Economics part II: Economies to globalization

Pure Market Economies

• Ownership of production resources is held privately. 

• Economic decision-making occurs with little government intervention. 

• The use of resources is left to private resource owners who act in their self-interest.

Pure Command Economies

• State ownership and control of production resources.

• The government determines what will be produced and who will produce it, independent of the market. 

Free Enterprise Systems

• An economy where the market determines prices, products, and services rather than the government. 

• Businesses and services are free of government control, and commercial activities are primarily regulated through private measures.

Free Trade

• an economic system where countries can trade with each other without tariffs, quotas, or other restrictions.

• It promotes the open exchange of goods and services across borders.

Benefits of Free trade

• lower prices - foreign competition has allowed for lower prices on goods (electronics)

• increased economic growth - allows countries to specialize in areas (leading to jobs and trade)

• a variety of goods - giving choices to consumers

• better political relations - promotes international cooperation

Negatives of Free Trade

• Job loss - cheaper labor in other countries

• Unfair competition - lower regulations = cheaper advantage

• Increased dependence - countries become dependent on imports, making it vulnerable to problems (distribution, supply chain, and price)

• loss of cult. identity - influx of foreign goods can erode cultural identity and traditions

Socialism

an economic and political system based on public ownership of the means of production

Communism

an economic system where the government owns most of the factors of production and decides the allocation of resources and what products and services will be available.

Pure Competition

characteristics include:

• Enough buyers/sellers that no one can impact supply, demand, or price

• Standardized Products: Items for sale cannot be differentiated between producers

• Complete Information: Buyers and sellers have knowledge of operating conditions in the industry

• Freedom of Entry & Exit: Barriers to entry and exit are low

• Example: Agriculture (wheat/corn). Farmers produce identical grains, and their crops can’t be distinguished from each other, so they are relying on global supply & demand

Monopoly

• One supplier of a product or service with no competition.

• It may develop from the control of limited resources, increasing returns to scale, technological advantages, and legal protections (patents, copyrights, and licenses). 

• They limit production to raise prices.

• Example: Electric companies are the only option in certain areas because competing for the power grid is too expensive, so they have a contract with the government

Oligopoly

• A limited number of companies compete in an industry.

• Develop from inefficient allocation of resources, increasing returns to scale, and other advantages that larger firms have over smaller firms. 

• Examples: Three companies produce most of the soft drinks for American consumption: Coca-Cola, PepsiCo, and Royal Crown

Monopolistic Competition

• Industries have many producers, but each producer has a product that is seen as different from the others. 

• Examples: Types of lemon-lime soda: Sprite, Sierra Mist, 7-UP, etc.

Monetary Policy

• Set by the Central Bank

• Heavily independent of the political process

• Impacts debt industries like the housing market

• Change in the money supply or how easy credit is to obtain

• Adjustment in federal funds interest rates or money supply

Fiscal Policy

• Set by the Federal Government

• Heavily integrated with the political process

• Impacts government budgets/net deficits 

• Change in how the existing monetary supply is utilized

• Adjustments in government spending and tax rates

Regulation

This involves setting rules and standards to control economic activities.

Intended Consequence of Regulation

• Protects consumers, ensures safety, and promotes fair competition.

• Example:

  • Environmental regulations to reduce pollution = Cleaner air and water, improved public health.

Unintended Consequence of Regulation

Increased bureaucracy, higher costs for businesses, and stifling innovation.

• Example:

  • Environmental regulations to reduce pollution = Increased costs for businesses, potential job losses.

Taxation

Governments levy taxes to generate revenue and influence economic behavior

Intended Consequence of Taxation

• Funds public goods and services, and discourages negative externalities (e.g., pollution taxes).

• Example:

  • Excise tax on cigarettes to discourage smoking = Reduces smoking rates and generates revenue for healthcare.

Unintended Consequence of Taxation

• Economic distortions, tax evasion, black markets.

