Chapter 5 Economic Policy Peoples concerns: 1.Prosperity & Economic Growth (how well is economy doing) 2.Distribution of Economic benefits (how wealth spread) Economy, People & Government For everything the state wants to accomplish (education, defense, etc), it must have a strong economy Political economy: How the state and economy interact Economy & the State Economic growth: Single thing by which governments are most judged Varies greatly from state to state Economic growth decisions require agility Economic Growth Often governments will leave economy to free markets Often people in government use rents Rents: transfer of money that do not relate to production (different than apt. rent) Example: Tax money to build a road Economic Growth: Rents 1950s-1970s, many less affluent states used import- substitution industrialization That is, to transform economies into advanced industrial economies, states encouraged establishment of factories Set high tariffs (taxes) to discuss imports Often failedfactory owners took advantage with extremely high prices Economic Growth: Import-Substitution Industrialization Inflation: a time in which most prices are rising at the same time & the value of the dollar is thereby declining too Can be caused/influenced by: 1.Deficit spending 2.Shortage of goods 3.Monopolies Economic Performance: Inflation Unemployment: Not enough jobs are available to those who want them Hurts morale and is inefficient Key to government control is to maintain a balance Economic Performance: Unemployment If government wants to create greater equality: 1.Create special subsidies and programs for poor 2.Create system of progressive taxation (greater taxes for wealthier) Distribution & Equality within Economy Central bank: a bank set up by a government to help handle its transactions; to coordinate policies of other banks and to control interest rates Every modern state has one Example: Federal Reserve Bank in United States Central Banks Degree of corruption in a government can directly influence the success of an economy (Example: Saddam Hussein took money for his family from Iraq) Globalization of business has meant businesses can exist in many different countries which can directly influence policy Influences on Economy Subfield of political science that focuses solely on study on relationship between politics and economy Rational Choice Model Political Economy