Transcript Section 2 - Seven Sources of Economic Progress

Climbing the Economic Mountain!
Section 4
Twelve Key Elements of Practical Personal
Finance
Section 3
Ten Elements of Clear Thinking About
Economic Progress and the Role of Government
Section 2
• The Financial Crisis of 2008
• Lessons from the Great Depression
• The Seven Major Sources of Economic Progress
Supply and Demand
• Supply and Demand: Applications and Extensions
• Supply and Demand: Basics
Section 1
Twelve Key Elements of
Economics
Section II
Seven Major Sources of
Economic Progress
2
Overview
The importance and incentives of private
property rights
How competition leads to economic progress
The importance of limiting government
regulation
An efficient capital market
Monetary stability and inflation
Why low tax rates are important for economic
progress
Discuss more fully the importance of free trade
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200 Countries in 200 Years
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#1 The Legal System
The foundation for economic progress is a
legal system that protects privately owned
property rights and enforces contracts in
an evenhanded manner
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#1 The Legal System
Private property rights involve:
1. The right to exclusive use of the property
2. Legal protection against invasion from
other individuals
3. The right to sell, transfer, exchange, or
mortgage the property
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#1 The Legal System
1. Incentive to use resources in ways that
are considered beneficial to others.
ex. Empty lot
owners bear the cost of ignoring the
wishes of others.
ex. Neutral colors
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#1 The Legal System
2. Private owners have an incentive to care
for and manage what they own
ex. How do you drive a rental car
compared to your own car?
ex. Berry’s Bikes
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#1 The Legal System
3. Private owners have an incentive to
conserve for the future
ex. Popcorn at the movies
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#1 The Legal System
4. Private owners have an incentive to make
sure their property does not damage your
property
ex. Keeping your dog on a leash or fenced in
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#1 The Legal System
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#1 The Legal System
Lack of property rights = lack of economic
progress
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#1 The Legal System
Even-handed enforcement of
understandable and stable laws is also
important for economic progress
Its all about the rules of the game!
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#2 Competitive Markets
Competition promotes the efficient use of
resources and provides a continuous
stimulus for innovative improvements
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#2 Competitive Markets
A. Competition places pressure on
producers to operate efficiently and cater
to the preferences of consumers
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#2 Competitive Markets
B. Competition gives firms a strong
incentive to develop better products and
discover low cost methods of production
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#2 Competitive Markets
C. Competition also discovers the business
structure and size of the firm that can
best keep the per-unit cost of a product
or service low
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#2 Competitive Markets
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Why do people hate Wal-Mart?
Wal-Mart employs sweatshop labor from other
countries.
Wal-Mart does not provide adequate compensation to
their domestic employees.
Wal-Mart destroys the local small business
community.
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#3 Limits on Government
Regulation
Economic progress comes through limiting
government regulation that reduces trade
and retards economic progress
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#3 Limits on Government
Regulation
A. Many countries impose regulations that
limit entry into various businesses and
occupations
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#3 Limits on Government
Regulation
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#3 Limits on Government
Regulation
B. Regulations that substitute political
authority for the rule of law and freedom
of contract tend to undermine gains from
trade.
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#3 Limits on Government
Regulation
C. The imposition of price controls will also
stifle trade
Remember price ceilings and price
floors, what do they have in common?
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#4 An Efficient Capital Market
To realize its potential, a nation must have a
mechanism that channels capital into
wealth creating projects.
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#4 An Efficient Capital Market
Interest is the price for loanable funds.
Productive investments will yield a return
sufficient to cover all costs, however not all
investment projects are productive:
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#4 An Efficient Capital Market
Governments can and do intervene in
capital markets by allocating investment
funds and fixing interest rates
1. Distorts market incentives
2. Increases the importance of political
rather than economic considerations
3. Makes unproductive investments more
likely.
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#5 Monetary Policy
Inflationary monetary policies distort price
signals, undermining the market economy.
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#5 Monetary Policy
Money serves 3 major functions in our
economy:
1. Medium of Exchange
2. Unit of Account
3. Store of Value
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#5 Monetary Policy
When the supply of money is constant or
increases at a slow and steady pace, then
the purchasing power of money will be
relatively constant.
