Theories of Economics, US Economic Policy, Economic Indicators, and the Global Economy

1. Theories of Economics, US Economic Policy, Economic Indicators, and the Global Economy

2. The major theorists in each area are: 1) Classical Adam SMITH 2)Keynesian John Maynard KEYNES 3) Monetarist Milton FRIEDMAN Friedrich August Von HAYEK

3. CLASSICAL THEORY The term ‘classical’ refers to work done by a group of economists in the 18th and 19th centuries. Much of this work was developing theories about the way markets and market economies work. Much of this work has subsequently been updated by modern economists.

4. Adam SMITH(1723-1790) • *Father of Economics • *Developed much of the theory about markets that we regard as standard theory now. • Scottish • Graduated from Glasgow at the age of 17 • fellow at Oxford • lecturer in Scotland.

5. Adam Smith argues that it was market forces that ensured the production of goods and services, ensuring profit. A laissez-faire environment would increase competition and keep costs down. All this can be done without GOVERNMENT INTERVENTION. This was the basis of the free market economy.

6. KEYNESIAN THEORY Keynesian economics is a theory suggested by John Maynard Keynes in which government spending and taxation is used to stimulate the economy. This theory is also called fiscal policies or DEMAND-SIDE ECONOMICS.

7. John Maynard KEYNES (1883-1946) is perhaps one of the best known economists. His work changed the whole face of post-World War II economic policy. *graduate of Cambridge --studied Classics and Math.

8. Keynes felt that a recession (or slump or trough) was a short-run problem stemming from a lack of demand. His theory was that the government should actively intervene in the economy to manage the level of demand. The government could stimulate the economy by running a budget deficit. It could create jobs, decrease interest rates, and encourage spending. When the private sector was spending again, the government could trim its spending and pay off the debts they had accumulated during the slump.

9. The idea, according to Keynes, was to balance your budget in the medium term, not in the short-run. One of his best known quotes summarizes this focus on the short-run policies: “In the long-run we are all dead.”

10. Friedrich August von HAYEK(1899-1992) *born in Vienna, was a great believer in free markets *Nobel Prize in Economics. *passionate opponent to Socialism and campaigned to make people aware of the dangers of Socialism.

11. Hayek argued that the growth of the money supply should be restricted, even if that led to high unemployment, as it was the only way to control inflation.

12. MONETARIST THEORY Monetarists are a group of economists so named because of their preoccupation with money and its effects. Federal Reserve: Minneapolis Their view that the main cause of changes in aggregate output and the price level are fluctuations in the money supply. The FEDERAL RESERVE is responsible for monetary policy in the United States. In his view, any attempt to manage the level of demand (as in Keynesian economics) would simply be de-stabilizing and make things worse. The role of government is simply to use its monetary policy to control inflation and supply-side policies to make markets work better and reduce unemployment.

13. Milton FRIEDMAN (1912- ) is the best known monetarist. He followed the ideas of Hayek. He is one of the select elite in our Virtual economy who has won a Nobel Prize in economics (1976). Friedman is a great believer in the power of the free market and much of his work has been based on this.

14. MONETARIST THEORY This school of thought, suggested by Milton Friedman, stressing the importance of stable monetary growth to control inflation and stimulate long-term growth is popular among conservatives. The FEDERAL RESERVE SYSTEM conducts monetary policy in the United States. Federal Reserve: Dallas

15. Timeline of Famous Economists

16. U.S. Economic Policy • Maintaining freedom of choice in the marketplace is the basis of the free-enterprise system. Government plays a limited but important role in the protection of individual economic freedoms. • Individuals have the right to the basic economic freedoms enjoyed in a free market society. The government is responsible for protecting these freedoms

17. U.S. Economic Policy Economic freedoms of individuals • Ability to earn money • Right to purchase property • Right to spend incomes on goods and services • Right to choose occupations or change jobs • Right to make choices about where and how much to save • Right to start new businesses • The government has created certain consumer-protection laws and agencies.

18. U.S. Economic Policy • A strong relationship exists between the economic and political freedoms enjoyed by citizens of free and democratic nations.

19. U.S. Economic Policy The degree of economic freedom in a nation tends to be directly related to the degree of political freedom its citizens enjoy.  Democratic nations • High degree of economic freedom • High degree of political freedom Authoritarian nations (Autocracies) • Limited economic freedom • Limited political freedom

20. U.S. Economic Policy • Formulation of economic policies requires an understanding of accurate measures of the economy’s performance.

