Promoting Growth and Stability

Chapter 3: Section 2

Macro Vs. Micro

Macroeconomics--> study of economic behavior and decision making in a nation’s whole economy

Microeconomics--> study of economic behavior and decision making in small units, such as households and firms

Macroeconomics

Microeconomics

GDP and the Business Cycle

Gross Domestic Product (GDP)--> total value of all final goods and services produced in a country in a given year

When in a recession, GDP goes down; In a growing economy GDP goes up

GDP

United States GDP in 2008 was 14.59 Trillion

GDP can rise and fallPeriod of expansion, followed by a

period of decline is called a business cycle

Business Cycles

Business cycles are major fluctuations, unlike the day to day ups and downs of the stock market

Making Predictions

Business owners who think consumers are going to spend more in the future may increase production and hire more workers

If enough employers take these steps the the economy will grow

Concerns of Rising Prices

Might lead consumers to buy fewer goods

If a decrease in consumer spending is widespread and lasts long enough, suppliers might be forced to cut production and lay off workers

Promoting Economic Strength

Government employs economists to track and predict future business cycles

Government tries to create policies to promote economic strength

3 Major Goals

1. Employment

2. Growth

3. Stability

Employment

Employment

Many economists consider an unemployment rate of 4-6% to be good

Latest unemployment rate for the United States was 9.0% in January 2011

2. Economic Growth

Always been the “American Dream” that each generation will enjoy a higher standard of living that previous generations

The economy must grow for that to happen…Is this still a reality?

3. Stability

Major indicator is stability is the general level of prices

Price surges strain consumers, especially those living on fixed incomes

Falling prices on the other hand harm producers

Other Signs of Stability

The security of our financial institutions is another sign of our economic stability

We want to feel that our money is safe and protected from fraud or mismanagement

Economic Citizenship

How can consumers have a say?

Referendums--> proposed laws submitted directly to the public, on spending or other economic issues

Way for voters to directly impact government economic actions

Technology and Productivity

Improved technology = more productivity

Innovation leads to obsolescence--> situation in which older products and processes become out of date

Obsolescence

Workers can become obsolete

Historical examples?

Telephone operators

The Government’s Role

The government promotes innovation and invention

The government has their own research institutions…such as?

NASA

Government Issues Patents

Government license that gives the inventor of a new product the exclusive right to produce and sell it for 20 years

Also Issues Copyrights

Grants an author exclusive rights to publish and sell their creative works

In the United States, a copyright lasts for life + 70 years

Providing Public Goods

Chapter 3: Section 3

Public Goods

A shared good or service for which it would be inefficient or impractical to make consumers pay individually or exclude those who do not pay

Taxes vs. Paying Individually

What would your share of the upkeep of Mt. Rushmore be worth?

Excluding Nonpayers?

How would we check to see if everyone paid for access to this road?

Taxes are the Answer

To simplify the funding of government projects in the public interest, the government collects taxes

We pay whether we go to the park or not, use the street or not, etc

Open to All

Any number of consumers can use them public goods without reducing the benefits to any single consumer

Increasing the number of consumers does not increase the cost of providing the good

Costs and Benefits

Infrastructure basic facilities that are necessary for a society to function and grow

Transportation is a good example

Transportations

Transportation goes more smoothly when government builds roads

We have to give up economic freedom to do so

2 Conditions Must be present

If something is to be produced as a public good you need:

1. benefit to each individual is less than the cost that each would have to pay if it were provided privately

2. Total benefits to society are greater than the total cost

Free-Rider Problem

A free rider is anyone who does not pay for a good or service but receives the benefit anyway

Free riders consume that which they do not pay for

This is what happens without taxes

If the U.S. government relied on voluntary contributions, most would not give

Would you give up money to pay for roads? Would you stay off those roads?

Other Examples

Fire protection What is your neighbor did not want to pay for it?

How could/would this impact you?

Local taxes pay for this because all residents are better of with it

Market Failures

Situation in which the free market, operating on its own, does not distribute resources efficiently

Private roads? High tolls? Not built in sparsely populated areas?

Externalities

Externalities

Economic side effects of a good or service that generates benefits or costs to a third party

Positive and negative externalities

Positive Externality

Example:Mr. Hutchins buys an old house

that is an eyesore in his neighborhood. He paints the house, does landscaping, and plants flowers. His neighbors are not involved in the decision but yet they benefit from this…how?

Negative Externality

ExampleMr. Hutchins’ lifelong dream is to

become a world renown salsa dancer. He practices every night in his home with the music blaring. You are his neighbor and hate salsa, but you have to put up with it.

Government’s Goals

U.S. government may take action to create positive externalities

Example: Education it benefits students and society as a whole

Government Limits Negative Externalities

Pollution would be an exampleAcid rain caused by auto plants

and power plantsHarms trees, lakes, wildlife, etc. The EPA promotes “scrubbers”

limit pollution in smokestacks

Scrubbers at Work