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#5 Monetary Policy
Inflation: When the supply of money
expands rapidly compared to the supply of
goods and services, the value of money
declines and the general level of prices
rise.
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#5 Monetary Policy
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Hyperinflation in Germany
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Hyperinflation in Germany
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Hyperinflation in Germany
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Hyperinflation in Zimbabwe
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Hyperinflation in Zimbabwe
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Hyperinflation in Zimbabwe
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Hyperinflation in Zimbabwe
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Hyperinflation in Zimbabwe
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#5 Monetary Policy
High and variable inflation cause 3 main
problems:
1. Reduces investment
2. Distorts the information delivered by
prices
3. Results in less productive use of
resources
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Adjusting for Price Changes
Nominal Values: values expressed in
current dollars
Real Values: Values that have been
adjusted for the effects of inflation
Don’t be fooled!
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Adjusting for Price Changes
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#5 Monetary Policy
The key to price stability is to control the growth of
the money supply
The country’s monetary authority (the central
bank) should be held accountable for the
inflation rate.
2. A country could tie its currency to another
country’s currency (or just adopt it)
1.
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#6 Low Tax Rates
People will produce more when they are
permitted to keep more of what they earn
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#6 Low Tax Rates
A. High taxes discourage work effort and
reduce the productivity of labor.
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#6 Low Tax Rates
B. High tax rates will reduce both the level
and efficiency of capital formation
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#6 Low Tax Rates
C. High marginal tax rates encourage
individuals to consume tax-deductible
goods in place of nondeductible goods,
even if nondeductible goods are more
desirable
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#7 Free Trade
A nation progresses by selling goods and
services that it can produce at a relatively
low cost and buying those that would be
costly to produce (The Law of
Comparative Advantage).
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#7 Free Trade
A. People of each nation benefit if they can
acquire a product or service through
trade more cheaply than if they produce
it themselves.
Remember how poor you would be if you
had to make everything yourself….
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#7 Free Trade
B. International trade allows domestic
producers and consumers to benefit from
the economies of scale typical of many
large operations.
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#7 Free Trade
C. International trade promotes competition
in domestic markets and allows
customers to purchase a wide variety of
goods at lower prices
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#7 Free Trade
Government barriers to trade:
1. Tariffs
2. Quotas
3. Domestic Subsidies
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#7 Free Trade
Potential reasons for the government to
restrict international trade:
1. The National Defense Argument
2. The Infant Industry Argument
3. The Antidumping Argument
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#7 Free Trade
The real reason the government restricts
most international trade….
The politics of special interest groups and
trade restrictions
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Economic Freedom!
Economic Freedom consists of:
1. Secure private property rights and even
handed enforcement of contracts
2. Minimal government regulation
3. Market versus government allocation of capital
4. Stable monetary environment
5. Low marginal tax rates
6. Minimal barriers to trade
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Economic Freedom!
How important is economic freedom for economic growth?
It matters more than anything else!
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Economic Freedom!
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North Korea vs. South Korea
Per Capita
Income
= $1,800
Per Capita
Income
= $24,200
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Economic Freedom!
Lets take a tour of the world and look at
countries with various levels of economic
freedom!
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A country with very low economic
freedom: Zimbabwe (in Africa)
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Families in Zimbabwe (Africa)
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Families in Zimbabwe (Africa)
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A country with low economic freedom:
Romania (in Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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Families in Romania (Europe)
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A country with medium Economic Freedom:
Mexico (in North America)
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Families in Mexico
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Families in Mexico
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A country with high levels of economic
freedom: Hong Kong (in Asia)
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Families in Hong Kong
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Families in Hong Kong
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Families in Hong Kong
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Economic Freedom!
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Review
Know the seven major sources of economic
progress
1. The Legal System: private property rights and
evenhanded enforcement of stable laws
2. Competitive Markets
3. Limits on Government Regulation
4. An Efficient Capital Market
5. Stable Monetary Policy
6. Low Tax Rates
7. Free Trade
Understand the importance of Economic
Freedom
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