21. Economic Indicators • Advance Monthly Retail Sales • Advance Report on Durable Goods • Construction Spending • Current Account Balance • Manufacturers’ Shipments, Inventories, and Orders

22. Economic Indicators • Manufacturing and Trade Inventories and Sales • New Home Sales • New Residential Construction • Personal Income and Spending • Wholesale Trade

23. Economic Indicators Let’s look at a few closer up: • Gross Domestic Product (GDP) is the total dollar value of all final goods and services produced in a year. • Consumer price index measures the monthly price changes of sample consumer goods and services. • Unemployment rate is the percentage of the labor force without jobs. • Balance of trade is the difference in dollar value between imports and exports. • Stock market averages are select groups of stocks whose performance is averaged, and over time, the averages serve as an indicator for the market. • Productivity is the amount of output per unit of input over a period of time.

24. U.S. Economic Policy • Productivity and the standard of living are generally higher in economies that have limited government planning and limited control of the economy.

25. Monetary and Fiscal Policies • Two major instruments for influencing economic activity are monetary and fiscal policies.

26. U.S. Economic Policy • Changes in fiscal and monetary policies can stimulate or slow the economy. • The Federal Reserve System serves as the United States central bank. • The Federal Reserve Board controls monetary policy by changing the availability of loanable funds and/or adjusting interest rates.

27. U.S. Economic Policy • Three instruments of monetary policy are reserve requirements, discount rates, and open-market operations. • The government can use fiscal policies such as changes in taxing, changes in spending, and the issue of government bonds to influence economic activity.

28. U.S. Economic Policy • Many public goods and services would not be available if they were not provided by the government.

29. U.S. Economic Policy • Government-provided public goods and services, sometimes called “collective” goods and services, benefit many but would not be available to everyone if individuals had to provide them. • Taxes and/or fees pay for the production of government-provided goods and services.

30. U.S. Economic Policy Examples of goods and services provided by the government • Infrastructure • Public health and safety • Public schools Reasons why government provides public goods and services • It is more efficient. • The goods or services may benefit everyone, not only a purchaser. • The value of the goods or services is greater than individual consumers could afford. • It promotes economic equity.

31. Government Regulation • The United States government creates laws and agencies to regulate production and exchange activities, conduct research, and establish guidelines for consumer rights and safety. The government can also intervene in labor-management relations and can regulate competition in the marketplace.

32. Government Regulation Government agencies created to protect consumer safety and against fraud and deception • The Consumer Product Safety Commission ensures safety of products other than food, drugs, and cosmetics • The Food and Drug Administration ensures the safety of food, drugs, and cosmetics • The government can intervene in labor-management relations and can regulate competition in the marketplace.

33. Government Regulation • Protecting the environment is a public service. • The government sets regulations and levies fees to ensure that the producer pays all costs resulting from polluting. The government also subsidizes pollution reduction efforts.

34. Government Regulation • Property rights of an individual are relative and limited. • Individuals have the right of private ownership, which is protected by negotiated contracts that are enforceable by law. However, the rights of a society as a whole rank above those of the individual.

35. Government Regulation • Contracts are legally binding. • Individuals enter into agreements (contracts) with one another to buy and sell goods and services. Whether written or oral, these agreements are legally binding.

36. The Global Economy • Democracy and capitalism go hand in hand as they both promote freedom. • With technology, trade extends beyond our borders most of the time. • International trade affects everyone everywhere. • The global economy deeply affects national security and foreign policy. • Recently, industrial espionage is the most powerful form of spying.

37. The Global Economy • The economies of individual nations are interdependent. • The economy of the United States depends on resources and markets around the world for the production and sale of resources, goods and services. • Total world production is greater when nations specialize in the production of those products that they can produce most efficiently.

38. The Global Economy • United States businesses have become multinational in their quest for productive resources, markets, and profits. United States firms may move factories to other countries to reduce costs (off-shoring). • International trade provides Virginia and the United States with goods and services for which they do not possess absolute or comparative advantage.

39. The Global Economy • Virginia and United States businesses have become multinational in their quest for resources, markets, and profits. • Virginia and the United States benefit when they produce goods and services for which they have a comparative advantage, and trade for other items.

40. The Global Economy • Advances in technology allow businesses to get skilled work, such as engineering and accounting, done by people who remain in their home countries (i.e., to outsource this work). This increases the supply of workers and holds wages and costs of production down. Immigration brings workers into the country and increases the supply of labor.

41. Global EconThe Global Economymy • Making foreign policy decisions requires balancing competing or contradictory foreign policy goals.

42. The Global Economy • As foreign countries develop and grow, they demand more products and natural resources, such as oil, pushing up prices.

43. The Global Economy • When the United States imports more goods and services than it exports, the difference is the trade deficit.  • Canada, Mexico, the European Union, China, and Japan are the major trading partners of the United States.

44. The Global Economy • Global Partnerships • European Union • North American Free Trade Agreement • Obama’s Initiative in the Far East