non-residential
- Residential
1,246
446
3. Gov. spending (G)
12
1,692
5
1,839
17
18
4. Net exports
- Exports (X)
1,051
- Imports (M)
-1,380
5. Inventory invest.
GDP (Y)
11
-329
-58
10,208
-14
-3
-1
100
8
Macroeconomic Policies
• Demand-side policies
– Affect aggregate demand/expenditure
– Short-run focus
• Supply-side policies
– Affect aggregate supply/output
– Long-run focus
9
Demand-side Policies
• Major macroeconomic policies
– Monetary Policy
• Changes in the money supply implemented by the government
– Fiscal Policy
• Changes in government spending and/or taxes
• How & when to apply...?
– Expansionary effects
• Increase aggregate demand if the economy is below its potential
output
– Contractionary effects
• Decrease aggregate demand if the economy is above its potential
output
10
Supply-side Policies
• To increase potential output by encouraging
– Labour productivity
– Innovation (R&D)
– Investment
– Technology advancement
11
Competitiveness of an Economy
Source: GCR 2014/2015
12
Factor-driven Stage
• Countries compete based on factor
endowments
– primarily unskilled labor and natural resources
• Companies compete on the basis of price and
sell basic products or commodities
– low productivity reflected in low wages
13
Required…
in the factor-driven stage
•
•
•
•
well-functioning public and private institutions
appropriate infrastructure
stable macroeconomic framework
healthy and literate workforce
14
Efficiency-driven Stage
• Wages rise with advancing development
• More efficient production processes and increase
product quality
• Competitiveness is increasingly driven by;
–
–
–
–
–
–
higher education and training
efficient goods markets
well-functioning labor markets
sophisticated financial markets
large domestic or foreign market
ability to harness the benefits of existing technologies
15
Innovation-driven Stage
• Sustain higher wages and the associated
standard of living by;
– competing with new and unique products
• Companies must compete through;
– new and different goods (innovation)
– using the most sophisticated production processes
16
Weights of the three main groups
of pillars at each stage of
development
Factordriven
Stage (%)
Efficiencydriven
Stage (%)
Innovationdriven
Stage (%)
Basic requirements
60
40
20
Efficiency enhancers
35
50
50
Innovation & sophistication
factors
5
10
30
Pillar Group
Source: GCR 2014/2015
17
The Concept of Political Economy
• Collectivism
– “Individual rights should be sacrificed for the good
of the majority and that property should owned in
common.”
- Plato (427–347 BC)
• Individualism
– “Private property is more highly productive than
communal property and will thus stimulate
progress.”
- Aristotle (384–322 BC)
18
Overview of Economic Systems
Major types
Main characteristics
National differences
•
Planned economy
Liberal market economy
•
•
State control
Collectivist ideology
•
•
•
•
Capitalist free market
Individualist
Democratic values
Minimum government
intervention
•
•
•
•
•
Social market economy
•
•
Markets tempered by social
values
Democratic values
Government welfare role
•
•
Mixed economy
•
•
•
Capitalist elements
Elements of state control
Weak individualism
•
North Korea – highly
authoritarian
Cuba – some liberalization
US – free market model, but
increased role of government
UK – elements of social market
models, belief in self regulation
Scandinavian – emphasis on
social welfare, extensive state
ownership
Northern European – emphasis
on social protections, state
ownership in key sectors
China – strong state
intervention, authoritarian
political system
19
India – market reforms under
Economic Transition
Political
System
UK
UK
Democratic
Chile
India
India
Russia
Mexico
Mexico
Russia
China
China
Chile
Totalitarian
Planned
Mixed
Market
Economic
System
20