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Essentials of Comparative Politics, Chapter 4 Political Economy Economy Political economy: the study of how politics and economics are related and how their relationship shapes the balance between freedom and equality Made up of markets and property,public goods, social expenditures, taxation, money/inflation/unemployment, regulation, and trade Markets and Property Markets: the interactions between the forces of supply and demand, and they allocate resources through the process of that interaction Creates values for goods and services by arriving at specific prices Emerge as a community of buyers and sellers in constant interaction through the economic choices they make Property: the ownership of goods and services exchanged in the market Public Goods Public goods:goods, provided or secured by the state, available to society and which no private person or organization can own States differ in large extent as to what they provide, because of role of ideology between state and market Social Expenditures the state's provision of public benefits, such as education, health care, transportation Can be very costly Taxation provides money for public goods and expenditures Some see it as stealing of hard-earned revenues; others see it as critical for a basic level of equality Money, Inflation, and Unemployment Money-medium of exchange State has much influence over domestic economy, through central bank: institution that controls how much money is flowing through the economy Actions of central bank tied to inflation and unemployment Inflation: when prices rise and money loses its value Deflation: when too many good are chasing too little money Money, Inflation, and Unemployment Money-medium of exchange State has much influence over domestic economy, through central bank: institution that controls how much money is flowing through the economy Actions of central bank tied to inflation and unemployment Inflation: when prices rise and money loses its value Deflation: when too many good are chasing too little money Trade Most states do not have only local markets; must get some goods elsewhere Regulation of trade: Generates state revenue Protects local jobs Promotes competition Keeps the costs of goods low Political Economic Systems The actual relationship between political and economic institutions in a particular country Differ in idea of relationship between state and market Liberalism, social democracy, communism, mercantilism Liberalism High priority on individual political and economic freedom Limited state involvement in economy Foundation in capitalism: system of private property and free markets Social Democracy Draws from liberalism and communism in an attempt to balance too much freedom and equality Believe in private property, but also public goods Communism Eliminates individual freedom to achieve equality Entire economy is public good Mercantilism Focuses on need of the state, not needs of the society Limits social expenditures Low interest rates of central bank to encourage borrowing Measuring Wealth Gross domestic product (GDP): total market value of all goods and services produced within a country over a period of one year Purchasing-power parity (PPP): attempts to estimate the buying power of income in each country by comparing similar costs, using prices in U.S. as a benchmark Measuring Inequality and Poverty Gini index: mathematical formula that measures the amount of economic inequality in a society Human development index (HDI): looks at the overall outcome of that wealth to decide the wellbeing of a country's people