Transcript Economics

Economics
• Term Economics coined around 1870
• Derived from the Greek
– oikos- for house or settlement
– nomos for laws or norms
19th Century Economists
• Adam Smith
The Invisible Hand
• David Ricardo
Comparative
Advantage
• Karl Marx
Mode of Production
Market Economics
Market economics – based on societies where
property is owned by individuals
Market - where buyers and sellers seek to maximize
their results by trading
Profit – made when labour and capital are used to
produce goods to sell in the market
Economic theory - how and why goods are
exchanged in the market
Mercantilism
• Gold is wealth
• Coined by Adam Smith
• Latin mercari
to run a trade
Mercantilism: Gold
• Gold and silver bullion are
synonymous with wealth.
• Coincided with emergence of
nation states in Europe, 19th c.
Gold used to fund the military.
• Large gold reserves fund larger
force for a longer period of time
Mercantile Theory
• Total volume of trade is unchangeable
• Governments use tariffs to encourage
exports and discourage imports
• Emphasized positive balance
Adam Smith - Wealth of Nations
• Proposed the invisible hand
• Competition produces the best distribution of
goods and services,
• Encourages specialization
• More value with the same labour.
• Systems are self-regulated by the activity of
their parts
John Maynard Keynes
• Coined Macroeconomics
• Government intervention and spending in the
economy is a necessity.
• Keynesian theory led to government spending
which ended the 1930’s Depression
Monetarism
• Formulated in the late 1940's and early
1950's by Milton Friedman
• University of Chicago School
• Supply-side Economics
Economics and Trade
Globalization
The Nature of Trade
• Mercantilism--power and profit
(navigation acts, England and Holland, good
night Amsterdam)
• Smith’s critique: trade should be natural and
for mutual benefit, surplus products
• But a fundamental proposition is that the
extent of [the division of labour] must always
be limited by the extent of…the market
Comparative Advantage
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Coined by Ricardo.
England and Portugal: trade wine and cloth
Methuen Treaty, 1703
If countries specialize according to their
comparative advantage, they can prosper
through trade, regardless of how inefficient
they may be in their chosen specialty.
Britain and Free Trade
• Empire, the Royal Navy and Gunboat
Diplomacy, in addition to the Bank of
England.
• Alexander Hamilton and Friedrich List:
infant industries and the comparative
advantage
Creating a Global Economy
Role of the Core Country
• 19th century UK
• International currency
– British Gold Sovereign
• International trading system
• Source of investment capital
• Source of technology
Economic Growth of USA
• Resources
• Industrialization
• High-wages and large
internal market
• High-productivity
• Transportation networks
• Tariffs
• Modern Corporation
The Modern Corporation
• Alfred Chandler,
The Visible Hand: the
Managerial Revolution in
American Business
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Oligopolies
Market share
Strategic planning
Rise of the business school
The New Core Economy: US
Re-establishing the Global Economy
• Post WWII
• International Monetary Fund
• $US dollar reserve currency
• GATT
• Influence of Keynes
• Government pursues economic stability
restricting market discipline if necessary
• Cold War military alliances
Trade Levels as % of GDP
World Merchandise Trade
74.7
80
70
64.1
54.8
60
45.2
50
40
60.5
39.5
35.9
25.3
30
20
10
0
1913
1955
1973
1994
Primaries
Manufactures
Average Tariffs Import Coverage
US tariffs %
US ntbs %
EU tariffs%
EU ntbs%
30
25
20
15
10
5
0
1950
1989
Post
Uruguay
Communications Costs
Foreign Direct Investment ’70-95
Sectoral Employment
US 1900-2000 (% of employment)
80
70
60
Agric
Services
Indust
50
40
30
20
10
0
1900
1960
1980
2000
Today’s Tri-polar World?
US model:
• shareholder capitalism,
• role of pension funds with
assets = 60% GDP
• maximizing short-term
profit
• low taxes
• flexible labour markets
• large income disparities
• low savings (easy credit)
European Model
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Social market economies
Generous welfare state
Central wage bargaining
High employment taxes
Regulated and skilled labour market
Co-determination “Hausbanken” as
shareholders
• Large management boards
Japanese Model
• Managerial capitalism; keiretsu with cross
shareholding and banking;
• Long term national interests with
government role
• Hierarchical with
less income disparity
• Lifetime employment
• High savings
US Response:
Potential Loss of Core Status
• Create level playing field
• New issues: services.
intellectual property, investment
• Role of government:
domestic regulation
• Deepen integration and globalization
• World trade organization (proposed by
Canada, 1990)