Ch. 5 Political Science

What are the four major economic responsibilities of most modern states?

1. Encourage economic growth

2. Keep inflation low

3. Keep unemployment low

4. Reduce economic inequality

What is an economic policy?

A course of action or set of measures used by governments to manage, influence, or control the behavior of the economy.

Which economic policy focuses on managing the money supply, interest rates, and inflation?

Monetary policy

Which economic policy regulates taxation, government spending, and the public deficit?

Fiscal policy

Which policy measures utilize tariffs and international trade agreements to manage the economy?

Trade policy

What is an economy?

A system where goods and services are produced, distributed, traded, and consumed to allocate limited resources within a region or country.

What are three key aspects of an economy?

1. Production & consumption

2. Resource allocation

3. Market dynamics

Why is governmental power necessary for resource allocation in an economy?

Because resources in an economy are limited

According to Marxist theory, what role does the economy play in relation to other societal institutions?

It constitutes the base upon which all other institutions and structure built

How does economic growth enable a state to provide essential public goods and services?

Economic growth increases tax revenue, giving the state the capacity and resources to fund healthcare, education, and public infrastructure.

What is political economy?

The study of the nature of the relationship between the state and the economy

What is the foundational assumption of Rational Choice Theory in political science?

People act rationally and in their own self-interest, making decisions by weighing risks against rewards and acting only when rewards exceed risks.

What is Baumol’s cost disease?

The rise of wages in jobs experiencing little or no labor productivity growth, occurring in response to rising salaries in high- productivity sectors.

Who developed the concept of Baumol’s cost disease?

William J. Baumol

What are the three major reasons for variations in economic performance among states?

• Any differences in natural resources, government investment policy errors, human capital capacities, lack of manufacturing or North- South dependency relations.

In political economy, what are rents?

Transfers of money that are not related to productive activity, often used by governments as a vehicle for buying political support.

What is rent-seeking?

An individual or entity seeking to increase their own wealth without creating any added value or benefits for society.

What is import substitution industrialization?(ISI)

An economic policy pursued by many developing nations to foster development by replacing foreign imports with domestically produced goods.

How is inflation defined?

The rate of increase in general prices or the cost of living over a specified period.

How is unemployment defined in economic terms?

The state of an individual who is not employed but is capable of working and actively seeking employment.

Progressive taxation

A tax system that takes a larger percentage of income from high-income groups than from low-income groups, based on ability to pay.

What are the two examples of progressive taxes?

Any two of: investment income tax, tax on interest earned, rental earnings tax, estate tax, or tax credits.

Regressive taxation

A tax assessed regardless of income where low- and high income earners pay the same dollar amount, resulting in higher relative burden on low incomes.

Two examples of regressive taxation?

Sales tax and excise tax: fuel, tobacco, airline tickets, heavy tickets.

What strategy did South Korea adopt regarding domestic savings to spur economic growth?

Encouraged domestic savings to directly boost investment.

What policy measures contributed to South Korea’s economic development?

1. Maintaining sector competition

2. Supporting education

3. Accommodating job mobility

4. Funding R&D to launch new industries

5. Scaled/graduated taxes and benefits

What primary functions does an independent Central Bank perform?

Handled government transactions, coordinates private bank policies, and controls interest rates.

Why is Central Bank independence valuable in economic management?

It allows interest rate regulation insulated from short-term political pressures, reducing corruption in government and industry.

Political corruption

The use of public resources for private gain

What are 3 major economic consequences of corruption?

1. Raises all economic costs

2. Distorts market choice

3. Creates patterns of abnormal economic behavior

Which non-governmental organization measures and publishes global levels of governmental corruption?

Transparency International

According to Transparency International, which regions tend to have the cleanest records?

Prosperous and developed countries in North America and Europe

What are 5 structural factors that can diminish a state’s capacity to manage its economy?

1. Globalization

2. Currency management and fluctuations

3. International trade agreements/pressures

4. Energy interdependence

What is co-determination in the context of Germany’s economy?

A legal requirement bringing workers onto the board of directors for companies employing more than two thousand employees

What does the German concept of Ordnungspolitik refer to?

Rule based economic policy making that incorporates the idea of free-market laissez-faire within a structured framework.

From which colonial power did Indonesia gain independence in 1945?

The Netherlands

What 3 main factors post serious operational concerns for businesses in Indonesia?

1. Excessive red tape

2. Persistent corruption

3. Poor infrastructure

In CIA World Facebook estimates provided in the context, which country had a GDP per capita of $139,100 with a population under 40,000

Liechtenstein

Based on CIA figures, which country had a low GDP per capita of $700 despite a population over 13 million?

Burundi

What core trade-off do governments often face when addressing inflation versus unemployment?

Actions taken to rapidly lower inflation can slow economic growth and increase unemployment, while aggressive job creation measures can spur inflation.

How does sales tax affect lower-income individuals compared to higher-income individuals?

Because sales tax is a flat rate regardless of earnings, lower income individuals spend a significantly larger percentage of their total income on basic taxed goods.

Excise tax

A specific regressive tax levied on targeted consumer goods, such as fuel, tobacco, indoor tanning, tires, or airline tickets

What is the primary motive behind rent-seeking behavior by entities or individuals

To extract financial benefits or wealth directly from the political system without engaging in productive economic activity.

In political economies terms, what is dependency theory’s structural explanation for global economic inequality?

Unequal dependency relationships where raw materials and wealth flow from developing countries of the South to industrialized countries of the North.

How does human capital capacity directly influence state economic performance?

A highly educated, skilled, and healthy workforce drives technological innovation, workforce efficiency and industrial productivity

What historical event in the 1970s tested South Korea’s governmental economic nimbleness?

The global oil crisis of the 1970s

How does energy interdependence restrict a state’s control over its own economy?

States reliant on foreign energy imports are vulnerable to international supply chain disruptions and global fuel price spikes

What governance shift occurred in Indonesia after decades of military dominance?

Progress toward economic reform and democratic development, notably accelerating since 2004

What is the primary function of trade policy tariffs?

To impose taxes on imported goods, protecting domestic industries and raiding state revenue.

The economic indicator that measures total national economic output divided by population size is called____

GDP per capita

What economic term refers to costs or benefits incurred by third parties not directly involved in a transaction?

Externality

What metric measures income distribution and inequality across a population?

Gini index

What metric accounts for differences in relative purchasing power and local cost of living when comparing economic output across nations?

Purchasing power parity(PPP)

Why can government policy errors in capital investment cause long-term economic underperformance?

Misallocating state capital into unproductive sectors wastes scarce national resources and reduces productivity.