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Walukiewicz A.P.
Govt/Econ
Lecture Notes Chapter
1&2
MACROECONOMICS
An Introduction An Overview of Economics
Basic concepts
The
sectors of the economy
What
is micro economics?
What
is macro economics?
A
review of micro is at end of Chap 1
What is the Economy?
All the activities involved in the
production and distribution of goods and services.
What is Economics?
Economics addresses three
basic questions:
What are the fundamental principles?
How well does the economy perform?
What public policies are best?
There are four factors of
production:
Capital - the tools of
production.
Entrepreneurship - organization.
Land
- our natural endowment.
Labor - people, their effort &
skills.
Who are some famous
entrepreneurs?
What accounts for their
success?
How do we measure the
success of an economy?
By the standard of living
it delivers:
Quantity of goods and
services and their quality.
Leisure time.
Environmental quality.
How can we achieve a
higher standard of living?
By
increasing the productivity of labor:
The output of goods and services per hour of labor effort.
How
would that improve the standard of living?
Higher productivity makes possible :
Greater quantity of goods & services
and higher
quality.
More leisure.
Better environment.
Thus a higher standard
of living.
The productivity of labor
is determined by:
Land and capital per worker.
Technology.
Skills.
Creativity
of entrepreneurs
Economies with a high
standard of living are notable for:
Lots
of capital,
advanced technology,
better education.
Sometimes, lots of natural resources.
Are large amounts of land
or natural resources necessary for prosperity?
Economic growth is a
continuing improvement in the standard of living over decades.
Income per capita in the
Economic growth requires
that society allocate a portion of its economic output to:
Investment in new
capital goods.
Research and
development.
Education and training
Sectors
of the Economy
We think of four:
The business sector
firms are where entrepreneurship brings land, labor, and capital
together for the production and distribution of goods and services
Economies
in which firms are privately owned are called capitalist or private enterprise
economies.
alternative is government ownership.
Communism
attempted central control.
"Socialism" today refers to the
welfare state.
Gov’t ownership is out of fashion.
"Privatisation" is the trend.
How
"capitalist" is the
What is a corporation
A
corporation is a legal entity.
Has many of rights
and privileges of individuals.
Owners
are "shareholders," and have limited liability.
Profit
goes to shareholders in return for use of capital.
The HOUSEHOLD sector:
Family units of society.
Consumes goods and
services.
Supplies labor, receives wages in return.
Owns the business
sector.
Success of economy:
How well it serves the household sector.
The GOVERNMENT Sector
Has several functions:
1. Provides the legal
framework, the "rules of the game" by which the economy functions
Property
rights: who can use property and what
can they do with it.
Commercial law: rights and obligations in
business transactions
Licensing:
who is allowed to practice a profession?
Regulations: what a firm can't or must do.
2. Collects taxes.
From households and
firms.
At federal, state, and local levels
Based on income, wages,
retail sales, estates.
3. Produces public goods
Fire & police,
K-12 education,
National defense.
4. Transfer payments under
Social Security
Medicare
Medicaid
Food Stamps
Called "entitlements"
The REST-OF-THE-WORLD
All countries we do business with.
"ROW" buys goods and services we
export, sells goods and services imported to the
ROW invests in
lends money to
the
We invest in the ROW too.
Two way flows of goods and capital.
International trade
growing fast, politically sensitive issues:
Foreign ownership of
Fluctuating
in exchange rates.
Is
free trade good?
Agreements
like NAFTA, GATT, WTO.
"Fast track" authority for President.
Trade "deficit" with
Microeconomics
is the study of markets
In
private enterprise economies,
it is in the marketplace that three fundamental decisions are
made:
1. What will be produced?
2. How will it be produced?
3. Who will consume it?
Adam Smith wrote in The
Wealth of Nations
"It is not from the benevolence of
the butcher, the brewer, or the baker that we expect our dinner, but from their
regard to their own interest." Market economy harnesses self-interest for
benefit of society. Altruism is rare. True evil is rare too!
Questions for
Microeconomics:
Has deregulation of the airlines been a
success?
Should Amtrak be subsidized?
Are smokestack scrubbers cost effective?
What is the effect of price controls?
Is Microsoft Corp. a monopoly?
Macroeconomics is the big
picture.
National Income
Cost of living and inflation
Interest Rates
Recession, Unemployment, Growth
Money and Banks
The Federal Reserve and Monetary Policy
Government Taxation, Spending, and
Deficits
International Trade and Exchange Rates
Macro issues are central
to politics:
Can the federal budget really be balanced?
Should Congress cut taxes?
Should the Fed raise interest rates?
Is inflation really dead?
Is recession possible in '99?
Are trade agreements like NAFTA good?
Or does free trade "cost jobs"?
Entitlements are a major
issue:
Social Security & Medicare:
transfer from
young to old,
or insurance
benefits that were paid for?
Can the "birth dearth"
generation afford the "baby boomers’" benefits?
Will they be willing to pay the tab?
Is there any way out of the mess?
How are entitlements
affecting:
Medical care?
Education?
Economic growth?
The welfare of young
families?
Economics and elections:
Economy is usually the # 1 issue
"It’s the economy, stupid!"
Candidates promise something for nothing,
always more than
they can deliver.
Economy is best predictor of election.
Recession means incumbents in trouble!