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Economics in debate

Economics in debate. What is Economics?. The study of how we use limited resources to meet unlimited wants This means that SCARCITY is at the heart of our understanding of modern economics. “Invisible Hand”. Ascribed to Adam Smith (who was not necessarily a capitalist)

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Economics in debate

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  1. Economics in debate

  2. What is Economics? • The study of how we use limited resources to meet unlimited wants • This means that SCARCITY is at the heart of our understanding of modern economics

  3. “Invisible Hand” • Ascribed to Adam Smith (who was not necessarily a capitalist) • Claims that markets direct individual self-interest towards socially desirable outcomes • Has become the foundation of free market capitalism

  4. “Capitalism” • Economic system based on the private ownership of the means of production • Is driven by the production of goods and services for a profit • Types of capitalism • Mercantilism • Free-market economy • Social market economy • State-ownership • Mixed economy

  5. “Socialism” • Economic system based on collective ownership of the means of production • Is driven by the production of goods and services to meet social needs • Covers a variety of sociopolitical systems • Anarchism (libertarian socialism) • Authoritarian communism • Democratic socialism • Syndicalism

  6. “Supply & Demand” • Describes how many markets determine prices • If supply increases relative to demand, prices DECLINE… • If supply decreases relative to demand, prices INCREASE • If demand increases relative to supply, prices INCREASE • If demand decreases relative to supply, prices DECREASE

  7. “Elasticity” • Describes the degree to which one economic variable affects others • ELASTIC variables exhibit large responses to relatively small changes in another variable • INELASTIC variables exhibit small responses to relatively large changes in another variable

  8. “GDP”—Gross Domestic Product • Value of expenditures on final goods and services • U.S. GDP has increased steadily—when you hear about “economic growth”, they are usually referencing GDP • ‘Recession’ means 6 months (2 quarters) of negative growth • GDP as a measure of economic performance can be misleading—non-monetarized labor, shift of non-monetarized labor into the market

  9. “Keynesianism” • School of economic thought arising from the ideas of John Maynard Keynes • Claims that markets often produce inefficient outcomes that can/should be corrected by government intervention • Interventionary instruments include • Fiscal policy • Monetary policy • Debate about effectiveness usually centers on interpreting the effectiveness of FDRs response to the Great Depression

  10. “Supply Side Economics” • Theory that economic growth should be stimulated by lowering barriers to production • Generally means lowering tax rates on income (individual and corporate) and capital gains • Strongly associated with “Ronald Reagan” and “trickle down economics”

  11. “The Markets” • Commodities: exchange, in bulk, of everything from orange juice to petroleum—include both ‘spot’ and ‘futures’ contracts • Currency: exchange of different national currencies • Debt: issuance and trading of bonds (promises to pay in the future) • Equity: issuance and trading of stocks (shares in a company)

  12. “Competitiveness” • Describes the ability of a particular group (company, sector, nation) to sell goods in a given market RELATIVE to other groups in the same market • Competitiveness expresses profitability, which is directly tied to income, wealth, etc. • EXP: Saudi vs. tar sand oil production

  13. “Productivity” • Describes the efficiency of production • Productivity increases when greater output becomes possible with the same input • Often couched in terms of “worker productivity”, but is also a measure of technological efficiency • Growth rates of 1-2% are good

  14. “Exchange Rates” • Rate at which one currency is exchanged for another and/or the value of one nation’s currency in terms of another currency • Appreciation: increase in value of a currency relative to others—benefits consumers and hurts producers, ceteris paribus • Depreciation: decrease in value of a currency relative to others—benefits producers and hurts consumers, ceteris paribus • Currencies typically are pegged, floating, or mixed

  15. “Employment Rate” • Is usually expressed in terms of ‘unemployment’ • The official unemployment rate is 8.2%--percentage of the workforce that is seeking employment but is unable to find a position • Including the number of people who are no longer actively seeking employment takes the rate up to 15%+ • ‘Normal’ unemployment levels are between 4 and 6 percent

  16. “Inflation” & “Deflation” • Inflation: rise of general level of prices of goods and services over time • Deflation: decline of general level of prices of goods and services over time • PREDICTABILITY is key, although economies tend to do best with relatively low, steady inflation (1-4%) • Deflation, over any extended period, and hyper-inflation can quickly wreck economies

  17. “Interest Rates” • Rate at which interest is paid by a borrower to a lender for the use of money • Are important because they directly affect consumer spending, the housing market, etc, and thus impact all financial markets • Key interest rates are: • Federal funds rate (rate for overnight, uncollateralized loans between banks) • Prime rate—general FFR+3% • Are generally linked to inflation on an inverse basis • Stagflation!

  18. “Confidence” • Consumer confidence: expression of consumer sentiment about the current and future status of the economy • Often used as a predictor of future consumer behavior • Particularly important because consumer spending makes up over two-thirds of the economy • Business confidence: expression of business sentiment about the current and future status of the economy • Often used as a predictor of future business behavior (hiring, tech investment)

  19. “Income (in)Equality” • Expression of the relative distribution of income (and wealth) across the population • Is highly variable, both across time and between countries • Income inequality is growing rapidly in the U.S.

  20. National Debt • Governments usually borrow through the use of bonds • U.S. national debt has two parts • Public debt—securities held by non-federal investors ($11T) • Inter-Government debt—IOUs held by federal accounts on other federal entities ($5T) • Influences interest rates, and more broadly, market sentiment

  21. Oil Prices • Influence the economy—a little bit

  22. Dedev • Premise 1: economic collapse is inevitable • Premise 2: collapse sooner is better than collapse later

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