• Example:

  • Excise tax on cigarettes to discourage smoking = Black markets for cigarettes, potential tax evasion.

Subsidies

The government provides financial assistance to support specific industries or activities.

Intended Consequences for Subsidies

• Promotes economic growth & supports essential sectors (agriculture, renewable energy)

• Example:

  • Agricultural subsidies to support farmers = Stabilizes food prices and ensures food security.

Unintended Consequences for Subsidies

• Inefficient allocation of resources, dependency on government support, & corruption.

• Example:

  • Agricultural subsidies to support farmers = Overproduction, higher food prices for consumers

Price Controls

The government sets maximum or minimum prices for goods or services.

Intended Consequences for Price Controls

• Protects consumers from price gouging (price ceilings), protects producers from low prices (price floors).

• Example:

  • Rent control to make housing affordable = Protects tenants from high rents.

Unintended Consequences for Price Controls

• Shortages or surpluses, black markets, reduced quality.

• Example:

  • Rent control to make housing affordable = Housing shortages, landlords reducing maintenance.

Public Goods & Services

The government provides goods and services that the private sector is unlikely to provide

(e.g., national defense, education, and healthcare)

Intended Consequences for Public Goods & Services

• Addresses market failures and improves overall well-being.

• Example:

  • Building roads & bridges = Improves transportation & stimulates economic activity.

Unintended Consequences for Public Goods & Services

• Inefficient allocation of resources, crowding out private sector investment.

• Example:

  • Building roads & bridges = Potential government debt if not financed properly.

Sherman Antitrust Act of 1890

• allowed the government to dissolve monopolies.

• Examples:

  • 1911- breakup of Standard Oil Company

  • 1980s- the breakup of Bell Telephone

  • 2000- Microsoft was deemed a monopoly that used its power to limit competition

Gov’t Regulating Labor & Labor Conditions

• Minimum wage

• Regulations limiting the work week (premiums for weekends, holidays, and overtime work)

• Child Labor Laws

• Ban on scrip payment

• Anti-discrimination legislation

• Social Welfare (unemployment insurance, health insurance, workers’ compensation, and old-age insurance)

1906- Meat Inspection Act

Created government oversight of the meatpacking industry.

1906- Pure Food and Drug Act

Created the Food and Drug Administration (FDA), which investigates adulterated and misbranded or misleading statements on food, drugs, cosmetics, and other consumable products. 

Gov’t Education & Social Welfare Regulations

• Child labor laws freed children to go to school rather than work. 

• Social Welfare (unemployment insurance, health insurance, workers’ compensation, and old-age insurance)

1969- National Environmental Policy Act

• Made reducing and preventing environmental damage a federal priority. 

• This led to the establishment of the Environmental Protection Agency (EPA)

Fiscal Policy

the combination of taxes and spending to ensure the economy is operating at an optimal level.

Expansionary Fiscal Policy

• Decreased taxes, increased government spending, and increased transfer payments. 

• Transfer payments include social security spending, welfare payments, farm or corporate subsidies, and other direct payments from the government to citizens. 

  • American citizens received multiple transfer payments at the beginning of the COVID-19 pandemic.

• This policy is used during periods of stalled economic growth and high levels of unemployment. 

Contractionary Fiscal Policy

• Increased taxes, decreased government spending, and reduced transfer payments. 

• Lowers economic output and reduces price increases.

• This policy is used to slow the economy and reduce inflation.

Monetary Policies

• lower or raise interest rates and the quantity of money in the economy to stabilize the money system.

• controlled by the Federal Reserve (central US Bank)

Monetary Policy: Discount Rates

• The interest rate the Federal Reserve charges banks to borrow from it. 

• The Federal Reserve can raise or lower

Monetary Policy: Reserve Rate

• The amount of money banks are required to hold in their vaults or reserves. 

