what is economics? the study of how we use limited resources to meet unlimited wants this means...
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ECONOMICS IN DEBATE
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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
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“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
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“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
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“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
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“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
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“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
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“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
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“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
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“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”
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“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)
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“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
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“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
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“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
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“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
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“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
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“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!
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“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)
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“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.
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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
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Oil Prices
Influence the economy—a little bit
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Dedev
Premise 1: economic collapse is inevitable
Premise 2: collapse sooner is better than collapse later