Transcript Learning Plan 6 - Moraine Park Technical College

Learning Plan 4
Government’s Role In An Economic
System
Chapter 5
Government’s Role In An
Economic System
Objectives:
• Evaluate the five current government’s role
in an economy (legal, promotes
competition, corrects externalities, provides
public goods and economic stability).
• Evaluate the role the government plays in
each of the five roles.
• Evaluate and analyses the cost/benefit of
government’s role in each of the five roles.
Government’s Role In An
Economic System
• Evaluate and draw conclusions about the
government’s role in each of the five roles.
• Evaluate and explain how the GDP is
derived.
• Evaluate and outline a personal position
describing the role government should play
in an economy and defends the position.
Government’s Role In An
Economic System
• Economic and political functions of
government can and do overlap.
Functions of Government
Functions of Government
1. Provides a legal system
Legal rules of the “game”
a. Recognizes legal status of businesses
b. The rights of private ownership.
c. Method for the enforcement of contracts.
Functions of Government
2. Promotes Competition
Protector of an competitive economic system
a. Antitrust legislation
Laws that restrict the formation of
monopolies and regulate certain anticompetitive practices.
Functions of Government
Monopoly is a firm that has great control
over the price of a good.In the extreme case,
a monopoly is the only seller of a good or
service.
Functions of Government
3. Corrects for externalities
• Market Failure is a situation in which the
operation of supply and demand fails to
produce a solution that truly reflects all of
the costs and benefits that go into producing
and consuming a good or service.
• Spillover, or externality is a situation in
which a benefit or a cost associated with an
economic activity affects third parties.
Functions of Government
• Third Parties are parties who are external to
negotiations and activities between buyers
and sellers.
• Correcting Negative Externalities
A. Special taxes through legislation.
• Effluent fee is a charge to a polluter that
gives the right to discharge into the air or
water a certain amount of pollution.
Functions of Government
B. Regulation. Limit or eliminate by laws,
regulations and other documents.
• Correcting Positive Externalities
• Positive externalities result in an under
allocation of resources to a specific activity.
a. Financing the production of the activity.
b. Subsidizing private firms.
c. Consumers to engage in the activity.
Functions of Government
4. Providing Public Goods
Private versus Public Goods
• Private goods are goods that can be
consumed by only one individual at a time.
Private goods are subject to the principle of
rival consumption.
• Public goods are goods which can be jointly
consumed by many individuals
simultaneously at no additional cost and
Functions of Government
• Principle of rival consumption states that
individuals are rivals in consuming private
goods because one person’s consumption
reduces the amount available for others to
consume.
Functions of Government
Characteristics of public goods.
A. They are indivisible;
B. Once they are produced, there is no
opportunity cost when additional consumers
use them.
C. Your use of a public good does not deprive
others of its simultaneous use.
D. Consumers cannot conveniently be
charged on the basis of use.
Functions of Government
Exclusion principle states that no one can be
excluded from the benefits of a public good,
even if that person hasn’t paid for it.
Free-rider problem
• A problem associated with public goods
when individuals presume that others will
pay for the public goods so that
individually, they can escape paying for
their portion without causing a reduction in
Functions of Government
5. Ensuring Economy-wide Stability
A. Government attempts to stabilize the
economy by smoothing out the ups and
downs in overall business activity.
B. Unemployment
C. Inflation
Political Functions of
Government
1. Merit and Demerit Goods
• Merit good A good that has been deemed
socially desirable via the political process.
Museums are an example
• Demerit good. A good that is deemed
socially undesirable. Heroin and gambling
are examples.
Role in taxing, regulating or prohibiting their
manufacturing, sale and use.
Political Functions of
Government
2. Income Redistribution
Two types of redistribution
• Transfer payments. Money payments made
by governments to individuals for which no
services are concurrently rendered.
Examples are welfare, social security,
unemployment insurance.
Political Functions of
Government
• Transfers in kind are payments that are in
the form of actual goods and services, such
as food stamps, low cost public housing,
and medical care, for which no goods or
services are rendered concurrently.
Collective Decision Making:
The Theory of Public Choice
Economic model up to this point has
explained the behavior of the private sectorfirms and households.
Incentives for those in government.
Collective decision making is how voters,
politicians, and other interested parties act
and how these actions influence non market
decisions.
Collective Decision Making:
The Theory of Public Choice
Theory of Public Choice. The analysis of
collective decision making.
Similarities in Market and Public Sector
Decision Making
Self interest. Individuals will act within the
political process to maximize their
individual well being. Same as the market
economy.
Similarities in Market and Public
Sector Decision Making
Scarcity Resources are fixed and therefore
scarce. Opportunity cost exists in both
sectors.
Competition Given scarcity constraints,
individuals in government will be
competing for government funding.
Similarity of Individuals Individuals are the
same if in a similar position, but…….
Similarities in Market and Public
Sector Decision Making
Individuals in government face a different
incentive structure than those in the private
sector.