• The Federal Reserve can raise or lower

Monetary Policy: Open Market Operations

• the purchase & sale of federal government securities (bills, notes, and bonds), which influence the interest rates in the banking industry. 

• Purchases add money into circulation, and selling reduces money in circulation. 

Expansionary Monetary Policy

• Expanding the supply of money in the economy by lowering the discount rate, reducing the reserve rate, and buying U.S. securities

• Used to increase demand and expand the economy during a period of recession and high unemployment.

Contractionary Monetary Policy

• Reducing the supply of money in the economy by raising the discount rate, increasing the reserve rate, and selling U.S. securities.

• Used to lower demand and shrink the economy when inflation is too high. 

economic indicator

one set of data about our economy that can give us a clue about whether our economy is headed toward growth or recession

Gross Domestic Product (GDP)

• the total value of goods and services that the economy has in a given time. The Commerce Department gathers this data quarterly. They look at:

  • Consumer spending

  • Business investment

  • Government spending

  • Foreign trade

• The higher the #, the better the economy for individuals and businesses

• only counts items that are produced in a country.

  • For example, if a tech company is based in California but has all manufacturing in China. The products count toward China, not the United States. . 

Consumer Spending

• the total money spent on final goods and services by individuals and households for personal use and enjoyment in an economy. 

• This accounts for ⅔ of the GDP and is a great gauge of consumer health.

• The Commerce Department gathers this data monthly. It also measures:

  • How much do individuals spend

  • Inflation rates  

Inflation

• Measures the change in price for consumer goods and services. 

• reduces the purchasing power of individuals and businesses

• Over time, we expect an increase in prices, but when it happens too quickly, we call it this.

• A gradual increase in prices hints at economic growth.

• lower prices over time hint at a recession.

Employment Figures

How high or low an economy’s employment numbers are. 

• The Department of Labor gathers these numbers monthly.

• High employment hints at economic growth, and low employment hints at a recession.

Industrial Production

A measure of what manufacturing-based industries put on the market.

Home Sales

High home sale rates signal a growing economy, while lower home sale rates signal a recession. 

• The price of homes is also important as it indicates the consumer’s ability to purchase real estate. 

• The Commerce Department releases a monthly report about home sales

Home Building

The number of houses being built, as well as the number of permits being applied for indicate the number of people in the market for a new home. 

• Higher demand for new housing signals growth, while lower demand signals a recession.

Construction Spending

The Commerce Department gathers these numbers monthly to gauge how many new buildings exist in a region and in the nation.

Manufacturing Demand

The Commerce Department gathers numbers on shipments and inventories to make predictions about demand, which indicates economic growth or recession.

Retail Sales

The Commerce Department gathers monthly data on how much food and retail spending happened in a given quarter. More spending signals growth, while lower spending signals recession.

Used to measure the health of an economy

Gross Domestic Product (GDP), and the Consumer Price Index (CPI)

Consumer Price Index (CPI)

• the price of goods and services as they change over time.

• one of the most popular measures of inflation and deflation.

Intermediate Goods

things that require additional processing, are not counted in GDP.

• For example, tomatoes are not counted, but jarred tomato sauce is a final good and is counted

Business Cycle

• changes in economic activity of a country—output, employment, income, and sales.

• The alternating phases are expansions and contractions (also called recessions).

• Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.

• The severity of a recession is measured by the three D’s:

  • depth

  • diffusion

  • duration

Genuine Progress Indicator (GPI)

Just like GDP, it measures output but makes adjustments for:

• Income distribution (is there a healthy middle class?)

• Value of household

• Volunteer work

• Costs of crime & pollution

It also measures:

• Impact of resource depletion

• Availability of leisure time

• Lifespan of consumer goods

Gross National Happiness (GNH)

This measure tries to capture a holistic view of society that isn’t focused on just monetary gains. It takes into account the same thing as the GPI, but also measures:

• Spiritual well-being

• Community and cultural involvement

• Citizens' level of concern for the environment

Ecological Footprint & Human Development Index (HDI)

Taking into account the GPI and the GNH, the Ecological Footprint measures:

• The biocapacity of a region compared to the demand

This means that the measure of health is when the environment can sustain the needs of the population.

