Transcript Chapter 3 - University of Management and Technology

ECONOMICS FOR
MANAGERS
University of Management and Technology
1901 North Fort Myer Drive
Arlington, VA 22209
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Chapter 3, ECON125
CHAPTER 3
Markets and Government
in the Global Economy
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Chapter 3, ECON125
Why Do Markets Exist?
Markets exist because we aren’t self-sufficient but instead
consume many products produced by other people.
The typical person is not self-sufficient but instead
specializes by working at a particular job and uses his or her
income to purchase goods and services.
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Chapter 3, ECON125
Specialization and the
Gains From Trade
We can use the principle of opportunity cost to explain the
benefits from specialization and trade.
PRINCIPLE of Opportunity Cost
The opportunity cost of something is
what you sacrifice to get it.
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Chapter 3, ECON125
Production per Hour
and Opportunity Cost
Brenda
Sam
Bread produced per hour
6
1
Shirts produced per hour
2
1
1/3 shirt
1 shirt
3 loaves of
bread
1 loaf of
bread
Opportunity cost of one loaf of bread
Opportunity cost of one shirt
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Chapter 3, ECON125
Opportunity Cost and
Comparative Advantage
Comparative advantage: The ability of one person or nation
to produce a good at an opportunity cost that is lower than
the opportunity cost of another person or nation.
Absolute advantage: The ability of one person or nation to
produce a particular good at a lower absolute cost than that
of another person or nation.
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Chapter 3, ECON125
How Do Markets Operate?
Exchanges occur in two markets:
Factor or input market: The owners of the factors of
production–natural resources, labor, physical capital and
human capital–sell these inputs to organizations that use the
inputs to produce goods and services.
Product or output market: The organizations that produce
goods and services sell their products to consumers.
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Chapter 3, ECON125
The Circular Flow Diagram
The circular flow
diagram is a diagram
showing the flow of
money and goods
between markets.
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Chapter 3, ECON125
Households as Sellers and
Buyers
In labor markets,
households sell their labor
to firms for wages. About
75% of income is earned
by households.
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Chapter 3, ECON125
Households as Sellers and
Buyers
In capital markets,
households provide
savings that firms use to
purchase physical capital.
Households receive
interest or a share of the
firm’s profits in return.
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Chapter 3, ECON125
Households as Sellers and
Buyers
In natural resource
markets, households sell
natural resources to firms
to use as inputs in the
production process.
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Chapter 3, ECON125
Households as Sellers and
Buyers
Inputs flow from
households into factor
markets where they are
purchased by firms and
then transformed into
products.
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Chapter 3, ECON125
Households as Sellers and
Buyers
Products flow from firms
to product markets where
they are purchased by
households.
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Chapter 3, ECON125
The Global Economy
and Interdependence
Export: A good produced in the “home” country (for
example, the United States) and sold in another country.
Import: A good produced in a foreign country and purchased
by residents of the “home” country (for example, the United
States).
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Chapter 3, ECON125
Major Imports and Exports
of the United States, 1999
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Chapter 3, ECON125
Major Trading Partners
of the United States, 1999
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Chapter 3, ECON125
Protectionist Policies
Protectionist Policies: Rules that restrict the free flow of
goods between nations, including tariffs (taxes on imports),
quotas (limits on total imports), voluntary export restraints
(agreements between governments to limit imports), and
nontariff trade barriers (subtle practices that hinder trade).
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Chapter 3, ECON125
History of Tariff and Trade
Agreements
General Agreement on Tariffs and Trade (GATT): An
international agreement that has lowered trade barriers
between the United States and other nations.
World Trade Organization (WTO): An organization that
oversees GATT and other international trade agreements.
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Chapter 3, ECON125
History of Tariff and Trade
Agreements
North American Free Trade Agreement (NAFTA): An
international agreement that lowers barriers to trade
between the United States, Mexico, and Canada (signed in
1994).
European Union (EU): An organization of European nations
that has reduced trade barriers within Europe.