Stakeholders:
Shareholders
Taxpayers
Dissimilarities in Market and
Public Sector Decision Making
Government goods at zero price
Use of force
Voting versus spending
Paying For The Public Sector
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•
•
•
•
•
Taxes
Marginal
Average
Proportional
Progressive
Regressive
Federal Taxes
•
•
•
•
•
Personal Income Tax
Capital Gains
Corporate Income Tax
Social Security
Unemployment Tax
Spending, Government Size, and
Tax Receipts
Please Turn to Page 113
Please Turn to Page 115
Government’s Role In An Economic
System
Chapter 8
National Income Accounting
Gross Domestic Product
• The total market value of all final goods and
services produced by factors of production
located within a nation’s borders.
• One year time frame
• GDP versus GNP
GDP
Intermediate goods
• Goods used up entirely in the production of
final goods.
Value added
• Value added is the amount of dollar value
contributed to a product at each stage of its
production.
Measuring GDP
Price times the quantity of everything
produced.
Two methods:
• Expenditure approach
• Income approach
Measuring GDP
• Expenditure approach
A way of computing national income by
adding up the dollar value at current market
prices of all final goods and services.
Consumption (C)
Government expenditures investment (G)
Investment (I)
Net exports (X)
Measuring GDP
Consumption (C)
• a. Durable consumer goods
• last three years or more
• b. Non durable consumer goods
• c. Services
Government (G)
• The value of government goods is
considered equal to their cost.
Measuring GDP
Gross private domestic investment (I)
• The creation of capital goods such as
factories and machines, that can yield
production and hence consumption in the
future. Also included in this definition are
changes in business inventories and repairs
made to machines or buildings.
Measuring GDP
• Investment (I)
Any use of today’s resources to expand
tomorrow’s production or consumption.
Producer durable, or capital goods
Durable goods having an expected service life
of more than three years that are used by
businesses to produce other goods and
services.
Expenditure Approach
1%
13%
18%
68%
Business
Government
Household
Foreign
Measuring GDP
• Mathematical Representation For GDP
Using The Expenditure Approach
• GDP= C + I + G + X
Measuring GDP
Income Approach
GDI=GDP
Four payments
• Wages
• Interest
• Rent
• Profits
Income Approach
7% 1%
Wages
13%
19%
Nonincome
expense
Profit
60%
Interest
Rent
Aggregate Demand And
Aggregate Supply
• Aggregate Demand
• The sum of all planned expenditures for
the entire economy.
• Aggregate Supply
• The sum of all planned production for the
entire economy.
Aggregate Demand And
Aggregate Supply
Aggregate Demand Curve
• A curve showing planned purchase rates for
all goods and services in the economy at
various price levels.
• Real domestic income consists of the output
of final goods and services in the economyeverything produced for final use by either
businesses or households.
Aggregate Demand And
Aggregate Supply
Price 130
Level
•
A
•
•
AD
4
Real GDP (per year)
($ trillions)
Aggregate Demand
Economy-wide Reasons For Downward
Sloping Demand Curve
• Direct-Effect: The Real Balance Effect
• Indirect-Effect: The Interest Rate Effect
• Open-Economy Effect: The Substitution of
Foreign Goods
Aggregate Demand
Real-balance effect
• The change in the real value of money
balances when the price changes, all other
things held constant. Also called the wealth
effect.
Aggregate Demand
Interest Rate Effect
• The effect on desired spending caused by a
change in the price level, said effect that
works through resulting changes in the rate
of interest. An indirect effect on desired
demand due to a change in the price levels.
Aggregate Demand
Open-economy effect
• The effect on desired spending caused by a
change in the price level, said effect that
works though resulting changes in the
relative price of imports and exports and in
their relative quantities demanded.
Aggregate Demand
Aggregate Demand versus Individual Demand
Aggregate Demand
Shifts In The Aggregate Demand Curve
• Any non-price level change that increases
aggregate spending (on domestic goods)
shifts AD to the right. Any non-price level
change that decreases aggregate spending
(on domestic goods) shifts AD to the left.
Aggregate Demand
Non-price determinants
• Government spending
• Taxes
• Population
• Expected Future Profits
• Etc.
Aggregate Supply
Long-run Supply Curve
Short-run Supply Curve
Aggregate Supply
Long-run aggregate supply curve
• A vertical line representing real output of goods and
services based on full information and after full adjustment
has occurred.
Endowments
• The various resources in an economy, including both
physical resources and such human resources as ingenuity
and management skills.
Aggregate Supply
Short-run Aggregate Supply Curve
• The relationship between aggregate supply
and the price level in the short run;
normally positive sloped.
• Represents the relationship between the
price level and the real output of goods and
services in the economy without full
adjustment and full information.
Aggregate Supply
Output can be expanded in the short run
because firms can use existing workers and
capital equipment more intensively. Also,
in the short run, when input prices are fixed,
a higher price level means higher profits,
which induce firms to hire more workers.
Aggregate Supply
Any change in land, labor, or capital will shift
both SRAS and LRAS. A temporary shift in
input prices, however will shift only SRAS.
Equilibrium
• Aggregate demand shock
• Any shock that causes the aggregate
demand curve to shift inward or outward.
• Aggregate supply shock
• Any shock that causes the aggregate supply
curve to shift inward or outward.