This measures:

• Health

• Education levels

• Standard of living

Price stability

• This is important as an indicator of a healthy economy.

• measured by inflation.

• The goal of a central bank is to try to improve this

• The value of this activity is:

  • Reserving the purchasing power of people’s money and investments 

  • Consumers and businesses can make long-term investment plans

  • Interest rate prediction

  • Promotes calm amongst individuals and businesses when short-term price fluctuations occur 

Unemployment Rates

• include jobless people, actively seeking work, and available to take a job. 

SWOT Analysis

Strengths

Weaknesses

Opportunities

threats

Internal Strengths of building a business

• Things that your company does well

• Qualities that separate you from your competitors

• resources, such as skilled labor or cash

• Tangible and intangible assets

Internal Weaknesses of building a business

• Items your company lacks

• Areas where competitors are better than you

• Limited or missing resources

• Ambiguous unique selling proposition

External Opportunities of building a business

• Underserved or unserved markets for products

• Few competitors

• Need for your service or product

• Promotional opportunities

External Threats of building a business

• Increasing competition

• Changes in the sales environment

• Negative publicity

• Declining consumer attitude toward products or the company

PEST Analysis

Political stability & gov’t intervention

Economic policies & factors

Social behaviors of society

Technological factors like automation & innovation

Price determination

to determine the cost of goods sold and services rendered in the free market. This will take into account the supply and demand curves for individual products.

Capital formation

the net capital accumulation during an accounting period for a particular country.

Fund mobilization

provides the capital needed to cover costs before work begins on a project or prior to invoicing. An example might be credit.

Liquidity

the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price.

Market efficiency

• refers to the degree to which market prices reflect all available, relevant information.

• If markets are “this”, then all information is already incorporated into prices, so there is no way to "beat" the market because there are no undervalued or overvalued securities available.

Productivity

Increasing output by the average worker

Physical Capital

Utilizing machinery and technology to increase productivity

Human Capital

Increased worker knowledge

Technological Progress

Drives all other aspects of economic growth

Seasonal Unemployment

• Predictable periods of increased or decreased employment. 

• EX: Construction and agricultural workers may experience unemployment during the winter months. 

Cyclical Unemployment

• Results from a downturn in the business cycle. 

• Is a sign of decreased demand and an indicator of a poor economy. 

Frictional Unemployment

A period of being unemployed while looking for new work.

Structural Unemployment

• A persistent surplus of workers in a specific industry results from a gap between the skills the workers have and the demand in the economy.

• Technological advancement often leads to this. 

Stabilization policies

include taxation and government spending to either reduce or increase demand.

Absolute Advantage

When a country can produce more of a product with its resources that other countries with their resources

Comparative Advantage

A countries ability to produce a certain good/service at a lower cost than other countries

Trade Barriers

Gov. policies aimed at interfering with international markets that affect national economies and global economic growth

Protective Tariffs

Taxes put on the sale of imports to increase the prices of imports with the goal of making it less competitive than domestic products.

Import Quotas

Limit the quantity of a product that can be imported

North American Free Trade Agreement (NAFTA)

Signed in 1993 - Removed barriers to trade between Canada, the United States, and Mexico.

World Trade Organization

Signed 1994 - Established to resolve trade disputes between 151 member nations. 

The value of the U.S. Dollar is weak

• when there is less demand for products from a country. 

• makes American exports cheaper and more competitive internationally. 

• makes traveling and purchasing in foreign markets more expensive due to lower purchasing power.

The value of the U.S. Dollar is strong

• when there is demand for products from that country.

• can make products less competitive in the international market. 

  Example: Chinese citizens buying American products increases the demand for the American dollar.