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Chapter 3, ECON125
History of Tariff and Trade
Agreements
Asian Pacific Economic Cooperation (APEC): An
organization of 18 Asian nations that attempts to reduce
trade barriers between their nations.
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Chapter 3, ECON125
Currency Markets and Exchange
Rates
Foreign exchange market: A market in which people
exchange one currency for another.
Exchange rate: The price at which currencies trade for one
another.
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Chapter 3, ECON125
Exchange Rates in July 2001
Nation
Australia
Brazil
Britain
Canada
France
Germany
Hong Kong
Ireland
Israel
Japan
Mexico
Saudi Arabia
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Currency
Dollar
Real
Pound sterling
Dollar
Franc
Mark
Dollar
Punt
Shekel
Yen
Peso
Rial
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Value in Dollars
(U.S. $ equivalent)
2.51
0.41
1.41
0.66
0.1291
0.4332
0.1282
1.07
0.24
0.0079
0.1095
0.27
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Units per Dollar
(Currency per U.S. $)
1.96
2.41
0.71
1.51
7.74
2.3077
1.799
0.92
4.19
125.75
9.12
3.75
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Chapter 3, ECON125
Global Interdependence
Multinational corporation: An organization that produces
and sells goods and services throughout the world.
Worldwide sourcing: The practice of buying components
for a product from nations throughout the world.
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Chapter 3, ECON125
Global Interdependence
Financial liberalization: The opening of financial markets to
participants from foreign countries.
International Monetary Fund: An organization that works
closely with national governments to promote financial
policies that facilitate world trade.
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Chapter 3, ECON125
Government in a Market Economy
The government has five general responsibilities in a
market-based economy:
Providing goods and services.
Redistributing income.
Taxation.
Regulation of business practices.
Trade policy.
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Chapter 3, ECON125
Percentage of Government
Spending on Various Programs
Public welfare 5%
Highways 5%
Local Expenditures (1996)
Health and hospitals
9%
Police protection 5%
Administration and
other 32%
Education 42%
State Expenditures (1998)
Administration and
other 20%
Police and
corrections 4% Highways 8% Health and hospitals
8%
Public welfare 25%
Education 35%
Federal Expenditures (1999)
Net interest 13%
Social security
23%
Other 14%
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National defense
16%
International
affairs 1%
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Income security
14%
Medicare 11%
Health 8%
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Chapter 3, ECON125
Criteria for a Tax System
The benefit-tax approach suggests that a person’s tax
liability should depend on his or her benefits from
government programs.
Horizontally equitable: the idea that people in similar
economic circumstances should pay similar amounts in
taxes.
Vertical equity: the idea that people with more income or
wealth should pay higher taxes.
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Chapter 3, ECON125
Percentages of Government
Revenue from Different Sources
Individual income
taxes 3%
Local Revenue (1996)
Charges and
miscellaneous
38%
Property 45%
Other 4%
General State Revenue (1998)
Sales 10%
Individual income
taxes 19%
Intergovernmental
revenue 28%
Corporate income
taxes 4%
Charges, fees, other
21%
Sales 26%
Corporate income
taxes 10%
Federal Revenue (1999)
Individual income
taxes 48%
Social insurance
and retirement
receipts 33%
Other 8%
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Chapter 3, ECON125
Tax Rates in Different Nations
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38.7 38.3 37.9 37.4 37.2
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Chapter 3, ECON125
Government Regulation of
Markets
Mixed economy: A market-based economic system in which
government plays an important role, including the regulation
of markets, where most economic decisions are made.
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Chapter 3, ECON125
Alternative Economic Systems
Centrally planned economy: An economy in which a
government bureaucracy decides how much of each good to
produce, how to produce the goods, and how to allocate the
products among consumers.
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Chapter 3, ECON125
Alternative Economic Systems
Transition: The process of shifting from a centrally planned
economy toward a mixed economic system, with markets
playing a greater role in the economy.
Privatizing: The process of selling state firms to individuals.
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Chapter 3, ECON125